India’s second quarter GDP growth (2024-25)

Udayan Hazarika

(The writer can be reached at udayanhazarika@hotmail.com)

The Ministry of Statistics and Programme Implementation (MOSPI) has recently published (29-11-24) its estimations relating to the gross domestic product of India for the second quarter of FY 25. (Q2FY25). The growth rate of real GDP, i.e., GDP at constant prices for this period, has been estimated at 5.4 percent, which happens to be the lowest since the last seven quarters, the last lowest being 4.3 percent occurring in the quarter ending December 22-23. The present estimate of a 5.4 percent growth rate is in sharp contrast to the estimates made by the RBI, which was 7 percent during its Monetary Policy Committee (MPC) review in October last. But the bank’s officials have recently come up with downsizing the volume of GDP by reducing the growth rate to 6.8 percent for Q2, indicating that the macroeconomic indicators’ performance is not very satisfactory. The bank appears to be unusually enthusiastic while it forecasts the growth rate for both Q3 and Q4 and together with the whole fiscal year of 2024-25, Their official estimates for both Q3 and Q4 come to 7.4 percent, while for the whole fiscal year it was estimated at 7.2 percent. Despite repeated downgrades of the second quarter growth rates by various monetary agencies (World Bank and IMF to 7.0 percent, Economic Times poll to 6.8 percent), the RBI preferred to stick to its estimates of October. However, with the present estimates of MOSPI, the RBI would inevitably downgrade its expectation on GDP growth rate.

As per the present estimates, the GDP at constant prices (2011-12) in Q2 FY 25 will touch the level of Rs 44.10 lakh crore as against Rs 41.86 lakh crore in 2023-24 for the same period. This gives a growth rate of 5.4 percent as against 8.1 percent for the same period last year. The corresponding GVA at constant prices was estimated to grow by 5.6 percent, which has slowed down from 7.7 percent last year. In absolute terms, it comes to Rs 40.58 lakh crore as against Rs 38.42 lakh crore during the same period last year. The sluggish growth rate during the second quarter of a fiscal year is not a new phenomenon. In 2022-23, when the first quarter growth was 12.8 percent, the Q2 growth was only 5.5 percent. Similarly, in 2023-24, while the Q1 growth was 8.2 percent, Q2 came up with the growth rate of 8.1 percent. Thereafter, the growth rate usually picks up in the third quarter.

Let us now examine how the sectors performed during Q2 on the expenditure front. In the private final consumption expenditure (PFCE) front, there was a meagre 1.01 percent growth during the September quarter compared to the June quarter of this fiscal year. But the year-on-year percentage shows a growth rate of 6.0 percent in Q2 FY25 against the same period last year. This slow growth was expected much earlier, depending on which many financial institutions had revised India’s Q2 growth rate downward. However, it may be noted that the contribution of this sector to the GDP has increased in this quarter to 62 percent as against the 61.1 percent at current prices last year. The sluggish growth in this PFCE is mainly due to falling demands in the urban front, which was the result of food inflation generated in the urban areas. Even retail inflation in general was 6.21 percent, which was well above the comfortable limit set by the RBI. Among other factors responsible for this sluggish growth are the growing borrowing cost, mainly due to high interest rates, and non-stimulating real wage rates. RBI, however, appears to be happy with the demand movement in the rural sector. These are also the reasons why manufacturing sector growth has dipped from 3.4 percent in Q2 of the current year from 11.9 percent of the last year.

A sharp fall can be observed in gross fixed capital formation (GFCE), or the volume of investment, from 14 percent in 2023-24 to only 4.4 percent in Q2 of the current fiscal year. But compared to the performance of this sector in the June quarter (-0.2%) of the current fiscal year, the performance of this sector in the September quarter is fairly high at 4.4 percent. It may be noted that government spending was negative in both Q1 of the current and last year. A fall in two major components can be observed: GFCF from 11.6 percent in Q2 of last year to 5.4 percent in the same period of the current year, together with the changes in stock from 10.12 percent in the last year to 1.3 percent in the current year for the same period. Exports fell significantly from 8.7 percent in the June quarter to 2.8 in the September quarter. The percentage on a year-on-year basis comes to almost half, from 5.0 percent in Q2 of last year to 2.8 percent in the current year. These are the major areas of expenditure that are responsible for the sharp fall in the rate of growth of GDP in Q2.

The performance on the consumption demand side presents an overall contraction in the GVA front from 7.7 percent in Q2 of last year to 5.6 percent in the current year for the same period. It shows that except for agriculture, the other two sectors have contracted compared to the June quarter, although marginally. The primary sector, as a whole, shows marginal growth from 2.7 percent in the June quarter to 3.0 percent in the September quarter. Growth on a y-o-y percentage is also nominal, from 2.9 percent in the last year to 3.0 in the same period of Q2 in the current year. In other words, the sector is just maintaining its level. The agriculture, livestock, and forestry sectors grew more than twice as much as that of the last year, from 1.7 percent to 3.5 percent, yet this growth was neutralized by the contraction in the mining and quarrying sector from 11.1 percent last year to negative 0.1 percent in the current year. Compared to the June quarter, the contraction in this sector is almost 24.90 percent. However, it is the sharp contraction in the secondary sector that actually pulled down the growth rate of GDP in Q2. All the components that comprise the secondary sector have fared poorly in this quarter. The sector as a whole has fallen from 8.4 percent in the last year to 3.9 percent in the current year, which indeed is a great fall. The manufacturing sector has fallen from 7.0 percent last year to a mere 2.2 percent. Electricity, gas, and water supply fell from 10.4 percent last year to 3.3 percent in the current year, and finally the construction sector, which contracted to 7.7 percent in the current year from 10.5 percent. It is the tertiary sector that has saved the economy from being submerged in stagnancy. All three components of this sector have achieved reasonable growth rates. The sector has grown by 7.1 percent from 6.0 percent last year. Its other components, like trade hotels, etc., have expanded to a modest 6.0 percent from 4.5 percent last year.

The Q2 performance of an economy is not always a determining factor of the annual GDP growth rate. An inspiring third quarter performance could change everything, and added to it, normal fourth quarter growth could make a bold start to the next fiscal year. Hence, there is room for improved performance even now.