Despite a marked decline in economic output in the first three quarters of 2024, India’s long-term growth story is believed to remain intact. A growth rate of 6.5% is projected over the next half decade, helping the country become the world’s fastest growing large economy.
However, China, Japan and South Korea grew by more than 8% on a sustained basis during their fast-growth phases. The big question is whether 6%-plus growth is enough for a country that needs to create 8 million jobs every year by 2030 – and whether this growth rate will be enough to reduce widening wealth inequality and provide opportunities for generational mobility.
There is an opinion that the decline in the growth rate is due to data distortions triggered by the pandemic and an abnormally low statistical base on the trend after the subsequent boom. Finance Minister Nirmala Sitharaman said the lower-than-expected GDP growth of 5.4% in the second quarter of FY25 was only a “temporary blip”.
Economist Neelkanth Mishra and his team at Axis Bank have described the loss of momentum in the Indian economy in the first half of the current financial year as “cyclical” due to “unexpected fiscal and monetary tightening”. In October, Japanese brokerage Nomura said the Indian economy was in a phase of “cyclical growth slowdown”, and described the Reserve Bank of India’s estimate of 7.2% GDP expansion as “overly optimistic”. Weeks later, the RBI was forced to cut its forecast by more than half a percentage point.
positive
There are some clear upsides to the current picture of the economy.
Government expenditure
Financial expenses seem to have increased after the election dust has settled. The recent cut in the Cash Reserve Ratio (CRR) has freed up the money banks have with the RBI.
While the capital cycle appears to be restarting in some sectors, boosting capital formation, this growth will be investment-led, says Mishra. Also, monetary easing is expected to support growth in the coming financial year. But the government will have to continue doing the heavy lifting.
Economists also say FY25 Q2’s GDP shock – another set of disappointing numbers is likely in Q3 – is only a sign of a progressive normalization of growth momentum after the base effect of the pandemic subsides, as the economy shrinks abnormally. This may partly explain the steady slide in growth from 8.6% to 7.8% to 6.7% to 5.4% in 2024.
“…it’s not as if the second quarter slowdown is purely a data artifact and as more data comes in, it will automatically be upgraded. The numbers will be revised higher or it could be a simple, seasonal factor … or it could cost the state budget A more fundamental thing in terms of potential…we will be on track to achieve…between 6.5-7 percent for the entire fiscal year.But the focus is on how we grow at a sustainable rate globally To be exceptionally difficult is going,” Chief Economic Adviser V Ananth Nageswaran said at a CII event on December 12.
After two quarters of potentially sub-optimal economic output, GDP growth is projected to settle around 6.5%, which could mark a return to trend in real growth. The RBI’s overvaluation — and subsequent correction — begs the question: Did the central bank keep interest rates higher than necessary because it projected an overly rosy picture of GDP growth? However, inflation remains at the upper end of the permissible band, and food prices are almost at double digits relative to inflation – which somewhat strengthens the argument for sticking with higher rates, and the RBI’s woes further.
Lower investment growth was mainly due to lower public investment; This may change in the second half of the financial year and beyond. One indication is the increase in the order backlog of capital goods companies which indicates that investment activity is likely to pick up. For example, in utilities, a pivot from renewables to thermal power, which accounted for the bulk of capex between 2010 and 2015, could spur industrial activity, as virtually no thermal capacity has been added over the past 6-7 years. year
According to Mishra, the relatively empty electoral calendar in states in 2025 provides a window for reform. But willingness to resume pending reforms such as the Labor Code also appears to have waned.
Possible MSME recovery
In two other dismal trends, analysts see a potential silver lining.
Corporate growth is slowing, partly due to slipping consumption growth, but there may be an upside. Former Chief Statistician Pranab Sen said micro, small and medium enterprises (MSMEs), which have been hit repeatedly by shocks like demonetisation, implementation of GST and the Covid-19 lockdown, are likely to return to business and compete with corporates. area.
Although more data are needed, two other indications suggest this possibility: one, consumption has recovered in rural areas despite flagging urban growth; Two, periodic labor force survey numbers show an improvement in wage employment, which may be partly due to increased non-casual employment with MSMEs. An MSME rebound could mean the two arms of a K-shaped recovery narrow.
