India’s economic slowdown calls for a well-crafted response

Logging disappointing year-on-year growth of 5.4%, the GDP data print for the second quarter of 2024-25 is not only much below consensus estimates from leading economists and analysts, but also offers a contrast from the economic narrative presented by top bureaucrats and economic administrators.

While there is no saying if it would have affected the poll outcome in Maharashtra, where a BJP-led coalition won handsomely, news of a slowdown often has a way of acquiring contagion characteristics, countering feel-good messaging or negating the income effects of political handouts.

Bad news always travels faster, and, given the eroding credibility of the political class, people are more inclined to lay great store by negative developments than accept news of progress at face value. The GDP print confirms some major apprehensions.

The immediate anxiety stems from a slowdown on the demand side: both consumption and investment demand growth were listless this quarter, confirming suspicions of a structural decline.

While private final consumption expenditure has grown 6% year-on-year, it masks the fact that in absolute terms the quarter is below both the third and fourth quarters of 2023-24.

Seasonality apart, consumption data over the past 12 quarters has remained largely range-bound, with only minor variation between quarters. This raises concerns of whether the economy stares at a major structural weakness. With private consumption accounting for close to 60% of GDP, any slump here is a worry.

The other saviour that had kept GDP ticking along all these quarters—gross fixed capital formation—has also lost pace, with state governments joining the private sector’s reluctance to carry the capex baton.

Slowing consumption and investment is mirrored on the supply side. Manufacturing inertia (2.2% growth this quarter) and a slump in net tax collections (2.7%) also reflect slower growth.

Beyond these signs of uneven expansion, what should really be worrying authorities are the second-round effects that can loop back and further depress growth.

The stasis in manufacturing, which has also shown signs of being range-bound, is sure to impact unemployment, which is rising in urban conurbations and could further dampen both consumption and overall economic growth.

For now, cash transfers by states and the Centre have managed to somewhat narrow the income gap and keep the consumption meter ticking, albeit at a slower pace. But handouts are not sustainable over the long term.

The budget for 2025-26, just 60 days away, presents the Centre with an opportunity to undertake some policy shifts. The government must not lose faith in capital expenditure, while ensuring that the policy environment becomes more conducive for private sector investment.

It is also vital for the Centre to re-engineer its production-linked incentive scheme to stimulate higher labour absorption. But before that is the Reserve Bank of India’s monetary policy committee (MPC) meeting of 4-6 December.

While the rate-setting panel’s members are indeed caught in a cleft stick, what would be truly path-breaking is for the MPC to publicly acknowledge India’s slowdown and act accordingly.