India’s GDP growth slowdown has caught the attention of people globally, including economists, policymakers, investors, and journalists.
Economic growth in the second quarter of FY25 dipped to 5.4%. This is the lowest growth figure in seven quarters. The country faces crucial questions about its economic trajectory.
Despite the challenges, opportunities for recovery remain strong, driven by structural reforms, government spending, and evolving market dynamics.
India Today quoted Radhika Piplani, an economist with Dam Capital Advisors, who said,
“The slowdown should be a ‘wake-up call’ for the *RBI. The next rate decision is live for a policy action and will be keenly watched for reasons behind the GDP miss.”
* RBI stands for the Reserve Bank of India, India’s central bank.
Numbers Behind the Slowdown
India’s GDP growth of 5.4% in Q2 is a marked decline from 6.7% in Q1. Key contributors to the slowdown include:
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Private Consumption
Growth slowed to 6%, reflecting weaker urban spending.
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Capital Expenditure
Capital expenditure, which refers to spending on long-term assets like buildings, machinery, and equipment to improve or expand operations, grew by just 5.4%, a decline from previous quarters, as private investment lagged behind government efforts.
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Industrial Sector
Industry recorded its slowest growth in six quarters at 3.6%, with manufacturing and electricity generation particularly impacted.
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Services Sector
The services sector fared much better, with growth at 7.1%. However, that was not enough to offset broader weaknesses.
The slowdown highlights a need for greater efficiency in policy implementation and private sector participation.
What’s Driving the Slowdown?
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Urban Spending Freeze
Urban middle-class consumption, a key driver of growth, has shown signs of stagnation.
Publicly traded companies—those listed on the stock market—reported reduced wage growth, which has dampened discretionary spending.
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Election-Related Capital Expenditure Pause
Government capital expenditure slowed during the election season, impacting infrastructure and industrial investments.
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Global and Domestic Inflation Pressures
Rising food prices worldwide and geopolitical uncertainties have undermined consumer purchasing power and increased businesses’ input costs.
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Liquidity Concerns
The banking system experienced tight liquidity, driven by foreign exchange interventions and GST (Goods & Services Tax) outflows. Consequently, borrowing costs rose, further dampening investment.
Opportunities for Recovery
Despite the slowdown, there is a good chance that the economy will gain momentum in the second half of FY25, driven by the following factors:
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Festive and Seasonal Demand
The festive season, from September/October through December, and the wedding season, between November and February, are expected to boost consumer spending and economic activity.
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Increased Government Spending
India’s government plans to boost capital expenditure, particularly in rural development and infrastructure, which will create jobs and drive demand.
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Monetary Policy Easing
The Reserve Bank of India is under pressure to address GDP-growth concerns by lowering interest rates. It could also implement liquidity-enhancing measures such as reducing the * cash reserve ratio (CRR).
* CRR refers to the percentage of a bank’s deposits that must be held in reserve with the central bank.
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Services Sector
As mentioned earlier, the services sector, a bright spot in the second quarter, continues to show robust performance.
The services sector is the largest contributor to India’s economy, accounting for 54.72% of the country’s GDP. IT and software services, financial services, healthcare, education, tourism, retail, and telecommunications are among the key industries driving growth within this sector.
Challenges Ahead
Recovery is likely; however, there are some potential hurdles:
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Persistent Inflation
High food inflation, particularly in vegetables, could undermine consumer confidence and delay monetary easing.
Mint quoted Mandar Pitale, Head of Treasury at SBM Bank India, who said,
“Inflation has been at the upper end of the target range for the past two months, which limits the room for rate cuts.”
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Weak Private Investment
Reviving private sector capital expenditure is essential for long-term growth.
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Global Risks
Trade and foreign investments could be negatively affected by external factors, such as exchange rate pressures and geopolitical uncertainties.
Policy Directions for Sustained Growth
To ensure a stable recovery and long-term growth, India’s government and central bank must focus on:
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Enhancing Rural Demand
If agricultural output performs well and rural incomes improve, the country will have a stable base for consumption.
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Boosting Capital Expenditure
The government must commit to accelerating infrastructure projects and incentivizing private sector investments.
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Addressing Inflation
The government must take short-term measures to curb food inflation, such as improving supply chain logistics, releasing buffer stock, and temporarily reducing import tariffs on essential commodities. It also needs to implement structural reforms in agriculture.
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Strengthening Financial Liquidity
India’s central bank must ease liquidity constraints in the banking system. Measures such as reducing the cash reserve ratio (CRR), conducting open market operations (OMO), and injecting funds through repo operations will support lending and investment.
Conclusion
India’s GDP growth slowdown is a wake-up call rather than a crisis.
A well-coordinated mix of fiscal and monetary policies can help the economy regain momentum. The government is in charge of fiscal policies, while the central bank manages monetary policies.
India has the potential to continue being one of the world’s fastest-growing major economies for many years to come if it focuses on efficiency, infrastructure, and rural revitalization.