5.4%: Q2 GDP growth slowest in seven quarters

India's GDP grew 5.4% in Q2, below forecasts, due to weak manufacturing and consumption amid high inflation and borrowing costs.

India’s economy expanded at a lower-than-expected 5.4% in the three months ended September, with sluggish growth in manufacturing and private consumption, a reflection of weak demand because of high borrowing costs, inflation and weak real wage growth.

From a sector-wise perspective, the loss of economic momentum is essentially rooted in what is called the secondary sector which comprises manufacturing, construction and electricity, gas, water supply and other utility services.(AFP)

The number is much lower than forecasts — Reuters and Bloomberg polls had estimated 6.5% and the Reserve Bank of India in October, 7% — but higher inflation (retail inflation was 6.21% in October) may mean the central bank’s monetary policy committee (MPC) has a tough job when it meets next week. The lower growth does warrant a cut in the interest rate, as demanded by two senior Union ministers in recent weeks, but the high inflation remains a concern.

The headline GDP growth number is 1.3 percentage points lower than the June quarter print and the lowest in seven quarters, since the 4.3% reading in the quarter ending December 2022. The latest GDP growth print marks the third consecutive fall in quarterly growth numbers.

Private consumption, accounting for 60% of GDP, and manufacturing was hit by slower urban spending due to rising food inflation, high borrowing costs and weak real wage growth, despite a recovery in rural demand.(HT Print)

What explains the sharp deceleration in GDP? From the consumption side, both private final consumption expenditure (PFCE), a measure of consumption and gross fixed capital formation (GFCF), a measure of investment, have seen a fall in growth rate between the June and September quarters, the respective numbers being 7.4% and 6% for PFCE and 7.5% and 5.4% for GFCF. Exports have also lost momentum with the September quarter growth falling to 2.8% from 8.7% in the June quarter. The headwinds from these three fronts more than compensated for the tailwinds from an increase in growth of government final consumption expenditure (GFCE) and a fall in imports.

From a sector-wise perspective, the loss of economic momentum is essentially rooted in what is called the secondary sector which comprises manufacturing, construction and electricity, gas, water supply and other utility services. The secondary sector’s overall growth fell from 8.4% in the June quarter to just 3.9% in the September quarter, pulling down the headline growth numbers despite the tertiary sector (government and private services) and the primary sector (agriculture and mining) largely retaining their June quarter momentum. In the case of manufacturing, the growth rate has fallen from 7% in the June quarter to just 2.2% in the September quarter. If one were to take out the secondary sector from the Gross Value Added (GVA) calculations, it would show an increase in growth from 6.2% in the June quarter to 6.5% in the September quarter rather than the deceleration from 6.8% in June to 5.6% in September seen in the headline GVA numbers.

Reuters cited economists and said private consumption, accounting for 60% of GDP, and manufacturing was hit by slower urban spending due to rising food inflation, high borrowing costs and weak real wage growth, despite a recovery in rural demand.

Did everyone miss what was coming in the latest GDP data? Not really, show the latest MPC minutes. Nagesh Kumar, an external MPC member had clearly articulated demand-side headwinds to growth.

“The Indian industry is clearly suffering from demand deficits in both domestic and external markets. Demand deficits may be the reason private investment has not picked up momentum despite the companies’ healthy balance sheets and all the reforms and incentives extended by the government”, MPC minutes record Kumar as saying. “Given that inflationary expectations have been successfully anchored, and industrial demand in both domestic as well as export markets is flagging, a rate cut could help to revive demand and help boost private investment”, Kumar added, asking for a 25-basis point reduction in interest rates. One basis point is a hundredth of a percentage point.

The MPC has now overestimated growth in both quarters of the current fiscal year. In its August 22 resolution, the MPC had projected a GDP growth of 7.1% for the June quarter, 40 basis points higher than the actual number in the estimates released a week later on August 30. The latest overestimation, of course, is significantly higher than last time. It remains to be seen whether MPC makes significant changes to its growth projections for the rest of the fiscal year. The October resolution projects a GDP growth of 7.2% for fiscal year 2024-25 with a projected growth of 7.4% each in the quarters ending December 2024 and March 2025. The MPC will meet from December 6-8. Some private forecasters expect India to grow by 6-6.5% for the year.

Commenting on the GDP numbers, chief economic adviser (CEA) V Anantha Nageswaran said while performance of manufacturing and mining were disappointing, agriculture, livestock, forestry and fishing were the bright spots.

The bulk of the slowdown due to the manufacturing sector is a part of the global phenomena, which were partly due to the presence of excess capacity elsewhere, imports dumping in India, he said.

“The consumption of steel went up, but production of steel did not go up. It was inventory draw down. So, these were some special factors that played a role in the in exaggerating or amplifying the growth slowdown [in the second quarter]. Therefore, some of it may not necessarily continue, or may not continue at the same pace in the subsequent quarters,” he said.

The quarter ending December is likely to benefit from a rise in government expenditure over the last few weeks, experts said.

“We have also seen a sharp rise in services exports in October, and goods exports may also pick up as inventories are stocked up globally in anticipation of higher trade tariffs in 2025,” said Pranjul Bhandari and Aayushi Chaudhary, economists at HSBC.

“The March quarter, in turn, may benefit from stronger rural consumption. Already agriculture growth has improved on the back of normalising temperatures and full reservoirs. Rural Indians seem to have used their earnings from the summer crop to build back savings (as per our study of cash balances in rural accounts). But may choose to spend earnings from the winter crop, boosting consumption growth,” they added.