First Half: Sweet Surprises
The economy exceeded expectations in the first half of 2024, with a remarkable 8.2% growth for 2023-24, driven by robust revisions of previous quarters' numbers.
Key highlights included an 8.6% growth in Q3 FY23-24 and a surge in private consumption and investments.
Second Half: Sputtering Growth and Inflation Concerns
The post-election period saw challenges emerge:
GDP growth slowed to a five-quarter low of 6.7% in Q1 FY24-25.
Q2 FY24-25 growth dropped to a seven-quarter low of 5.4%, raising alarm bells.
Persistently high food prices pushed inflation closer to 6%, dampening rate cut expectations.
The Clamour for a Rate Cut
Why the demand?
Slowing growth, urban demand struggles, and weaker corporate results have prompted government officials to urge the RBI to lower rates to spur private consumption and investments.
Challenges for the RBI
Food price volatility, especially in September, led to inflation spikes.
Despite benign inflation prints mid-year (3.5% in July and August), the RBI prioritized price stability, maintaining high rates.
Budget 2024-25: A Mixed Bag
Presented in July, the Union Budget emphasized:
Public infrastructure spending with a ₹11.11 lakh crore capital expenditure plan.
Job creation and skilling initiatives to address urban demand concerns.
Token tax cuts for income taxpayers to alleviate inflation’s impact and boost consumption.
Economic Projections and Realities
Initial optimism: The government projected FY24-25 growth at over 7%.
Downward revisions: The Finance Ministry now expects growth to hover around 6.5%, while the RBI has pared its projections to 6.6%.
Prolonged cyclical slowdown?
High interest rates temper urban demand and private consumption.
Growth drivers like capital spending and investments remain subdued.
Growth vs. Inflation: A Tug of War
The RBI and Finance Ministry diverge on the path forward:
RBI’s stance: Focus on taming inflation to ensure sustainable growth.
Finance Ministry’s view: High rates have exacerbated the demand slowdown, and a more accommodative policy is necessary.
Looking ahead:
A new RBI Governor may not herald immediate rate cuts.
Inflation trends and policy coordination will be critical for breaking the growth-inflation impasse in 2025.
The Road Ahead: Challenges and Opportunities in 2025
Rebalancing Act: Achieving a delicate equilibrium between inflation control and growth stimulation will be pivotal.
Global uncertainties: External factors like U.S. policy shifts under President Trump and commodity price volatility may add to the complexities.
India’s resilience: With strong fundamentals and proactive measures, the economy could navigate these headwinds and sustain moderate growth.
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