“….third quarter has been better, but the components that are driving that don’t give the confidence yet that we are on a durable recovery path yet,” she said in a discussion with CNBC-TV18 on the latest GDP numbers.
India’s economy expanded by 6.2% in the October-December quarter (FY25)
, up from a revised 5.6% in the previous quarter, driven by stronger rural consumption following a good monsoon and increased government spending.
For the full 2024-25 fiscal year (April 2024 to March 2025), the Indian government now forecasts a GDP growth rate of 6.5%, slightly above its initial estimate of 6.4%, but below the revised 9.2% growth for 2023-24.
Madhavi Arora, Lead Economist at Emkay Global Financial Services, who joined the conversation, believes that India’s growth outlook for next year remains uncertain, as current policy measures are not providing enough counter-cyclical support.
The Reserve Bank of India (RBI) has taken steps to manage liquidity, but its balance sheet growth remains sluggish at under 1%. This has led to tighter monetary conditions, impacting credit availability. While there is a possibility of further rate cuts, their extent and effectiveness remain unclear.
Arora stated that, given these challenges along with global economic headwinds, India’s GDP growth is expected to remain around 6.5%, similar to the current year.
These are the edited excerpts of the interview.
Q: You are saying that growth recovers, but it is still cycling down that’s the word you used in your report. I am just trying to play the devil’s advocate. Is it not that with employment heavy sectors like trade and construction and agriculture doing well, that consumption can get a bump up, and then let us remember, there is also the tax break that is coming so can’t consumption give you a pleasant surprise?
Varma: When we try to look at growth and analyse growth, we need to segregate the cyclical sectors and the non-cyclical sectors. What we have clearly seen in the third quarter is a much better momentum, and if you look at the components that have driven it, I would say, to a large extent, are sectors that are not as cyclical. Government spending has picked up after the election and code of conduct and heavy monsoon related slow down. Rural demand has picked up because agriculture output is better, and some of these factors will be here with us now.
The other side of the equation are the most cyclical sectors that are more private sector driven, so urban consumption, which is driven more by things like availability of credit, salary increases, stock market, wealth effect, private investment, which has slowed down despite the pickup in government consumption and exports of services have picked up. But it has really been a big contraction in import, which is a signal of domestic demand that led to a big net export contribution to GDP growth in the third quarter. So, it is in that context that third quarter has been better, but the components that are driving that don’t give the confidence yet that we are on a durable recovery path yet.
Q: Would January-March 2025 quarter (Q4FY25) be better than October-December 2024 quarter (Q3FY25), what’s your number?
Varma: We are looking at around 6.50%. The second advance estimate implies a 7.6% for January-March 2025 quarter which at this stage looks too high to us.
Q: Our 2025-26 (FY26) GDP growth is only 6%, right?
Varma: Yes, we are expecting 6% next financial year.
Q: Madhavi what are the chances of next year surprising on the upside. After all, our exports to the US is 2% of our GDP, the actual extraction in terms of value add for us, some people are calculating, is 0.1 to 0.3% of our GDP. The global headwind is bad, since we are a domestic facing economy, can we still do better next year?
Arora: For that we need to have a much more counter cyclical policy effort, which is not being seen as of now. Look at the Reserve Bank’s balance sheet that has grown less than 1% while they are doing all the liquidity measures that they can in the recent months or so. One has to realise that they are just paying for their past sins because between October and December, they intervened up to $100 million worth of foreign exchange intervention, of which the large part of liquid suction that has happened is because of that, and this is what they are basically sterilising.
At this point in time, their balance sheet is still grown less than 1%, reserve money is still sluggish, credit off take is obviously impacted because of that so monetary conditions are still tied despite supportive measures that RBI has taken. RBI needs to sort of be much more easier on its stance. We can possibly see further cuts coming from the Reserve Bank, but we are not very sure as to how deep that would be.
On the other hand, fiscal is still at this point in time is I believe, pro cyclical. While we have seen some support to the urban segment, urban middle class led by the tax cuts they have been cutting their revenue expenditure, ex-interest payment subsidy, which is going to impact the rural segment, which is just started to recover. On the other hand, the urban segment, the wages have been pretty sideways and are low on the real basis, which is going to impact the urban consumption, income effect would be much more felt than the wealth effect that people are talking about.
Absence of the private economic agencies is going to be probably the story which will play out even next year as well. And that’s why we believe that even though the external headwinds or something which are not in our hands, the domestic dynamics are also not very solid. At best, we are going to be growing at around 6.5%, which is what we are probably growing in this year as well.
For full interview, watch accompanying video
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