The sharp drop in Q2 GDP growth to 5.4% has cast a shadow over expectations for FY25, with all projections painting a gloomy picture. The Reserve Bank of India (RBI) forecasts a 6.6% growth rate, the government estimates 6.5%, and the National Statistical Office (NSO) has reduced its estimate further to 6.4%. Are we prepared to confront the reality of a slowing economy?
On January 7, the government’s initial advance estimates suggested that India’s GDP growth is likely to ease to 6.4% in FY25, marking the lowest growth rate in four years. If accurate, this would be the first time in this period that the growth rate drops below 7%.
According to a report by Bank of America Global Research, the projected GDP growth rate represents the slowest pace since the pandemic, effectively reversing gains made during the recovery. This deceleration is likely to impact consumer confidence, wage growth, corporate revenues, investment, credit demand, and fiscal calculations.
Key factors contributing to the slowdown include sluggish growth in new investments and manufacturing, as well as restricted credit availability due to the RBI’s tight monetary policies.
A slowing economy often triggers a vicious cycle, reducing household demand, forcing businesses to cut back on production, and making banks more cautious about lending. Prolonged stagnation could lead to concerns about asset quality—a scenario that financial institutions are eager to avoid.
With growth slowing, pressure is mounting on the central bank to reduce interest rates. Calls for rate cuts have been growing louder following Q2’s disappointing GDP figures, and these demands are likely to increase further.
Interest rate reductions are critical to boosting demand. If the economy’s growth trajectory continues to take a backseat to inflation management, the fallout could be severe. The central bank may find it difficult to justify its stance on growth at future briefings.
However, addressing the slowdown requires a combined effort. The government must also explore strategies to revive investments. Increasing public investment, reducing the tax burden on middle-class households, and rebuilding confidence in the economy are vital steps. Gross fixed capital formation, a key metric of investment activity, is currently at a three-year low.
It’s important to note that the first advance estimates are provisional and subject to significant revisions. These numbers are based on data available until November, as highlighted by Madhavi Arora, an economist at Emkay Global Financial Services.
“The first advance estimate is a preliminary figure and will likely be revised. The second advance estimate, to be released by the end of February alongside Q3 data, could provide a more accurate picture. Additionally, the NSO plans to publish revised national account estimates for the past three years by the end of January, which could impact base-year data,” Arora explains.
Only time will tell how these numbers evolve.
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