Opinion GDP numbers swing: Where does the key to sustaining growth lie?

First, government spending was heavily backloaded in an election year. Non-interest general government spending grew at just 2 per cent in the first half of the year but then surged to 15 per cent in the second half as the Centre and states rushed to meet budget targets. Second, subsidies were frontloaded, depressing net indirect taxes — and, with it, GDP growth — in the first half but then dramatically boosting both in the last quarter. Third, agricultural growth clocked less than 3 per cent in the first half but more than doubled to 6 per cent in the second half. Once you adjust for these “exogenous” factors, underlying growth is much more stable at about 6.5 per cent — which is where full-year GDP growth landed.

To ask what caused the slowdown and now the recovery is, therefore, to ask the wrong question. Instead, the question to be asked is what it will take to first stabilise growth at current levels amidst the ongoing global storm and then to accelerate it to fulfil the demographic opportunity and challenge that confronts India.

The task will not be trivial. Heightened levels of global uncertainty are likely to persist for the foreseeable future, creating headwinds. It’s bad enough that economic agents around the world don’t know what levels of tariffs will confront them when the 90-day Liberation Day pause ends? Recent legal events in the US have only compounded the uncertainty. Does the US President even have the legal authority to impose broad-based reciprocal tariffs in the first place? If he cannot use the International Emergency Economic Powers Act to impose tariffs, to what extent can he compensate under different sections of the statute (Section 301, 232, 122, 201, 338) all of which come with their own riders? What does it even mean to negotiate with the US under this uncertainty? Who around the world is going to invest in the tradable sector amidst this policy chaos?

The impending uncertainty-induced global slowdown will inevitably put near-term pressure on exports across the globe, including India. India’s outlook over the next year therefore depends crucially on how domestic demand evolves and on how two crucial rotations in the domestic economy pan out — from investment to consumption and from urban to rural.

Recall, investment has been key to India’s post-pandemic recovery, as the government’s capex push has been complemented by a real estate cycle. But the public investment impulse has peaked and there are signs that real estate may have also peaked. As both these pillars of investment provide less support, can the slack be shouldered by the third pillar: Corporate investment? While corporate India will undoubtedly benefit from lower interest rates and energy prices, it confronts three sources of external uncertainty. First, can India escape reciprocal tariffs? Second, to what extent will the global economy slow? Third, if China is hit with high tariffs, will increasing amounts of excess capacity be redirected to India? Given these multiple and overlapping sources of uncertainty, it’s unrealistic to expect a corporate investment surge this year.

The implication is that the heavy lifting on growth will have to transition from investment to private consumption. There were tantalising signs of this last year, but for it to sustain, much will depend on the second rotation, between urban and rural. Thus far, the urban economy has been consumption’s mainstay, reflected in strong four-wheeler sales, high-end services and premium products in recent years. But those impulses are unmistakably slowing as underlying supports — pandemic-era excess savings, formal-sector wages and unsecured lending — have faded. For consumption to sustain, urban slowing will have to be offset by rural firming. The signs are encouraging across MGNREGA, tractor sales and FMCG products. But will it be sufficient to offset urban slowing? Therein lies the key to whether consumption can accelerate from current levels and offset the potential investment slowdown. Consumption will have several catalysts this year: Softening inflation that boosts purchasing power, lower interest rates, income tax cuts and hopefully a strong monsoon. But will this be enough to offset heightened global uncertainty and fiscal tightening? Therein lies the rub.

From a policy perspective, near-term objectives should be obvious. The trade deal with the UK sends a powerful signal of openness. Now, India must quickly try to conclude a US trade deal to reduce at least one source of external uncertainty. Simultaneously, it must hasten the EU trade deal. If these deals are expeditiously concluded, it would send an unmistakable signal of openness that increases India’s attractiveness as a “China+1” destination.

Domestically, the focus must be on boosting monetary policy transmission, ensuring fiscal capex targets are hit and implementing the four labour codes so that labour-intensive sectors can exploit the trade-diversion opportunities from Southeast Asia, whose proximity to China will make US trade deals very challenging.

Clocking 6.5 per cent growth in 2024-25 amidst all the global uncertainties is creditable and encouraging. But the resilience of India’s economy will be tested in the coming year. As long-serving growth drivers (public capex and urban consumption) step back, can new ones take on the mantle? What can policy do to facilitate this rotation? And how do we position ourselves for even higher growth, which our demographic transition will demand? The answers to these questions will determine how well India will be able to swim against the rising global tide.

The writer is head of Asia economics at J P Morgan. All views are personal