The main problem is investment on the demand side and manufacturing on the supply side, says RBI deputy governor Michael Patra.
As India's gross domestic growth (GDP) growth slowed to a seven-quarter low of 5.4% in the second quarter of the ongoing fiscal, Reserve Bank of India (RBI) governor Shaktikanta Das on Friday explained why GDP growth in Q2 was much lower than anticipated.
The decline in growth was caused mainly by a substantial deceleration in the industrial growth from 7.4% in the first quarter to 2.1% in the second quarter due to subdued performance of manufacturing companies, contraction in mining activity and lower electricity demand, says Das.
The weaknesses in the manufacturing sector, however, was not broad-based but was limited to specific sectors such as petroleum products, iron and steel and cement, the RBI governor says. “Going forward, high frequency indicators available so far suggest that the slowdown in domestic economic activity bottomed out in the second quarter of this year. It has since been aided by strong festive demand and pick up in rural activities. Agricultural growth is supported by healthy Kharif crop production, higher reservoir levels and better rabi sowing. Industrial activity is also expected to normalise and recover from the lows of the previous quarter. The end of the monsoon and the pick-up in government capital infrastructure may also provide some impetus to cement as well as iron and steel sectors. Mining and electricity are also expected to normalize post the monsoon-related disruptions,” he says.
The central bank slashed GDP growth forecast for 2024-25 to 6.6% from 7.2% earlier. It projects Q3 FY25 GDP at 6.8% and Q4 at 7.2%.
Responding to a question on why India posted a GDP growth shocker of 5.4% for the second quarter of FY25, Michael Debabrata Patra, the senior most deputy governor of the Reserve Bank, says the main problem is investment on the demand side and manufacturing on the supply side. “The two are intertwined. In manufacturing, the biggest issue is the slump in sales growth and that is reflected in inflation hitting urban consumers. When sales growth is down, companies do not want to invest in new assets because they see demand as moderate which can be met by existing capacity. Since they don’t want to engage in new capacity creation, investment is down. The underlying slowdown in growth is because of inflation,” said Patra.
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