GDP figures highlight government’s waning role as economic driver

The latest GDP numbers at 5.4 per cent for the July-September quarter have thrown up a rather disconcerting picture of the economy.

The government’s role as an economic driver has diminished, with public capital expenditure — a crucial lever for spurring private sector investments — falling notably behind.

Manufacturing output barely grew at 2.2 per cent in the last quarter, underscoring the need for industrial momentum. Meanwhile, global uncertainties, such as potential US tariffs on BRICS nations and inflationary pressures, have added to the economic gloom.

Against this backdrop, the two primary engines of growth — consumption and investment — are faltering, posing significant challenges to India’s economic recovery.

“The recent slowdown in India's GDP growth to 5.4 per cent reflects a combination of cyclical factors and weaker-than-expected consumption, investment and exports,” New York-based financial services firm JP Morgan said in a report.

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Key driver losing steam

The RBI had earlier revised the growth estimate upwards to 7.2 per cent for 2024-25, which is unlikely to happen now.

Consumption, a significant portion of India’s GDP, is facing a sharp slowdown. The momentum has evaporated after a surge in urban demand post-COVID, driven by pent-up demand and increased spending.

Urban wage growth has stagnated, job creation in key sectors like IT and services has slowed, and inflation continues to erode household purchasing power. The result is weak consumer sentiment, which is reflected in the tepid performance of FMCG companies. Even essential categories are struggling, pointing to widespread demand fatigue.

Rural consumption, often a stabilising factor during economic downturns, is also under stress. Slower agricultural income growth and higher input costs for farmers have softened demand in rural markets. This dual pressure — urban and rural — has made it difficult for the consumption engine to drive growth.

Slow capital expenditure

“Consumption demand has been disappointing for H1 FY25, and we think the recovery will be pushed into FY26. There have been multiple macro challenges — high base, weak jobs market and credit tightening by the RBI. Our expectations of a mass category consumption revival also appear to have been belied with FMCG companies reporting weak numbers,” Emkay Global said in its note to investors.

The government’s capital expenditure, vital for creating jobs and boosting private sector confidence, has been slower than anticipated.

While industries like defence and railways are expected to see a pickup in spending in the second half of FY25, the delay in disbursements has created a short-term drag on economic momentum.

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Subdued private investment

Private sector investment has also remained muted. Businesses are cautious amid weak demand, rising costs and global uncertainties. With a robust public investment push to act as a catalyst, private investment will likely rebound soon, further stalling the recovery.

“The concerns have been long-standing: consumption was being narrowly driven by the top, which, by itself, was not enough to generate strong consumption growth in the aggregate," said the JP Morgan report.

"In turn, the lack of domestic demand visibility meant private investment was not remarkably broad-based, and the economy’s investment was overly reliant on public investment. If public investment even temporarily stepped back – as has been the case the last two quarters – the softer underbelly of private sector demand would become evident. Meanwhile, even as service exports have been solid and sound exports have been much more volatile, they now face a more hostile global environment. These dynamics seem to have been at play in the last two quarters,” it added.

Trump threatens BRICS

Significant global headwinds add to these domestic challenges. Potential US tariffs on BRICS nations threaten India’s manufacturing and IT services exports.

Inflation, driven by high energy and commodity prices, constrains consumer spending and corporate profitability.

The strength of the US dollar has also led to capital outflows, putting pressure on the Indian rupee and limiting the RBI's ability to ease monetary policy effectively.

“Trump’s threats to retaliate with sanctions on BRICS countries attempting de-dollarisation add to the uncertainty,” Emkay Research said.

Will RBI do the needful?

With growth slowing, the RBI is pressured to cut interest rates to stimulate borrowing and spending. However, inflation remains above 6 per cent, leaving little room for aggressive monetary easing.

Even if rates are cut, their impact may be muted due to low economic leverage levels and cautious corporate sentiment. For monetary policy to be effective, it must be paired with structural reforms and targeted fiscal measures to revive demand and investment.

The economic slowdown has created an uneven playing field across sectors. Capex-driven industries like energy, materials, and utilities could benefit from a pickup in government spending, but disbursement delays remain a risk.

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Possible correctives

Consumer-facing sectors such as FMCG and retail are expected to remain under pressure, with any meaningful recovery in demand unlikely before FY26. The financial industry faces structural challenges, including slow credit growth and rising bad loans, making it a cautious investment choice.

Meanwhile, export-driven sectors grapple with global uncertainties, though opportunities exist for companies adapting to shifting supply chains.

Analysts said despite the challenges, there are steps the government and policymakers can take to steer the economy back on track:

Accelerate Public Investment: Speeding up capex disbursements, particularly in high-impact sectors like defence, railways, and infrastructure, is critical for creating jobs and boosting economic activity.

Stimulate Consumption: Targeted measures, such as tax cuts for middle-income households and direct support for rural areas, can help revive demand. The upcoming Union Budget presents an opportunity to introduce these measures.

Implement Structural Reforms: Addressing long-standing issues in land acquisition, labour market regulations and financial sector governance will be essential for attracting private investments and sustaining long-term growth.

Leverage Global Shifts: While global risks remain, India’s large domestic market and competitive advantages in IT and pharmaceuticals offer opportunities to benefit from shifting global supply chains.

Recovery might take time

Economists have revised their GDP growth forecasts for FY25 downward to 6.1-6.8 per cent, reflecting the challenges in the current environment.

While government spending is expected to drive a recovery in the second half of the fiscal year, private consumption and investment are unlikely to rebound meaningfully before FY26.

The economy will require sustained policy efforts, structural reforms, and global tailwinds to regain momentum.