Is India's economic growth really weak and could a repo rate cut boost it?

An external member of the MPC highlighted that India's economic growth is below potential, with weak consumption contributing to the slowdown

Debunking those who say economic growth is robust in India, external member of the monetary policy committee (MPC) Ashima Goyal said economic growth is below potential and may slow further since consumption remains weak.

She took the potential growth rate of India at eight per cent. The MPC projected economic growth to be 7.2 per cent during the current financial year, one percentage point lower than 8.2 per cent in 2023-24.

Growth in private final consumption expenditure (PFCE), denoting demand in the economy, recovered slightly to four per cent during the third quarter of 2023-24 on a low base of the previous year from 2.6 per cent in the second quarter. The growth remained intact at four per cent in the fourth quarter.

However, if we take figures at two decimal points, the growth in PFCE declined to 3.98 per cent in the fourth quarter against 4.03 per cent in the third quarter of FY24.

Besides, the share of PFCE in GDP fell to a seven-quarter low of 57.9 per cent from 63.5 per cent during this period.

Similarly, PFCE growth came down to a three-year low of four per cent during 2023-24 against 6.8 per cent in the previous year. Its share in GDP declined slightly to 60.3 per cent from 60.9 per cent during this period.

In this context, Goyal voted for cutting the repo rate by 25 basis points at the June MPC meeting.

She says increasing income and employment is the only sustainable way to bolster consumption, as well as private investment, according to minutes of the meeting made public last month.

"Transfers from a small percentage cannot give prosperity to a billion people," she asserted.

Reducing unemployment is important for political and financial stability, she said, adding without a rise in productive employment, aggressive redistribution becomes more likely and may provoke a flight of wealth taking India back to the stagnant seventies.

However, the Reserve Bank of India (RBI) has a different take on the subject.

Its governor Shaktikanta Das said recently the country is at the cusp of a major structural shift in terms of economic growth and is moving towards eight per cent gross domestic product (GDP) growth.

He laid emphasis on the importance of maintaining inflation at the targeted level for stability in the growth trajectory. The MPC projected retail price inflation at 4.5 per cent for the current financial year, down from 5.4 per cent in the previous year.

Is the economic growth rate still weak?

The projected growth rate of 7.2 per cent is 0.8 per cent below the potential growth rate which many, including Goyal, pegged at eight per cent. If consumption does not pick up, it could even be lower.

However, Bank of Baroda chief economist Madan Sabnavis differs on consumption not picking up this year.

"India’s potential growth is 8% plus. This said, we are still below this potential and will grow by 7.3-7.4% in FY25 with the high base effect dragging it down. But we do see consumption and investment improving in the second half of the year assuming that the monsoon is satisfactory," he says.

Anil K Sood, professor and co-founder of the Institute for Advanced Studies in Complex Choices (IASCC), does not believe that India's growth potential is eight per cent.

"It is not easy to assert that India's growth potential at this stage is eight per cent as our workforce participation levels have been stagnant, real wages have not been growing, MSMEs are not doing well, our dependence on agriculture is much higher and its productivity low and the government is a reluctant investor," he says.

If one looks at gross value added, the growth rate rose to 7.2 per cent from 6.8 per cent. GDP rose higher due to robust indirect taxes, net of subsidies.

Sood says a jump in GDP growth rate from seven per cent during 2022-23 to 8.2 per cent during 2023-24 may be arising for non-economic reasons too.

"Our GDP growth rate during the last year includes a large proportion of statistical discrepancies, which are likely to get corrected or adjusted. Another aspect that we need to look at is the way WPI has been behaving – an index that we use for GDP deflator. It has been very erratic during the last few years," he says.

Sood, however, does not believe that GDP growth rate will go down below 7.2 per cent this financial year.

"It is an election year and the election-related spending is significantly large, assuming that deflator does not cause errors in measurement," he says.

Some of the businesses that were possibly holding back their investment decisions may start investing now. Similarly, government spending too should get a boost, given the verdict and the fact that Maharashtra and a few of the smaller states are going for elections this year, Sood says.

Would a cut in the repo rate have spurred economic growth?

Sabnavis says lowering the repo rate will not push up growth as seen when the repo was at four per cent.

He further says the mandate of the MPC is to target inflation and hence with inflation fear more serious compared with growth which is in a steady state, there is no justification for lowering the repo rate now.

"Investment picks up with demand improving and not because of low interest rates. Therefore, the decision to hold on to the repo rate appears to be the right choice," he points out.

Sood says there is no clear evidence that lower rates help accelerate growth.

He quotes a recent study -- Are lower interest rates really associated with higher growth? -- by Kang-Soek Lee and Richard A Werner as saying that empirical results show that the correlation between economic growth and interest rates is not negative but positive in virtually all countries examined over most time periods and when significant, the majority of evidence suggests that the causal link does not run from interest rates to economic growth but more likely from economic growth to interest rates.

		2022-23				2023-24
	Q1,	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Growth in gross private final consumption expenditure yoy in %	18.5	8.2	1.8	1.5	5.5	2.6	4	4
GDP growth yoy in %	12.8	5.5	4.3	6.2	8.2	8.1	8.6	7.8
GVA growth yoy in %	11.3	5	4.8	6	8.3	7.7	6.8	6.3

	2018-19	2019-20	2020-21	2021-22	2022-23	2023-24
Growth in gross private final consumption expenditure yoy in %	7.1	5.2	-5.3	11.7	6.8	4
GDP growth yoy in %	6.5	3.9	-5.8	9.7	7	8.2
GVA growth yoy in %	5.8	3.9	-4.1	9.4	6.7	7.2

Source: MoSPI