India must shift its policy focus to address the demand deficiency that ails its economy.

Food inflation was 10.9%, the highest since July 2023. The second data-point was on growth in gross domestic product (GDP) in the second quarter of 2024-25, which, at 5.4%, was the lowest since the last quarter of 2022-23.

Not only was this the sixth straight quarter of decline from a high of 8.2% in the first quarter of 2023-24, it also came as a shock to the government.

While the Reserve Bank of India had projected a growth rate of 7% as late as October, even the finance ministry was off the mark with a projection of 6.7%. This reflected the inability of our financial and monetary authorities to read the state of the Indian economy accurately.

For manufacturing, the growth rate has been trending down from 14.3% in second quarter of 2023-24 to 2.2% in the latest quarter. Overall, for the secondary sector, including construction and utilities, the decline has been from 13.7% to 3.9% during the period.

This slump did not happen all of a sudden. It has been visible for the last six quarters, but there was no urgency to correct the policy prescriptions or even acknowledge the severity of the problem.

This was true for the issue of inflation as much as for the state of the economy. A host of economic indicators have been pointing to deficient demand. Wage data from rural areas has been signaling distress.

This was supported by employment trends, which have consistently been pointing to a reversal of the economy’s structural transformation away from farm to factory jobs.

Rural wages have been stagnant for the last 10 years, but even general wages have shown a decline in real terms for both rural and urban areas for more than a decade. Agricultural incomes, whichever way one calculates them, have shown sustained stagnation.

Several high-frequency indicators, from automobile sales to the offtake of durables and other consumer goods, have recorded a deceleration in volume growth.

Even data from the private corporate sector has highlighted a slowdown in earnings. While policymakers now acknowledge a slowdown in urban demand, signals of a slump have been visible for some time.

Even with inflation, while food prices remain untamed with 12 of the 15 recent months showing them rising by more than 8% year-on-year, it has long been clear that monetary policy is unlikely to be effective in controlling it.

The Centre’s strategy for managing food inflation has largely relied on the old instruments of stock limits and ad-hoc trade restrictions that the government sought to dismantle through its farm bills, rather than fixing supply chain issues and logistical problems related to storage, processing and transportation.

The fact that core inflation has remained low also confirms a decline in discretionary spending. The rising cost of living, particularly food prices, is compressing the purchasing power of most Indians and aggravating the problem of weak demand.

Anyone reading the fine print of some of these indicators would have realized that the problem with the economy is one of deficient demand. Unfortunately, the policy response has been to treat the supply side. Even there, the focus has been on large corporations and large infrastructure projects.

Blaming monetary authorities for keeping interest rates high is unlikely to resolve an economic ailment of low demand. In many ways, the last two years appear similar to the slowdown seen from 2016-17 to 2019-20.

If there is one lesson that was clear from that period, it was on the ineffectiveness of lowered interest rates in reviving a demand-constrained economy.

Despite massive incentives in the form of tax subsidies and through other means, private investment remains sluggish, indicating an unwillingness of the private sector to invest in the absence of signs of a demand recovery.

The upcoming budget offers an opportunity for the government to take concrete steps to revive the economy, primarily by generating demand. The solution lies in raising incomes, both in rural and urban areas. It is easier done in rural areas through an upward revision of MGNREGA wages.

However, a broader economic recovery would entail imaginative policy responses to raise productivity in the unorganized sector, which remains India’s largest employer. The surest way of reviving growth is to create employment that is both productive and remunerative.