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On November 29, 2024, the Ministry of Statistics and Programme Implementation (MoSPI) released the Quarterly Estimates of Gross Domestic Product (GDP) for the second quarter (Q2) of the financial year (FY) 2024-25. The latest economic data reveals a decline in GDP for the third consecutive quarter, with lower-than-expected growth in Q2 (July-September). The real GDP growth for Q2 FY 2024-25 is 5.4%, marking the slowest rate since the last quarter of 2022 (seventh quarter low).

This represents a significant slowdown compared to the 8.2% increase in the first half of FY 2023-24, and is the weakest six-month growth since the second half of FY 2022-23, when GDP grew by just 5.3%. This growth rate also falls short of the Reserve Bank of India’s (RBI) forecast of 7% and the Ministry of Finance’s projected range of 6.5%-7%.

In terms of Gross Value Added (GVA), the real GVA grew by 5.6% in Q2 of 2024-25, significantly lower than the 7.7% growth recorded in Q2 of the previous fiscal year.

India’s Q2 GDP – Sectoral Performances

There has been a marked decline across most sectors, except for agriculture and services, compared to the corresponding period last year. On a more positive note, after four quarters of suboptimal growth rates (ranging from 0.4% to 2.0%), the agriculture and allied sectors showed a recovery, with a growth rate of 3.5% in Q2 FY 2024-25.

Mining and Quarrying: This sector has slipped into contraction, with a decline of -0.1%, compared to a robust 11.1% growth in Q2 of the previous fiscal year.

Construction: Despite a slowdown, the construction sector registered a 7.7% growth in Q2 of FY 2024-25, compared to a stronger 13.6% in Q2 of FY 2023-24, largely driven by consistent domestic consumption of finished steel.

Services: The services sector posted a growth of 7% in Q2 FY 2024-25, up from 6% in the same period last year. Private Final Consumption Expenditure (PFCE): This key GDP driver grew by 6% in Q2, a significant increase compared to 2.6% in the same period last year.

Government Final Consumption Expenditure: After three quarters of weak or negative growth, government spending saw a recovery, growing by 4.4%.

Reasons for the Slowdown

Three out of the four key engines of growth are stalling. Exports have declined, and private investment has slowed. Private consumption, a critical driver of GDP, also showed signs of weakness in Q2.

After several quarters of lackluster performance, government consumption increased, though government spending in the first half (H1) of FY 2024-25 was much lower than in the same period last year (2% growth in H1 of FY 2024-25 compared to 6.2% in H1 of FY 2023-24).

The sluggish performance in manufacturing and mining sectors, exacerbated by wetter-than-normal monsoon rains, which affected the mining (-0.1%) and power generation (3.3%) sectors, is another contributing factor.

Excluding agriculture and services, all other sectors experienced a slowdown, further contributing to the deceleration in GDP growth.

Economic Challenges

Several factors are affecting economic growth in FY 2024-25, including:

Inflation: Though retail inflation dropped to 5.48% in November 2024, it still exceeds the RBI’s target of 4%. Food inflation remains a significant concern, standing at 9.04% in November 2024, which could pose a major challenge for the economy if left unaddressed.

Corporate Stresses: Investment has slowed as major companies reported their worst quarterly performance in over four years. With the economy cooling down faster than anticipated, the industrial sector is particularly affected, and businesses are delaying recovery plans, especially in private investment.

Wages: Stagnant wages, coupled with declining corporate profits, have led to slower hiring and wage growth. This indicates that the economy is slowing down for the first time since the pandemic.

Interest Rates: The RBI has kept interest rates unchanged for the 11th consecutive time, opting for high rates to combat inflation. However, this is negatively impacting the economy by stifling growth. The current inflation is largely driven by food prices, particularly vegetables, fruits, and oils, making high interest rates less effective in addressing the core issue.

Consumption: Despite signs of recovery in rural demand, urban private consumption, which constitutes 60% of GDP, remains weak. This is due to stalled wage growth and higher borrowing rates, which are tied to elevated interest rates.

Additionally, the weakening of the rupee poses a risk of triggering inflationary pressures. Private investment and exports remain sluggish, and external risks, such as potential trade wars and a slowdown in global economic growth, further threaten India’s recovery.

Infrastructure: Infrastructure remains a bottleneck for growth. Challenges such as long return periods on infrastructure projects, difficulty securing long-term loans, and deficiencies in transport, power generation, and port infrastructure are impeding productivity. Land acquisition for infrastructure projects remains a significant hurdle, delaying key power and transportation initiatives.

Silver Lining and Conclusion

A positive aspect in the current economic landscape is the growth in agriculture and allied activities. The RBI’s recent monetary policy statement noted that strong Kharif and good Rabi production should ease food inflation. Agriculture has shown positive growth compared to the previous two quarters.

While the decline in urban demand appears to be stabilizing, it may be part of a broader adjustment rather than a long-term slowdown. The surge in consumption demand over the past few years, driven by post-Covid “revenge shopping,” may be tapering off, and this shift in consumer behavior has impacted the earnings of major consumer goods firms.

Whether the current slowdown is structural or cyclical remains a subject of debate. Some economists view it as a temporary adjustment, while others argue it signals a deeper recession or stagnation with more entrenched challenges.

As consumption patterns shift, with consumers opting for local brands or smaller packet sizes, corporate earnings and in-vestments may be affected, further slowing economic growth.

To recover from this slowdown, policymakers must focus on increasing government spending on infrastructure projects, tackling inflation, revitalizing private investments, creating employment opportunities, and boosting demand and exports.

Policymakers are now at a critical juncture where their deci-sions will determine the future trajectory of India’s economic growth. The scale of recovery will depend on how effectively these challenges are addressed. As policymakers navigate these issues, it is clear that India’s economic growth story may need to be revised in light of the current conditions.