When the GDP growth rate for the first quarter of the financial year 2024-25 was announced, and it registered a fall from 8.2% to 6.7%, no one was shocked. It has been sliding for quite some time and reached the minimum level in 15 months. Many factors may be blamed for the downfall and many excuses may be given, but the fact remains that it is much lower than the RBI estimation of 7.1%.
Did GDP Slip Due To Reduced Bank Advances?
One of the main reasons for the slowing down of the Indian economy is the reduced advances made by banks. RBI has kept the repo rates unchanged for many previous quarters. Contrary to the expectation of the corporate house, it did not slash the interest rates. It may be one of the reasons for the slowing down of the economy. Many believe that 6.5% is still higher than the ideal condition.
Reduced Government Spending
Another reason for the cooling down of the Indian economy is reduced government expenditure. As it was the time of the general election, the model code of conduct was in force and the government could not announce new schemes. This theory holds water, but it is also a fact that the government did not announce any big-ticket investments like infrastructure development projects due to a shortage of funds. Experts believe that the government spends so much on populist schemes like Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) and others. In short, the government has no money to spend and this has been expressed in the GDP growth rate.
Extreme Heat Slows Down Rural Economy
Extreme heat and record temperatures were also the reasons that pushed down the GDP Growth rate. The unexpected heat reduced the agricultural output, slashed rural income and increased inflation. The food inflation rate went up due to the reduced agriculture output and it further slashed the rural spending.
Manufacturing, Industrial Production Slips
The year 2023-24 was an exceptionally good year for manufacturing and industrial production, it was not repeated in the first quarter of 2024-25. The All India Index of Industrial Production was registered at 5.7% in May 2023, it went up to 10.9% in August 2023 and touched the level of 11.9% in October 2023. But industrial production fell from there and it came to 5.4% in March 2023. The financial year of 2024-25 began with a tepid growth rate of 5% in April 2024 and 5.9% in May 2024.
Economic analysts believe that the GDP growth rate in the country may go further down. The US economy has slowed down, the US stock markets witnessed a bloodbath in August 2024. The situation was so bad that Federal Reserve Chairman Jerome Powell indicated a rate cut in September. But the experts believe if the Fed slashes the present interest bank rate of 5% by 50 basis points, it would not help much.
If the US economy slips into a recession, India will be hit hard and its IT and ITES sectors will suffer, its exports in other sectors too will fall. So, one should not be too much optimistic about the Indian economy’s growth rate.