Disappointing but not alarming. That is how V Anantha Nageswaran, the Chief Economic Adviser in the Finance Ministry, described the 5.4% growth in July-September 2024, a seven quarter low. Projections by various agencies, including the central bank, were all upwards of six or higher percentage. So, what went wrong? Lots of things, some expected, some unexpected. Slowdown in government capital expenditure was bound to impact growth. The Modi Government spent nearly 15% less in the first six months of this financial year as against the previous financial year. Maybe the slowdown in government capex spending was due to the parliamentary poll earlier this year. And spending would pick up steam in the coming months, given the gap between planning and actual spending in all public works. Capital spending by State governments too remained sluggish, especially when they diverted funds for poll-oriented freebies. Of course, the private sector capital spending remained a laggard, though in recent weeks bank credit to the sector has improved somewhat. Again, thanks to a 6-plus% consumer inflation, and little or no rise in private incomes, the urban middle class consumer spending has been lukewarm. Most fast moving consumer goods (FMCG) manufacturers have instead tapped the rural markets for growth. There were other signs of slowdown. For instance, in the automobile sector car sales were down by about 15% this year, though the two-wheeler sales have registered a double digit growth in the same period. A key factor for lower growth could be the sharp slowdown in the flow of funds into the new start-ups. This financial year these have virtual disappeared, with foreign investors becoming highly selective in putting funds in new ventures. Maybe the near turning off the spigot of easy money and retail credit by non-banking financial institutions and credit card companies has curbed spending, impacting the growth numbers. It is the cumulative impact of all these factors which has dashed the hopes of a seven-plus percentage growth which the people at large were led to believe till very recently. We were led to believe that India was the only large emerging economy growing at a seven-plus percentage. The latest quarter numbers, especially for manufacturing, would necessarily call for lowering expectations. With Trump in the White House, and fear of tariffs looming over exports, it would help to be realistic in assessing our growth potential. To begin with, at the December 6th meeting of the Monetary Policy Committee any hope of a cut in the prime lending rate ought to be abandoned. The consumer inflation is still higher than the RBI’s comfort level of 4 +/- 2%. Despite demand from some quarters to lower the PLR, the MPC would be wise to maintain status quo on rates. It is imperative to note that the RBI itself has reason to re-do its numbers since the actual second quarter growth is lower by 1.4% from its own projection. Hopefully, the central government infrastructure spending will pick up now that the crucial LS and Assembly polls are behind us. The new kharif crop arrivals, and the hope of a bumper rabi crop next year add to the positive signs of an economic pick-up in the second half of 2024-25.
