A surprise dip in GDP to 5.4 per cent in Q2 of FY25, far below the street expectation, is a steep fall from the 8.1 per cent posted in Q2 of FY24. Caught between the pincers of elevated interest rates and fiscal prudence, the economy struggled in vain to maintain its trajectory of ascent.

Among others, a drop in year-on-year (y-o-y) government final consumption expenditure from 13.8 per cent to 4.4 per cent, government final capital formation from 11.6 per cent to 5.4 per cent, lower corporate earnings, and manufacturing sector growth going down from 14.3 per cent to 2.2 per cent during Q2 of FY24 and Q2 of FY25 decelerated the economy.

The downsized credit to manage liquidity risks due to differences in deposit and credit growth slackened consumption, adding to the woes.

Based on the weak GDP data, many global think-tanks and analysts have begun to cut their GDP outlook for FY25. CRISIL lowered the GDP outlook from 6.8 per cent to 6.5 per cent, and Goldman Sachs from 6.4 per cent to 6 per cent. Driven by the current data and to remain realistic, the RBI may revise its GDP outlook downwards to sub-7 per cent during the December monetary policy.

However, the Chief Economic Advisor allayed the fears, calling the dip in growth a one-off development, and outlined the need to address the impediments to rejuvenate the economy.

Some tailwinds

However, amid the disappointing GDP data, there are some tailwinds — such as prospects of a robust farm sector, resurgence of the core sector growth, a growing order book, continuing robustness of the service sector, the lag impact of festive gains, and expected revival of rural demand. These, along with timely policy support, can help improve H2 performance

Given the state of the domestic economy, and external sector having already moved to a lower interest rate curve, the RBI will now have to go for a major shift in its approach to better balance inflation and growth.

Overwhelmed by food inflation — the headline inflation breached the 6 per cent mark in October 2024 — the Monetary Policy Committee (MPC) may explore options, using the latitude of the glide path of inflation, to resuscitate the economy. In the backdrop of robust growth posted until Q1 FY25, the RBI opted to wait for a durable 4 per cent inflation and did not use the window of opportunity to cut rates even when inflation was below 6 per cent since September 2023.

Pump-priming the economy

Now, a 25 percentage point cut in repo rate in December or a pause with a 50 basis points cut in February 2025 is possible, which can pump-prime the economy. The monetary policy needs to have measures that will harness the full potential of the economy to ensure that it rebounds in H2.

Such positive action of the RBI can resonate across sectors providing much-needed buoyancy to the economy.

The writer is an Adjunct Professor, at the Institute of Insurance and Risk Management. Views are personal

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