GDP Growth Rate to Five-Quarter Low of 6.7%

Syllabus: GS3/Indian Economy

Context

• India’s real Gross Domestic Product (GDP) growth rate slipped to a five-quarter low of 6.7% in the first quarter of the fiscal year 2024-25 (April-June) that was primarily driven by slower growth in three key sectors: agriculture, government spending, and services.

Key Sectors of Slower Growth

• Agriculture Sector: The Gross Value Added (GVA) growth rate for agriculture in April-June was 2.0%, down from 3.7% in the same period the previous year.
  • Factors such as monsoon variability and supply chain disruptions likely contributed to this slowdown.
• Government Spending: Public spending, especially during the election phase, contracted by 0.2% in April-June. This decrease in government final consumption expenditure impacted overall economic growth.
  • The government’s capital spending declined significantly (by 35%) during this period, which further affected growth.
• Services Sector: The services sector, which includes a wide range of activities such as finance, retail, and hospitality, posted an overall growth rate of 7.2% in April-June.
  • However, this was notably lower than the 10.7% growth seen in the year-ago period.
  • The services sector had experienced a strong recovery in the first few years after the Covid-19 pandemic, and maintaining those high levels led to a strong increase in the base. Consequently, the growth rate moderated.

Other Sectors

• Manufacturing and construction sectors showed positive signs of growth.
  • Manufacturing grew at 7.0%, and construction at 10.5% in April-June, compared to 5% and 8.6% growth, respectively, in the year-ago period.

Consumption Demand

• Private final consumption expenditure (PFCE), a proxy for consumption demand, recorded a seven-quarter high growth of 7.4% in Q1, up from 5.5% in the previous year.
  • Consumer spending constitutes about 60% of GDP, compared to 4% in the previous quarter. 
• The expectation is that rural consumption demand will improve, leading to overall growth of 6.5-7% in the financial year.

Conclusion

• While the slowdown in GDP growth is concerning, there are positive signs in certain sectors. The government’s efforts to boost capital spending and enhance consumption demand will be crucial for economic recovery in the coming quarters.

Source: TH