India must address the demand deficiency that ails its economy

Addressing supply issues alone won't help when the problem pertains more to weakening demand

- HIMANSHU

Two key pieces of economic data released last month have rung alarm bells on the state of India's economy. The first was on retail inflation, which breached the 6% upper tolerance limit in October, climbing to 6.21%, the highest since August 2023. Food inflation was 10.9%, the highest since July 2023. The second data-point was on growth in gross domestic product (GDP) in the second quarter of 2024-25, which, at 5.4%, was the lowest since the last quarter of 2022-23.

Not only was this the sixth straight quarter of decline from a high of 8.2% in the first quarter of 2023-24, it also came as a shock to the government. While the Reserve Bank of India had projected a growth rate of 7% as late as October, even the finance ministry was off the mark with a projection of 6.7%. This reflected the inability of our financial and monetary authorities to read the state of the Indian economy accurately.

For manufacturing, the growth rate has been trending down from 14.3% in the second quarter of 2023-24 to 2.2% in the latest quarter. Overall, for the secondary sector, including construction and utilities, the decline has been from 13.7% to 3.9% during the period. This slump did not happen all of a sudden. It has been visible for the last six quarters, but there was no urgency to correct the policy prescriptions or even acknowledge the severity of the problem.