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India's economic growth has slowed in the first quarter of the 2024-25 fiscal year, raising concerns about the country's future potential. While the official gauge of real GDP growth came in at 6.7%, marking a five-quarter low, this figure fell below the Reserve Bank of India's (RBI) projection of 7.2%. This slowdown reflects a cooling economic momentum, despite some base effects being in play. Notably, the Gross Value Added (GVA) in the economy grew at a slightly higher rate of 6.8%, highlighting the continued divergence between GDP and GVA figures.
At the start of the fiscal year, hopes were high that a normal monsoon would boost farm sector output and ease inflation, ultimately lifting weak rural demand and private consumption witnessed in the previous year. Increased demand was expected to bolster private firms' investment in new capacities and ease the pressure on public spending to stimulate growth. To further support this narrative, the government had planned to ramp up capital expenditure by 17% to ₹11.11 lakh crore. However, the reality has fallen short of these expectations.
The extended general election has significantly hampered public capex, forcing the government to redouble its efforts to meet its spending goals. On a positive note, private consumption spending reached a six-quarter peak of 7.4%, driven in part by easing headline inflation. However, food prices remain elevated. The monsoon, while better than last year, has been erratic and uneven, both temporally and spatially. While farm GVA growth has climbed to a four-quarter high of 2%, the coming weeks will be crucial in determining whether the sector will experience a genuine rebound and a cooling of food inflation. The possibility of above-normal downpours in September could impact standing kharif crops, which is a significant concern for the RBI.
The RBI's independent monetary policy panel members have flagged a potential 1% GDP growth loss this year and next if interest rate cuts are delayed. Despite the challenges, India is still projected to achieve a growth rate of 6.5% to 7% this year. However, most analysts expect growth to slip to 6.5% in 2025-26, with the medium-term potential hovering around that figure. This level of growth is deemed too slow for comfort. As Gita Gopinath, a top IMF official, recently pointed out, policymakers need to urgently implement meaningful reforms across all aspects of the economy to improve the efficiency of institutions and the judiciary. This is crucial for raising India's growth potential and fulfilling its aspirations of creating sufficient gainful employment opportunities for its young population, a demographic dividend that must be leveraged effectively.