Intervening in a parliament debate, Nirmala Sitharaman said that the highly discussed dip in second quarter growth figure was just a blip and the state of the economy was healthy. Growth momentum should pick up in no time and India was on a high growth trajectory.

On Wednesday, Rahul Gandhi put a post on his Twitter account which tellingly speaks of the dumps the economy is currently in. Gandhi posted: “what happens when a government priorities crony businesses over play-fair businesses”.

Gandhi provides the reply: “Weakened manufacturing sector, depreciating currency, record high trade deficits, high interest rates, failing consumption and soaring inflation”. For sure, some of the latest figures bear out the Opposition viewpoint. But there is more in the data than immediately meets the eye.

Let us grant a little more hearing space to Sitharaman about what she said in parliament in reply to a debate on the economy. There is little doubt that the manufacturing sector had suddenly slumped. Manufacturing growth collapsed to 2.2% in the second quarter affecting overall industrial sector performance. Growth was at a meagre 5.4%, which many had expected to be around 6.8%.

However, she denied that this was a foretaste of what was to come. Let us not pick out one sector performance and predict a growth collapse on that basis. She could not, as a finance minister, sound pessimistic and placed her hope on a growth rebound in a short period.

In between, some of the leading Indian industrialists and businessmen aired their confident view at a gathering in the capital recently that the fall in recent growth rates was mainly in the nature of a “blip” rather than a structural or more fundamental shift. But then, when have industrialists and businessmen gone against the government view, however much revolting in the face of facts!

When two diametrically opposite political camps are fighting, it is sensible to go to a neutral judge. Who can be a better judge of economic matters than the Reserve Bank of India. In its latest statement accompanying the monetary policy the central bank had observed that the near term growth prospects for the Indian economy have somewhat darkened, mainly because of the persistent high inflation levels.

That rising prices are a problem, one need not go to economists and experts. Who will not testify to the rising prices. Food items prices are soaring and the households are struggling to meet costs. Food prices have increased substantially, despite the fact that at this time of the year, when winter crops arrive in the market, the prices tend to soften. Not this time.

The CPI headline inflation increased from average 3.6% during July-August to 5.5% in September and further to 6.2% in October 2024, which was the highest in more than a year, since September 2023. This is way ahead of the Reserve Bank’s inflation target of 4%. Why is inflation count so Germaine to the growth prospects as well as overall economic stability.

Indian economy is growing on the back of domestic consumption, unlike many other countries, including China. RBI has noted that the rising price levels are affecting the principle growth engine of the economy, consumption.

“Persistent high inflation reduces the purchasing power of consumers and adversely affects both consumption and investment demand. The overall implication of these factors for growth is negative.” Therefore, price stability is essential for sustained growth. A good Rabi crop and its arrival in the markets would be key to inflation stabilisation, according to the central bank’s analysis.

The early indications are that the forthcoming crop should be ample and these should be a helpful factor. “Early indications point to adequate soil moisture content and reservoir levels, conducive for rabi sowing. The estimates of a record kharif production should bring relief to the elevated prices of rice and dal. Vegetable prices are also expected to see a seasonal winter correction.

With prices stabilising, it is the performance of the industrial sector —particularly mining and metals and manufacturing— which will set the pace of the economy.

High frequency indicators available, according to the RBI, suggest that the slowdown in domestic economic activity bottomed out in the second quarter of 2024-25, and has since recovered, aided by strong festive demand and pick up in rural activities.

Industrial activity is expected to normalise and recover from the lows of the previous quarter. The end of the monsoon season and the expected pick up in government capital expenditure may provide some impetus to cement and iron and steel sectors.

Mining and electricity are also expected to normalise post the monsoon-related disruptions. The purchasing managers’ index (PMI) for manufacturing at 56.5 for November indicated elevated levels of activity in the industrial sector. The supply chain pressures eased in October-November and fell below the historical average. The services sector continues to grow at a strong pace. PMI for the services remained steady at 58.4 in November, indicating continued expansion.

Yes, while the Indian economy had suddenly witnessed a road bump and had slowed down, with a bit of luck, we might witness another spurt in growth in the next year.

On the demand side, rural demand is trending upwards while urban demand shows some moderation on a high base. Government consumption is improving. Investment activity is also expected to improve. On the external front, merchandise exports expanded by 17.2 per cent in October 2024, while services exports continue to post upbeat growth (22.3 per cent in October).

On its considered and cautious view, the real GDP growth for 2024-25 is now projected at 6.6 per cent, which is not as buoyant as previously estimated. However, that is none too bad for a big economy like India’s. (IPA Service)