As expected, India’s GDP growth has slowed to 5.3 per cent year-on-year in July-September, from 5.7 per cent for the preceding quarter. Given that this was the first full quarter under the BJP-led government, which officially took over in end-May, it may seem a trifle disappointing. But the real story is not in GDP growth: the 5.7 per cent figure for April-June, the highest in nine quarters, was on a low base of 4.7 per cent, whereas the 5.3 per cent increase this time was on top of 5.2 per cent in July-September 2013. More worrying is the annual increase in gross fixed capital formation (GFCF) — virtually zero in July-September after growing by 7 per cent in the previous quarter. Any dynamic emerging economy should see growth in GFCF — a measure of investments taking place in new factories, infrastructure and other fixed assets — outpacing that of GDP. This was the case in India during the boom years from 2003-04 to 2010-12, before reversing thereafter.
What the latest data points to is a simple thing: While “sentiment” has no doubt improved ever since the present government under Narendra Modi has come to power — the BSE Sensex climbing over 16 per cent is proof of that — this is yet to translate into “animal spirits” that induce actual investment on the ground. This government has been incredibly lucky with respect to global crude prices, which have fallen by almost a third during its six months and look set to drop even further. But getting corporates to put money into greenfield projects generating fresh jobs and incomes — without which there can be no sustainable growth in GDP or consumption — requires much more than plain luck. Reviving investments is going to be the Modi government’s biggest challenge in the weeks ahead.
The latest GDP numbers also confirm that getting growth and investment going again should be the top priority for policymakers today. This applies equally to the Reserve Bank of India, which needs to recognise that the threat from inflation has clearly receded since the presentation of its last monetary policy review. It must hence seriously consider initiating interest rate cuts in its next bi-monthly review on Tuesday. True, lowering policy rates alone may not really attract investment. But it will certainly aid sentiment and, more importantly, convey a general signal to entrepreneurs or even prospective homebuyers that their cost of finance is going to come down. This is unlikely to do any harm — in terms of stoking inflation fires in today’s circumstances — even while possibly helping the cause of growth at the margins.