The sharply lower print will dent the full-year growth number while intensifying pressure on the Reserve Bank of India (RBI) to advance interest rate cuts. Gross domestic product (GDP) growth was 6.7% in the April-June period and 8.1% in the second quarter of FY24.
Chief economic advisor V Anantha Nageswaran said the unexpected deceleration was an isolated development.
“There is enough reason to believe it’s just a one-off thing rather than the beginning of a trend,” he told reporters. Manufacturing growth in the second quarter was impacted by excess domestic capacity and dumping of products from overseas, he said.
GDP grew 6% in the first half of FY25 compared with 8.2% in the year earlier, official data released Friday showed. The growth in gross value added (GVA) was marginally higher at 5.6%. It had grown 6.8% in the first quarter of the current financial year.
Rate-cut Pressure
Economists expect the RBI, which has projected growth at 7% for the year, to advance rate cuts.
The central bank’s Monetary Policy Committee next meets on December 4-6.
Services and Agri Rebound
“With the GDP growth print sharply undershooting the MPC’s expectations, a February 2025 rate cut may be on the table if the next two inflation prints recede,” said Aditi Nayar, chief economist, ICRA.
The MPC has kept the key repo rate unchanged since February 2023 to keep inflation in check. At its last meeting, the MPC changed its policy stance to “neutral” from “withdrawal of accommodation.”
Some economists expect a rate cut at the December meeting itself following the growth slump, even as retail inflation has accelerated to a 14-month high of 6.2% in October, fuelled by food prices, breaching the outer bounds of the RBI’s inflation target band.
FY25 outlook
Economists said the latest data may have dampened the outlook for FY25 and lead to moderation of earlier growth projections.
“A sharper-than-expected growth slowdown in Q2 has tilted risks to our growth outlook of 6.8% for the current fiscal downwards,” said Crisil chief economist DK Joshi.
ICRA chief economist Aditi Nayar cautioned against risks from a slowdown in personal loan growth on urban consumption as well as geopolitical and tariff-related developments on commodity prices and external demand.
“There is a downside risk to the full-year forecast, which can now be closer to 6.5% after assuming a pickup in momentum in the second half,” said HDFC Bank principal economist Sakshi Gupta.
To be sure, the economy may do better in the second half.
“A likely improvement in rural demand owing to the robust growth in kharif foodgrain output and pick up in the Government of India’s capex is expected,” said Nayar. ICRA expects FY25 growth at 6.5-6.7%.
Full-year growth is seen at 6.6-6.8%, lower than the initial 7% projection, said Bank of Baroda chief economist Madan Sabnavis.
“Rural demand, festivals, and wedding season will contribute to the spending in the second half,” he said. “Government spending will pick up as they will expedite budget spending.”
D K Pant, chief economist at India Ratings, said: “Rising real wages have the ability to increase consumption demand, the ripple effects of which would also provide succour to the economic growth.”
Broad-based slowdown
Manufacturing growth slowed to 2.2% in the September quarter from 7% growth in the preceding one. Services and agriculture have performed better in the second quarter, data showed. Agricultural and allied sectors saw a recovery at 3.5% growth, up from 2% in the June quarter, and 1.7% in the year before.
The tertiary sector grew 7.1%–public administration, defence and other services led with 9.2% growth, followed by financial, real estate and professional services (6.7%), and trade, hotels and transport (6%).
“On the demand side, consumption growth slowed, probably due to a moderation in urban demand, as seen in high-frequency indicators,” said HDFC’s Gupta.
Private consumption expenditure–which has a nearly 60% share in GDP–grew 6%, lower than the first quarter’s 7.4%, as high food inflation dampened demand. While government expenditure slowed in the first quarter due to the general elections, it rebounded to 4.4% growth in the September quarter as spending resumed.
“Investments saw the sharpest slowdown–5.4% in Q2 vs 7.5% in the previous quarter–as support from government capital expenditure has been weaker this year,” said Joshi of Crisil.
