Why Has the Indian Economy Slowed Down? From 9.7% Boom to a 6.4% Dip

A Four-Year Low: India’s Growth Hits 6.4% Amid Sectoral Slowdowns

India’s economic growth rate is projected to slow to 6.4% in the fiscal year 2024-25, marking its lowest point in four years. The National Statistics Office (NSO) attributes this dip to a subdued performance in the manufacturing and services sectors, signaling challenges for policymakers and industry leaders alike. This figure represents the slowest growth since the pandemic-stricken year of 2020-21, when the economy contracted by 5.8%.

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In comparison, India’s GDP grew at 9.7% in 2021-22, followed by 7% in 2022-23, and 8.2% in the fiscal year ending March 2024. The Reserve Bank of India (RBI) had earlier projected a 6.6% growth rate for 2024-25, while the finance ministry estimated a range of 6.5-7%. The revised numbers are expected to weigh heavily on the formulation of the Union Budget, to be unveiled by Finance Minister Nirmala Sitharaman on February 1.

Sectoral Performance: Manufacturing and Services Take a Hit

The manufacturing sector, which has been a key driver of India’s growth, is expected to decelerate significantly, with a projected growth of 5.3%, compared to 9.9% in the previous fiscal. This slowdown could be attributed to rising input costs, sluggish global demand, and persistent supply chain disruptions.

Similarly, the services sector—comprising trade, hotels, transport, and communications—is estimated to grow at 5.8%, down from 6.4% in 2023-24. The decline in these two critical sectors underscores the challenges faced by businesses and consumers amid high inflation and tightening financial conditions.

A Silver Lining in Agriculture

Contrary to the slowdown in manufacturing and services, the agricultural sector presents a more optimistic outlook. Growth is expected to accelerate to 3.8% in 2024-25, compared to a modest 1.4% in the previous fiscal. Favorable monsoon conditions and government initiatives aimed at boosting rural incomes have contributed to this positive trend.

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Key Economic Indicators: GDP and GVA

The NSO’s projections indicate a 6.4% growth in India’s real GDP for 2024-25, down from 8.2% in the provisional estimates for 2023-24. Nominal GDP is expected to increase by 9.7%, reaching ₹324.11 lakh crore, compared to ₹295.36 lakh crore in the previous year.

The size of India’s economy is estimated to touch $3.8 trillion (based on an exchange rate of ₹85.7/USD) in 2024-25. Nominal Gross Value Added (GVA), which provides a more granular view of economic activity, is projected to grow by 9.3%, reaching ₹292.64 lakh crore.

Consumption and Government Expenditure Trends

Private Final Consumption Expenditure (PFCE), a crucial measure of household consumption, is anticipated to grow by 7.3% in 2024-25, a significant improvement from the 4% growth recorded in 2023-24. This uptick reflects a rebound in consumer confidence and spending.

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Government Final Consumption Expenditure (GFCE) is also expected to see a recovery, with an estimated growth of 4.1%, compared to 2.5% in the previous fiscal. Increased government spending could play a pivotal role in offsetting some of the adverse effects of the slowdown in manufacturing and services.

Challenges Ahead: Inflation, Global Uncertainty, and Policy Imperatives

While the agricultural sector provides some respite, the overall slowdown in economic growth poses significant challenges. High inflation continues to erode purchasing power, while global economic uncertainties—such as geopolitical tensions and fluctuating commodity prices—add to the complexities of managing domestic growth.

The manufacturing sector’s slowdown is particularly concerning, given its role in generating employment and driving exports. Policymakers will need to focus on incentivizing investments, reducing input costs, and enhancing ease of doing business to revive this critical sector.

Moreover, the services sector’s muted growth highlights the need for targeted interventions to boost tourism, transport, and communication infrastructure.

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A Call for Strategic Policy Responses

India’s economic growth rate of 6.4% for 2024-25, though respectable in a global context, underscores the need for strategic policy measures to sustain long-term growth. As the Union Budget approaches, the government must address structural bottlenecks, encourage private investment, and foster innovation to reinvigorate the manufacturing and services sectors.

With a robust agricultural performance and a recovery in consumption trends, India has the potential to navigate these challenges effectively. However, the path forward requires coordinated efforts from policymakers, industry stakeholders, and consumers alike.