Despite Missing Growth Target, India Remains the Fastest Growing Economy
STORIES, ANALYSES, EXPERT VIEWS
Industrial production growth slowed to a six-month low in February to 2.9%, down from January’s 5.2% and almost halved from last February’s 5.6%. This decline was broad-based, except for a marginal rise in power production. While mining witnessed the steepest decline to 1.6% this February, from 8.1% last year, manufacturing almost halved to 2.9%, from 4.9% last year.
In the opinion of The Hindu the steep decline in consumer durables output as well as a production contraction for the third month in a row, of consumer non-durables “indicates a marked decline in overall consumption demand. This has been despite a sharp dip in retail inflation….”
Trepidation of manufacturers and low demand: The above highlights two things: “the trepidation of manufacturers facing unprecedented global economic uncertainty following U.S. President Donald Trump’s actions and the lack of an appetite among consumers, many of whom have witnessed the value of their assets plummet due to Indian stock market volatility that has mirrored the peaks and troughs in global exchanges.”
Green shoots: There have been green shoots, however. Within the manufacturing sector, which has the highest weightage of about 77% in the IIP, 14 of 23 industry groups recorded growth this February from a year ago. Capital goods output accelerated to 8.2% from 1.7% last year, indicating robust investment demand aided by a massive rise in government spending. This was despite the liquidity squeeze in India’s banking system by ₹1.7 trillion, as on February 20, due to the massive flight of foreign capital in search of haven asset classes and to hedge against a depreciating rupee.
The Centre, states The Hindu “can perhaps take solace in the fact that despite a possibility of its growth target for the last fiscal being missed, India remains the fastest growing economy."
Consumption growth back on track?
However, in the view of DK Srivastava, Chief Policy Advisor at EY India, “Subject to some adjustment or the seasonality pattern, consumption expenditure appears to be picking up on average and is being driven largely by rural demand.” He emphasizes that while consumption shows signs of recovery, it’s essential to consider the seasonal fluctuations when interpreting these figures.
Srivastava notes, “Both considered together, there may be some overachievement of the fiscal deficit target. However, it comes at the cost of sacrificing some growth.” He highlights the expected shortfall in government capital expenditure and the potential consequences for the overall economy.
On inflation, Srivastava shares an optimistic view, stating, “So I see the CPI inflation as a positive movement which is preparing ground for interest rate reduction.”
Low inflation
A positive indeed, is that retail inflation in March was down to a near six-year low of 3.34%, making it almost certain that the Reserve Bank of India (RBI) will cut its banks’ lending rate further from the current level of 6%, signalling the emphasis on growth, amid global trade uncertainties.
The repo rate reduction, writes The Hindu “has already begun translating into lower interest on bank loans. In normal times, this would translate into greater capital flows into businesses, thereby raising jobs, incomes and consumption. But it comes at a time of dampening investor confidence: U.S.-led tariff uncertainty is forcing exporters to scramble for newer markets, amid a concern over near-term demand contraction, as America has been India’s largest buyer of merchandise goods since fiscal year 2022. Easing inflation could raise domestic consumption and India’s sluggish industrial production.”
What must concern policymakers more “should be the steep fall in food prices, as this means lower farmer incomes, directly impacting rural consumption demand….”
Above normal monsoon anticipated
Another positive is that the India Meteorological Department (IMD) has given a reassuring signal that from June to September, India is likely to receive ‘above normal’ monsoon rainfall, or 5% more than the historical average of 87 cm. Were this to pan out as projected, it would be a second consecutive year of ‘above normal’ rains. Last year, India received 8% more monsoon rain than what is typical from June to September. This is good news for ‘kharif’ (winter crop) sowing, which will help improve stocks of grain and shore up reserves for exports.
