RBI repo rate cuts alone can't shift India's economic growth gear

On June 6, the Reserve Bank of India (RBI) surprised the markets — it sliced the repo rate by 50 basis points (bps) to 5.5 per cent and cut the cash reserve ratio (CRR) by 100 bps, phased over four 25-bp tranches from September to November. The move, expected to inject ₹2.5 trillion ($30 billion) into the system, briefly lifted spirits: The Nifty index climbed 1 per cent that day, with a modest gain the day after. 

However, by the end of the week, the index had slumped below its pre-cut level. The rate cut is a sideshow. With the RBI shifting its stance to “neutral” from “accommodative” there will be no “easing cycle”. A mere 100-bp cut will do little to spur demand. The RBI’s expected growth in gross domestic product (GDP) is projected to be the same 6.5 per cent as last year, and consumer price inflation slightly lower. This means overall growth expectations are modest. The reason: The four main economic drivers of the economy are stuck in low gear. 

Consider consumption first. Private final consumption expenditure (PFCE), which makes up nearly 60 per cent of India’s GDP, fell from a growth rate of 6.8 per cent in the pre-Covid years to 4.1 per cent in 2019-20 (FY20). After a brief post-pandemic recovery, it fell again: To 5.6 per cent in FY24, according to the RBI, and an even weaker 4.4 per cent, according to the National Statistics Office. The consumption rebound was short-lived because it was led by debt and higher welfare spending by the government. After all, average income growth in most sectors (engineering, financial services, retail, information technology, logistics and consumer goods) was outpaced by inflation. But debt-funded consumption has its limits. Since mid-2023, growth in personal loans has fallen off the cliff — from 22 per cent then or 10 per cent or so now — reducing consumption. 

The second element in GDP growth is net exports (exports minus imports). Indian exports are a disaster. Large headline stories, like growing cell phone exports, mask a poor overall performance in merchandise exports, which fell 12.8 per cent in FY24 and are expected to grow by only 2 per cent in FY25. Year after year, India’s net exports are negative. It has no control over imports — fossil fuel and gold imports are inelastic — and benefits only when the prices of these commodities are down. It cannot boost exports either, because enormous costs of doing business sap the productivity and competitiveness of Indian exporters. India’s services exports and enormous remittances partly reduce the impact of poor net exports. 

The third driver of growth is private capital expenditure (capex). There is a lot of bullish anecdotal evidence about shiny new factories coming up, but the most comprehensive and authentic set of data is not so rosy. According to the Forward-Looking Survey of the Ministry of Statistics and Programme Implementation, actual intended private-sector capex will fall from ₹6.56 trillion in FY25 to ₹4.9 trillion in FY26, a fall of 26 per cent. This survey was confined to large enterprises, and the mood is worse among small and medium ones. The reason for sluggish spending is sluggish demand — this can be traced back to the state, which comes in the way of creating a thriving, competitive, and innovative business climate. 

This leads us to the fourth engine of growth: Government capex, probably the most important one in the current climate. India is continuing with the old “dominant state” model, extorting a lot of money from businesses and citizens even in a period of stagnant growth. Notice that the growth of manufacturing and exports is miserably low, and even large companies are struggling to increase their revenues beyond single digits. But the government’s take from goods and services tax (GST) between FY20 and FY25 expanded by an astonishing annual rate of 19.46 per cent. In FY23 and FY24, capitalising on GST collections and adding massive borrowings to its pot, the government massively increased spending. The Union Budget of FY24 announced a huge capital outlay of ₹10 trillion, which was increased to ₹11 trillion in FY25, to be spent on railways, roads, urban transport, waterworks, energy transformation, and defence production. This boosted growth for two years. However, despite large allocations, actual government capex was surprisingly sluggish in FY25. There was no growth that year, while revenue expenditure went up, leading to a 22 per cent revenue deficit. In a society where the rule of law is weak, corruption is rampant, and red tape is entrenched, the limitations of government capex as a driver of growth are obvious. Also, if tax-and-spend was expected to trickle down, it has failed: India’s rural wages and job growth are stagnant, and this has wrecked consumption growth.  

Clearly, it is not for the RBI and its monetary policy committee (MPC) to fix any of these deep structural issues and magically create growth. If any evidence is needed that the current economic strategy is not working, payroll growth is a definitive one. According to the government data, net payroll addition under the Employee Provident Fund was -5.1 per cent in FY24 and -1.3 per cent in FY25. The Naukri Jobseek Index of white collar jobs has flattened since FY23. Weak job creation reflects how ineffective the headline 6.5 per cent GDP growth really is; it also hobbles consumption, the economy’s lifeblood. There is no escape for policymakers to face facts: What we have is a structural, not cyclical, issue.

The writer is editor of www.moneylife.in and a  trustee of the Moneylife Foundation; @Moneylifers