India’s Q2 GDP Growth Slows to 5.4%: What’s Impacting the Economy?

India’s economic growth slowed significantly in the second quarter of the current financial year, with the GDP growth rate dropping to 5.4%. This is a sharp decline compared to 7.6% in the same period last year and 6.7% in the April-June quarter. Released by the government on Friday, these numbers reflect challenges such as reduced consumption, adverse weather, and inflationary pressures.

Economists Predicted the Dip in Growth

Economists had already signaled a slowdown for the second quarter. A poll of 17 economists by The Economic Times projected an average GDP growth of 6.5%, driven by weakened urban demand, reduced government spending, and disruptions in key sectors like mining and power due to heavy rains.

Similarly, a survey by Reuters also forecasted a 6.5% growth rate, falling short of the Reserve Bank of India’s (RBI) estimate of 7%. Another critical metric, Gross Value Added (GVA), was expected to grow at 6.3%, slower than the 6.8% growth in Q1, indicating a broad slowdown across sectors.

What’s Impacting India’s GDP Growth?

Several factors are contributing to the decline in GDP growth. Experts point to both global and domestic challenges:

1. Reduced Urban Consumption

Urban private consumption, which accounts for nearly 60% of India’s GDP, has taken a hit. Rising food inflation and stagnant real wage growth have significantly reduced purchasing power, leading to lower spending.

• Retail food inflation surged to 10.87% in October, reducing disposable income.
• Higher borrowing costs, driven by stable but high interest rates, have also curbed household consumption.

2. Corporate Earnings Decline

The July-September quarter saw Indian companies report their weakest performance in four years, reflecting economic stress. With falling profits, businesses are reconsidering expansion plans and investment activities.

3. Weather Disruptions

Unseasonal rains have disrupted mining and power generation activities, further impacting industrial output. These sectors play a vital role in GDP growth but have faced setbacks due to adverse weather conditions.

4. Rising Costs of Living

The persistent increase in food and fuel prices, coupled with stagnant wages, has reduced consumer confidence. This directly impacts consumption patterns, the backbone of India’s economic growth.

RBI’s Outlook and Policies

Despite the slowdown, the Reserve Bank of India (RBI) has maintained its GDP growth forecast for FY2024-25 at 7.2%, down from 8.2% in the previous fiscal year. The central bank has chosen to keep the repo rate steady at 6.50%, signaling a cautious stance amid ongoing inflationary pressures.

The RBI’s policy now focuses on maintaining economic stability while closely monitoring inflation trends. Economists believe that a more accommodative stance may be adopted if inflation persists or growth slows further.

Key Sectors Facing Challenges

Agriculture

The agriculture sector has felt the impact of unseasonal rains and higher input costs. While rural demand may recover following a favorable harvest, current conditions have strained farmers’ incomes, affecting their purchasing power.

Manufacturing

Manufacturing growth has slowed due to weak domestic and global demand. Rising costs of raw materials and higher borrowing costs have further pressured the sector.

Services

The services sector, traditionally a strong contributor to India’s GDP, has also slowed, with consumer-facing industries like retail and hospitality feeling the brunt of reduced spending.

Hope for Recovery in the Second Half

While the Q2 numbers are concerning, there is optimism for a rebound in the latter half of the financial year. Several factors could help improve GDP growth:

1. Increased Government Spending:
   Post-election government spending on infrastructure and welfare programs could boost economic activity.
2. Improved Rural Demand:
   A favorable harvest season is expected to enhance rural purchasing power, potentially driving up consumption.
3. Easing Inflationary Pressures:
   If food and fuel prices stabilize, consumer confidence could improve, leading to higher spending.
4. Global Economic Conditions:
   An improvement in global demand could benefit India’s export-driven sectors, providing a much-needed boost to the economy.

What This Means for Households and Businesses

The slowdown in GDP growth directly impacts both households and businesses:

• Households face higher costs of living and reduced purchasing power, leading to tighter budgets.
• Businesses, especially small and medium enterprises, are grappling with reduced consumer demand and higher operating costs, affecting profitability.

Sectoral Analysis: Winners and Losers

Winners

• Information Technology (IT): Despite global uncertainties, the IT sector continues to benefit from outsourcing and digital transformation trends.
• Pharmaceuticals: Increased healthcare spending has kept this sector resilient.

Losers

• Real Estate: High borrowing costs have slowed housing demand.
• Automobiles: Rising input costs and reduced discretionary spending have impacted vehicle sales.

Comparing India’s Growth with Global Trends

India is not alone in facing economic challenges. Globally, several economies are experiencing slower growth due to inflation, geopolitical tensions, and supply chain disruptions. However, India’s growth rate, while lower, still remains relatively robust compared to major economies like the US, UK, and China.

What’s Next for India’s Economy?

The Indian economy is at a critical juncture, balancing inflationary pressures and growth concerns. While the government and RBI are optimistic about a recovery in the second half, much will depend on external factors like global demand and internal reforms to boost consumption and investment.

With structural reforms and targeted policies, India can navigate these challenges and maintain its position as one of the fastest-growing major economies in the world.