India’s economy recorded its weakest growth rate in nearly two years, shocking even economists who had anticipated a slowdown in the fiscal second quarter but not to this extent.

The country’s gross domestic product (GDP) slowed to a growth of 5.4% in the July to September period, the lowest since Q3FY23, amid high inflation, elevated borrowing costs, weak consumption, subdued government spending and shrinking wages. This compared with a GDP growth of 8.1% a year ago and 6.7% in the previous quarter, government data showed. It was also far below the RBI’s projected figure of 7% for the September quarter.

The threat of a slowing economy is set to pressure the Reserve Bank of India (RBI) to lower interest rates, but high inflation can be a bottleneck. When the RBI’s rate-setting monetary policy committee (MPC) starts its three-day meet on 4 December, it will look carefully at the 14-month high inflation figure of 6.21% in October. High food prices and geopolitical uncertainty have also been factors behind RBI deciding to keep the repo rate unchanged at 6.5% since February 2023.

The GDP growth worry got reflected in companies missing earnings forecasts in the second quarter, a downturn in private consumption and a slowdown in manufacturing and urban middle-class consumption. Manufacturing growth in the September quarter slowed to 2.2% from 7% in the previous quarter and 14.3% a year ago. On the positive side, agriculture grew 3.5% in the September quarter versus 1.7% growth a year ago and 2% growth in the June quarter. 

“GDP growth dipped much sharper than expected to a tepid 5.4% in Q2 FY2025, with a number of sectors throwing up negative surprises, especially the anemic outturn of manufacturing growth and the marginal contraction in mining, as well as a slower than projected growth of the services sector,” said Aditi Nayar, chief economist at ICRA.

However, the Union finance ministry, in its latest economic review forecast, expects a rebound in the second half of 2024-25 driven by stronger rural demand and increased government spending. The RBI has forecast India’s FY25 GDP growth to be 7.2%.

Though economists expect growth to rebound in the second half after a disappointing first two quarters of the fiscal year, they think the RBI’s estimate will fall short. “The high-frequency data suggests that festive-linked revival in activity may provide a marginally better H2, FY25 growth figure. But overall GDP growth for FY25 is going to be around 100 bps (basis points) lower than RBI’s estimate of 7.2%,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

Nayar expects GDP growth to pick up in H2 FY2025 on the back of Government capex, agri output and rural consumption. She says this would result in a full-year expansion of 6.5-6.7%.