Labor statistics show another positive: female participation in the labor force is increasing, especially in rural areas. About 39.6% of women with post-graduate education level and above were reported to be working in FY2074 compared to 34.5% in FY2076. For women with a higher secondary education level, these numbers were 23.9% and 11.4%.
Increase in services
India’s service surplus as a share of GDP reached a new high in October 2024 – a major positive. On the structural drivers of India’s share gains in global services exports, Mishra and his team say the fragmentation of global service value-chains, rapid growth in global cross-border telecom bandwidth, and growth in remote-working are adding to demographic trends. Supporting growth in India’s services exports to developed markets.
In November, India’s services trade exports surpassed goods exports as IT exports continued to register strong growth amid weak goods demand in the West and higher shipping costs due to disruptions in the Red Sea, according to official data released by the commerce ministry. However, going forward, India’s IT exports, structurally speaking, appear to be vulnerable to new technologies such as AI.
Negative
slow investment
Performance is declining for many corporations, and investments are struggling. Executives at Tata Consumer Products Ltd have expressed concern about “softness” in urban demand. Those at Nestlé India have blamed “muted demand” partly on big cities being pressure points and food inflation. Carmakers are pointing to concerns over demand, blaming heavy rains and an election-induced slowdown. All these can affect growth and job creation.
But why are private investments struggling despite pre-Covid corporate tax cuts and government calls for investment?
To free the so-called animal spirits, companies must feel optimistic about the future, and not look behind them. The biggest obstacle to creating an investment-friendly environment is India’s tax laws and its administration, senior advocate Arvind P Datar told the All India Tax Practitioners’ National Conference on December 16.
Companies are also reducing salary expenses. Real salary and wage expense growth of listed non-financial corporates – a proxy for real urban wages – improved to 0.8% in Q2 FY25 from 1.2% in Q1 FY25, and declined from 2.5% in FY24 and 10.8% in FY23, Nomura said. said
savings-investment gap
A decline in household financial savings rates may pose another challenge. RBI’s latest Financial Stability Report shows that net financial savings of households fell from 7.3% of GDP in FY22 to 5.3% of GDP in FY23, well below the average of 8% in the previous decade. Household net savings is the total money and investments of households such as deposits, stocks and bonuses, loans and other liabilities.
During the same period, household debt has increased rapidly. Annual borrowing is at 5.8% of GDP, the second-highest level since the 1970s. A large part of the savings is also bypassing the banking industry and entering the financial market, which is another concern.
Sliding credit growth
Loan growth is slowing — households that used to borrow most to buy a home have not done so since 2021. For a while the industry offset this, but since early 2023 it has declined. Overcapacity and shortages appear to limit the industry’s ability to take on new loans and appetite for new projects.
In such a situation, government spending based on bonds is the only viable means of injecting new credit into the economy, says Mishra, but much of this new credit issued is being used to clean up old ‘hidden debt’ at the local level.
High growth is unlikely unless there is a fundamental shift in the use of financial power to stimulate the economy. Bank lending to MSMEs may be something to look at, especially if personal credit slows down and corporates are unwilling to borrow.
While bad loans are coming down, there are fresh concerns over the sharp rise in NPAs in the personal loans and credit card segments. Both these types of credit are unsecured and have high interest rates. In November 2023, the RBI increased the risk weighting of banks’ exposure to consumer credit, credit card receivables, and non-banking finance companies.
Financial prudence
At the Centre, fiscal consolidation has been a consistent theme. The projected decline in fiscal deficit from 6.4% of GDP to 5.9% in FY24 will stabilize public debt at around 83% of GDP – a promising indicator of sustainability, given India’s growth outlook, according to the IMF.
But competitive loosening of the purse strings by states poses a financial problem. The RBI has expressed concern over the sharp increase in spending by states on various subsidies, including farm loan waivers and cash transfers.
Axis Bank’s India Outlook report predicts that by 2025, some version of “handout” schemes will target 134 million women in 14 states, about 20% of all women in India. These programs cost the government about Rs 1.9 lakh crore every year or about 0.6% of the country’s GDP.
These transfers have helped low-income families by giving them more money to spend, especially on food items such as pulses, onions and tomatoes, but the supply of these items has not increased enough, driving up food prices, the report said. .
Anil Shasi Business Editor, The Indian Express
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