There was already considerable pessimism about the Indian economy’s growth trajectory in FY25. High-frequency data as well as the commentary from companies have been pointing at weak consumer demand. The rise in goods and services tax collections, for instance, have consistently undershot nominal gross domestic product growth. Even in that background, the first advance estimates released by the government on Tuesday came as a surprise. At 6.4%, it’s a four-year low, and is a sharp decline from the 8.2% growth in FY24. The advance estimates number will surely be achieved as growth in the second half of the fiscal year can be expected to easily clock a growth of 6.7%. But the headwinds could strengthen beyond that. If we have to avoid another disappointment in FY26, some immediate measures need to be taken to resuscitate demand.
While private final consumption expenditure is tipped to grow at 7% — a good level on the face of it — it is on a very weak base of only 4% in FY24. The fact is that consumption may have been resilient at the top end for a range of premium goods, but there is clearly very limited purchasing power with middle- and lower-income households. To bring relief to small enterprises and give their businesses a leg-up, the central bank must shift its priorities and cut interest rates by a chunky 100 basis points in the next six months. That could cheer the sentiment and boost retail credit which has moderated sharply. To revive the credit impulse, the Reserve Bank of India must ensure liquidity remains abundant, enabling lenders to mop up cheaper deposits. Without some succour for small units and middle-income and lower middle-income households, it will be hard to revive demand.
The trade, hotels, transport, and communications segment is estimated to grow at only 5.8% in the current year, the slowest pace in six years. This sector generates employment in large numbers and the sluggish performance probably explains the slow job creation in the country. In general, the lack of job opportunities is worrying. A report by FICCI-Quess Corp has found that the compound annual growth rate in wages, across six sectors, was just 0.8-5.4% in the 2019-2023 period. This was low not simply in absolute terms but also did not cover for the 5.7% annual average inflation. The increase in persons hired by a clutch of 1,196 firms fell to 1.5% in FY24 from 5.7% in FY23, revealing how companies are cutting back on hiring. To be sure, many are opting to hire on contract but it doesn’t seem like the numbers are very large.
Real rural wages have been negative for a long time. Demand for work under the government’s rural employment guarantee scheme was at a four-month high in December, suggesting the rural recovery is not as strong as is believed. The lack of visibility in demand is apparently holding back further investments by the private sector. While companies are putting up capacity in several sectors, in aggregate the gross fixed capital formation, expected to grow at 6.4% this year, could have been better. While the private sector must definitely commit more capital and hire more, the government should up spending meaningfully — at least by 10% annually — for a couple of years. As imprudent as it may sound, a little bit of pump priming is called for to ensure the economy doesn’t lose any more momentum.