Q2 growth disappointing but 6.5% GDP target for FY25 ‘not in danger’, says CEA

Chief Economic Advisor V Anantha Nageswaran on Friday described the economic growth number of 5.4 per cent for July-September quarter as “disappointing” but reassured that the situation is “not alarming.”

He also listed key factors contributing to the slowdown while pointing to sectors showing resilience.

“There is every reason to believe that 5.4 per cent is just a one-off number,” he said, pointing to improved rural demand and growing order books of companies. He said the dip in growth could be due to moderation in urban demand. However, he said, there is no concern about a continued moderation in urban demand.

He also stressed that it is too early to extrapolate to full fiscal GDP growth figure.

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“We will take a look at the possibilities on the final outcome in terms of the GDP estimates for the full year. These are first estimates. The first cut of the full year growth estimates for FY25 will be available in January. It is too early to say that that even 6.5 per cent number is in danger. One should not extrapolate too much,” he stressed.

The CEA highlighted that the global economic environment remains challenging, impacting India‘s domestic manufacturing sector. Among key concerns include a slowdown in production and the adverse effects of dumping in specific industries, notably steel. While steel consumption in the country has risen, production levels have not kept pace, Nageswaran added.

Key contributors

Quarrying and manufacturing emerged the primary contributors to the supply-side slowdown. Gross fixed capital formation (GFCF), a measure of investment activity, has also underperformed due to reduced capital expenditure by the public sector, the CEA said. Among bright spots in the economy, he pointed out that agriculture continued to shine, delivering robust growth amid the economic challenges. The construction sector also stood out, registering high single-digit growth over the full year, reflecting resilience in infrastructure activity.

The CEA suggested that some of the factors driving the slowdown might lose momentum in the coming quarters, offering hope for a rebound. “Some of the slowdown factors may not continue at the same pace in the coming quarters,” he said.

Pointers

Outlook for the near-term

Positives

Ø     Economy shows resilience underpinned by steady demand and strong manufacturing and service sector activity.

Ø     Record production estimates for kharif foodgrains as well as promising rabi crop prospects augur well for farm income and rural demand.

Ø     Labour market shows signs of growth, with an easing unemployment rate and expanding formal workforce, with notable increases in manufacturing jobs and a strong inflow of youth into organised sectors.

Ø     Better growth in labour incomes holds the key to sustained demand growth and capital formation in the private sector.

Ø     Global crude oil prices remaining low, bodes well for economic activity and price stability.

Risks

Ø     Geopolitical conditions remain fragile and may continue to impact domestic inflation, supply chains and capital flows.

Ø     Elevated asset prices globally is a risk factor.

Ø     Exports face greater uncertainties due to potential policy development elsewhere and an uncertain outlook for monetary policy and economic growth in advanced economies.

Ø     Limits to States’ capacity on capex, capital-intensive growth in private corporate sector and the regulatory environment are medium to long-term risk factors for economic growth.