India's Economic Growth Slows to 6.7% in January-March Quarter

Weak Demand and Sectoral Moderation Impact Growth

India's economy likely experienced its slowest growth in a year during the January-March quarter, with a projected annual expansion of 6.7%, according to a Reuters poll of economists. This slowdown is attributed to weak domestic demand and moderation in key sectors such as manufacturing and services.

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Previous Quarter's Growth Driven by One-Off Factors

The October-December quarter saw an unexpected GDP growth of 8.4% year-on-year, largely driven by a significant reduction in subsidies, which artificially boosted net indirect taxes. 

However, the more telling measure of economic activity, gross value added (GVA), showed a more modest increase of 6.5%. Economists believe that these unusual factors did not carry over into the January-March quarter.

Survey of Economists Reflects Pessimistic Outlook

The Reuters poll, which surveyed 54 economists, indicates a consensus that GDP growth slowed to 6.7% annually, with GVA growth expected to decrease to 6.2%. The forecasts for GDP growth ranged from 5.6% to 8.0%. 

The data release, scheduled for May 31, comes just days before the announcement of general election results on June 4, with Prime Minister Narendra Modi anticipated to secure a rare third term.

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Weak Domestic Demand Evident in Core Inflation

Many economists in the poll believe the likelihood of GDP growth significantly exceeding their forecasts is low. Kundu highlighted that the ongoing drop in core inflation, now at its lowest since the onset of the pandemic, indicates weak domestic demand. This weak demand is expected to persist, affecting private consumption, which constitutes 60% of GDP, in the upcoming quarters.

Long-Term Growth Projections and Job Creation Concerns

India's economic growth, which averaged 7.7% last fiscal year, is forecasted to slow to 6.8% this fiscal year and 6.6% in the next. Sustaining an 8% growth rate, essential for generating adequate employment for the growing workforce, remains a distant goal. Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, considers a 5-6% growth rate as more realistic, emphasizing the need for sustained reforms.

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Discrepancies in Growth Estimates and Measurement Issues

There is a growing divergence between financial economists' GDP forecasts and government estimates, raising concerns about India's growth measurement methods. The National Statistical Office (NSO) expects GDP growth to be 5.9% for the January-March quarter. 

Dhiraj Nim, economist at ANZ, pointed out potential overestimations of the informal sector's GDP, which may not fully reflect the on-ground economic reality. The informal sector, crucial to India's economy, contributes nearly half of the GDP and employs about 90% of the workforce.

Conclusion

The projected slowdown in India's economic growth highlights the challenges of sustaining high growth rates amid weak demand and sectoral moderation. With the economy's reliance on private consumption and the informal sector, addressing these areas will be critical for achieving consistent long-term growth and job creation. 

As the country navigates these challenges, domestic and international observers will closely scrutinise the upcoming economic data and policy decisions.

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