Invoking animal spirits

NEW DELHI: India’s economic growth fell to a seven quarter low of 5.4% in the second quarter of 2024-25, compared to 8.1% in the same quarter last year, and 6.7% in Q1 of this year. The National Statistical Office (NSO) zeroed in on the factors responsible for the sharp dip — poor performance of the manufacturing and mining sectors, staggered government spending, and weak private consumption. The GDP’s half yearly report card set off alarm bells as RBI had forecast the GDP to grow at 7% in Q2.

Segments such as manufacturing, mining and investments were doing well last fiscal. Manufacturing fell from 14.3% in Q2 of 2023-24 to 2.2% owing to weaker domestic demand and deteriorating exports. Mining and quarrying shrank 0.1% in Q2 of FY25 on account of prolonged rainfall, a contrast to the 7.2% growth in the previous quarter, and 11.1% growth a year ago. The plunge in investments was linked to inadequate support from government capital expenditure amid a milieu of dull private corporate investments. Gross fixed capital formation, which is expenditure on asset creation, slid from 11.6% in Q2 of 2023-24 to 5.4%, which is down from 7.5% in the first quarter of this year.

Until September, the Centre had spent just 37% of its capex budget, while 15 major states had spent only 30%. RBI Governor Shaktikanta Das had attributed the lower government spending to the enforcement of the model code of conduct for the recent Lok Sabha polls. A report by India Ratings suggested that nearly Rs 62,000 cr of the Rs 11.11 lakh crore set aside for infrastructure might not be spent. Private consumption, beset by the cost of living as well as unemployment crisis, grew at 6% in Q2, down from 7.2% in Q1. Higher borrowing costs and food inflation had also adversely affected the discretionary spending capacity of households.

On Wednesday, the RBI’s six-member Monetary Policy Committee (MPC), headed by Governor Das commenced deliberations on the monetary policy amid expectations of maintaining the status quo on interest rate, as Consumer Price Index (CPI) inflation is higher than the upper threshold of the central bank. Year-on-year CPI inflation rate for October 2024 is 6.21%. The government has tasked the regulatory body to ensure that this metric remains at 4% with a margin of 2% on either side.

Cumulatively between May 2022 and February 2023, the repo or short-term lending rate rate was raised by 250 basis points. Since then, the apex bank has maintained the repo rate unchanged at 6.5 per cent, which has prompted experts to surmise that some easing could only be possible in 2025. Analysts have forecast that RBI might opt to infuse durable liquidity by phased reduction in cash reserve ratio (CRR). The decision of the panel will be announced tomorrow.

Observers believe the economy is in need of urgent structural reforms. Cumbersome and archaic regulatory requirements pertaining to labour laws that impede the scaling up of businesses should be struck down in order to spur investments, and in turn, expedite job creation. Reviving demand will require the Centre to introduce fiscal measures like cutting fuel taxes and high GST on certain products. More importantly, we must transition our focus from an approach centred on GDP (ranked 5th globally) to one centred on per capita income (ranked 141st globally).