Growth slowdown cyclical or policy-driven?

India's real gross domestic product (GDP) growth stood at a seven-quarter low of 5.4 per cent in the second quarter of 2024-25 (Q2FY25), well below India's potential GDP growth of 7-7.5 per cent.

- BAREENDRA KUMAR BHOI

The drastic slowdown was contributed by mining and quarrying (-0.1 per cent), manufacturing (2.2 per cent), and electricity group (3.2 per cent). Is this slowdown cyclical or policy-driven? Going by the recent growth rates, which sequentially fell from 8.6 per cent in Q3FY24 to 7.6 per cent in Q4FY24 and further to 6.7 per cent and 5.4 per cent in the first two quarters of FY25 respectively, a cyclical slowdown seems to have set in. On the contrary, if one considers the RBI's latest assessment of India's 'State of the Economy', growth momentum remains fairly promising in H2FY25.

According to the RBI's assessment, the slow growth in H1FY25 was temporary, attributed to inadequate public spending in Q1FY25 due to the general election and excess rainfall in Q2FY25. Hence in its October monetary policy, the RBI retained the growth and inflation projections at 7.2 per cent and 4.5 per cent respectively for FY25. As India's growth momentum was perceived to be resilient, MPC was not in a hurry to cut the repo rate, until retail inflation was durably secured at 4 per cent.