A return to trend growth

After a blistering 8.2 per cent growth in gross domestic product (GDP) last financial year, India is now returning to its trend growth rate of 6.5-7 per cent.

- DHARMAKIRTI JOSHI

Some moderation was anticipated for three reasons: A lower fiscal impulse, interest rates remaining elevated for 21 months, and tighter lending norms.

The sharp deceleration in the second quarter of 2024-25 is a blip caused by slower-than-expected capital expenditure by central and state governments due to the prolonged elections and the impact of weather vagaries.

While the economy is expected to recover in the second half, growth for this full financial year will be slower than initially projected. The Reserve Bank of India now forecasts 6.6 per cent, compared with 7.2 per cent earlier. CRISIL has countenanced a downside to its 6.8 per cent growth forecast.

Nevertheless, medium-term prospects for India remain healthy. CRISIL estimates average annual growth through the end of this decade at ₹6.7 per cent. Typically, there are three drivers of long-term growth: Capital, labour and productivity. Higher productivity means more output with the same inputs.

We see the bulk of the growth coming from capital investments, which are currently driven by government infrastructure projects and household investments. Infrastructure development is critical for a developing economy, as it not only drives short-term growth through higher multiplier effects but also enhances the economy's long-term growth potential. Notably, the government's infrastructure push has led to positive growth surprises following the Covid-19 pandemic. However, India's private corporate sector has yet to fully engage in investment activity, despite favourable conditions such as low leverage, reduced corporate taxes, and benefits from government infrastructure investments.