India's GDP shocker: Bad news can sometimes be good

A tango of fiscal and monetary policies can do the trick and give India's economy the fillip it needs

- SACHCHIDANAND SHUKLA

India's growth in gross domestic product (GDP) of 5.4% in the three months ended 30 September, or the second quarter of 2024-25, was a shocker. It undershot even the most pessimistic forecasts. It's the lowest level seen since the third quarter of 2022-23 and a sharp drop from 8.1% growth in the same period last year and also from 6.7% in the first quarter of 2024-25. The consensus expectation stood at about 6.5% and the Reserve Bank of India (RBI) was expecting around 7% growth till its October policy, only to pare it to 6.8%. Growth in gross value added (GVA), which is the preferred measure of economists to gauge the economy's momentum, at 5.6% was a tad better (even if a seven-quarter low). Core GVA, which strips out more volatile components such as agriculture and thus is a broader and better measure of private-sector growth, stood at a mere 4.3%, capturing the intensity of the slowdown. Even nominal GDP growth slowed to 8% year-on-year in the latest quarter, the weakest since Covid. Given the budget's 10.5% nominal growth assumption for 2024-25, any undershoot could also hurt India's fiscal accounts. Yet, with this sort of a shocker, a peculiar logic may take hold too: 'What's bad is good.' This may seem like yet another example that challenges the tradition of economics which assumes all economic agents as rational, but read on.

The first thing a shocker does is make everyone, including policymakers, sit up and take notice. It then forces an assessment that prompts corrective action and hence the 'bad news is good' thinking.