India’s economy grew at a slower-than-expected pace of 5.4% in the July-September quarter of the current fiscal year, marking a seven-quarter low. This slowdown was largely attributed to a decline in manufacturing and a contraction in the mining sector. While the services and agricultural sectors showed resilience, the overall economic performance undershot expectations, signaling potential challenges for the rest of the fiscal year.
GDP Growth Slows Amidst Weak Manufacturing and Mining Sectors
Data released by the National Statistics Office (NSO) revealed that India’s GDP growth for the second quarter of FY2024-25 was a significant drop from the 6.7% growth recorded in the April-June period and much lower than the 8.1% expansion observed during the same quarter last year. The growth for the July-September period also fell short of the Reserve Bank of India’s (RBI) projection of 7% for the quarter. The Indian government, however, has maintained its forecast for economic growth to be in the range of 6.5% to 7% for the entire fiscal year.
Despite the deceleration, the services sector remained largely stable, while the agricultural sector showed encouraging signs of recovery. The slowdown, while expected by economists, was sharper than anticipated and raised concerns over weakened consumption and investment patterns. The contraction in key sectors like manufacturing and mining contributed heavily to the lower-than-expected growth rate.
Key Sectors Underperform in Q2
The most notable factor behind the slowdown was the underperformance of the industrial sector, which saw a significant decline. The manufacturing sector, a key pillar of the Indian economy, grew by just 2.2% in Q2 FY2024, a stark contrast to the impressive 14.3% growth recorded in the same period the previous year. The mining sector also contracted by 0.1%, compared to a growth of 11.1% in Q2 FY2023. Together, these declines in manufacturing and mining contributed to the overall slowdown in industrial output, which fell to a six-quarter low of 3.6%.
Rajani Sinha, Chief Economist at CareEdge, highlighted that the sharp moderation in industrial performance was the primary driver of the lower GDP growth, particularly in the mining, manufacturing, and electricity sectors. Several factors, including adverse weather conditions such as excessive rainfall, disrupted operations in key industries like electricity, coal, and cement, further exacerbated the slowdown.
Services and Agriculture Show Resilience
Despite the downturn in the industrial sector, India’s services sector remained a bright spot. The services sector grew by 7.1% in Q2, nearly matching the 7.2% growth recorded in the previous quarter. This steady performance in services reflects the sector’s continued strength and its critical role in driving India’s economic growth. With a significant contribution to GDP, the services sector includes key segments such as IT, telecommunications, finance, and trade, all of which are expected to play an important role in sustaining growth momentum for the remainder of the year.
The agricultural sector also showed signs of recovery after a period of stagnation. The farm and allied sectors grew by 3.5% in Q2, a notable improvement from the 2% growth seen in Q1 and 1.7% in Q2 FY2023. This recovery in agriculture, particularly due to favorable weather conditions for the rabi crop, could provide a much-needed boost to rural demand, supporting the overall economy.
Investment and Consumption Trends
The slowdown in manufacturing and mining, coupled with a contraction in investments, has raised concerns about the sustainability of growth. According to analysts, there has been a sharp moderation in both private and government investments. While government capital expenditure (capex) had been supporting growth in recent years, it saw a decline in the first half of FY2024. The Centre’s capex fell by 15%, while the consolidated state capex dropped by 11%.
Despite these challenges, consumption growth remained relatively healthy. Consumer spending, which is a major driver of India’s economic activity, continued to grow at a rate of around 6% in Q2. This indicates that while there are headwinds in industrial output and investment, demand for goods and services in the economy has remained resilient.
Global and Domestic Challenges
The broader economic slowdown can be attributed to a combination of domestic and global factors. Geopolitical tensions, rising input costs, and stubborn inflation have impacted both consumer demand and corporate earnings. Additionally, India’s growth is closely tied to global economic conditions, and the softening of global demand and economic uncertainties could weigh further on the country’s growth prospects.
While the external environment remains challenging, domestic economic policies, including government-led investments in infrastructure and the push for digitalization, are expected to support growth in the coming months. However, economists caution that addressing the structural weaknesses in manufacturing, mining, and infrastructure will be essential to sustaining long-term growth.
Economic Outlook and Policy Implications
India’s economic outlook remains positive but uncertain, as the sharp slowdown in the second quarter poses challenges for the remainder of FY2024-25. While the government has maintained its growth forecast of 6.5% to 7%, the key to achieving this target will depend on how quickly the industrial sector can recover and whether consumption continues to remain robust despite inflationary pressures.
Experts suggest that India’s growth trajectory will hinge on several factors, including favorable weather for agriculture, a rebound in industrial production, and stable global oil prices. Moreover, the government’s ability to accelerate infrastructure development and attract private investment will be critical to mitigating the risks posed by the slowdown in key sectors.
In conclusion, while the Indian economy faces short-term challenges, it is still underpinned by strong fundamentals, including a resilient services sector, a recovering agricultural landscape, and steady consumption growth. However, the government and policymakers will need to monitor key sectors closely and implement measures to bolster industrial activity and investment to sustain growth moving forward.
For the latest Business and Finance News, subscribe to Globalfinserve. Click here to stay updated on breaking news and analysis in the world of business and finance.