India's growth slowdown demands an RBI response

The central bank could buy bonds to ease Indian liquidity conditions well before it goes for a rate cut

- NIRANJAN RAJADHYAKSHA

The Indian economy is in the midst of a cyclical slowdown. The government statistics office reported last week that economic growth had declined for a third quarter in a row. There were enough indications from the ground by then that the economy was losing momentum; but hardly anybody expected such a sharp slowdown from 6.7% in the first quarter to 5.4% in the second quarter of 2024-25.

Economic growth in the second quarter was 3.2 percentage points below the rate of economic expansion in the December quarter in 2023-24. India had experienced seven quarters of declining growth just before the pandemic struck. It is still not clear whether the ongoing slowdown will be a similarly lengthy stumble or a momentary wobble because of transient influences.

A lot of the discussion these past few days has been about how policymakers should respond to the growth shocker, but first it would be useful to examine the nature of the slowdown. Private sector demand has been weakening for some time. Urban consumers have paused for a breath after a wave of hectic spending following the end of pandemic restrictions. Companies have still not been keen to build new capacity in their operations.

The government had stepped in to bolster domestic investment through spending on new roads, ports, airports and other types of infrastructure. However, government capital expenditure in the first half of the current financial year is lower than what it was in the same period last year, perhaps because of national elections in 2024. The net result is that fiscal support has further weakened.