Why in the News?

India has been growing well even with global challenges. After growing by 8.2% in 2023-24 and 6.7% in the first quarter of 2024-25, growth slowed down to 5.4% in the second quarter.

Is the Slowdown in GDP Growth a Temporary Setback or a Sign of a Longer-Term Trend?

• Current Growth Trends: India’s GDP growth decelerated to 5.4% in the second quarter of FY 2024-25, down from 6.7% in the previous quarter and 8.1% in the same quarter last year. This sharp decline has raised concerns about the sustainability of growth, particularly given that industrial performance has been poor, especially in the mining, manufacturing, and electricity sectors.
• Sectoral Performance: The industrial sector’s growth slowed to 3.6% from 8.3%, indicating significant challenges in manufacturing and mining.
  • While agriculture has shown recovery due to good Kharif harvests, and the services sector remains robust, the overall industrial slowdown suggests vulnerabilities that could impact future growth.
• Expectations for Recovery: Despite the current slowdown, there are expectations for GDP growth to rebound in the latter half of the fiscal year due to improved government expenditure and rural consumption. However, this recovery is contingent upon various factors, including global economic conditions and domestic consumption patterns.
• Long-Term Concerns: Analysts caution that while some recovery is anticipated, the overall GDP growth for FY 2024-25 is projected to be lower at around 6.5%, which is a decrease from the 7-8% range seen in previous years.

Measures to Stimulate Consumer Sentiment and Boost Household Spending

• Tax Benefits for Households: The government could consider implementing tax incentives aimed at increasing disposable income for households, thereby encouraging spending. This could involve direct tax cuts or enhanced deductions for certain expenditures.
• Job Creation Initiatives: A strong focus on job creation, especially in sectors vulnerable to automation, could bolster household incomes and consumer confidence. Initiatives could include skill development programs and incentives for businesses that hire more workers.
• Support for Agriculture: Given the positive impact of agricultural performance on rural consumption, enhancing support for farmers through subsidies or better access to markets could further stimulate spending in rural areas.
• Addressing Inflation Concerns: Moderating food inflation through effective supply chain management and price controls could help ease consumer spending pressures. Ensuring stable prices for essential commodities would improve overall consumer sentiment.
• Incentives for Private Investment: Encouraging private sector investment through favorable policies and easing regulatory burdens can lead to increased economic activity and job creation.

How Should Policymakers Respond to Current Economic Challenges? (Way forward)

• Enhance Public Investment: Policymakers should prioritize increasing government capital expenditure (capex), which has been weak due to election-related restrictions. A robust public investment strategy can stimulate economic activity and create jobs.
• Focus on Deregulation: Continued efforts to deregulate sectors can improve business confidence and attract private investments, fostering a more conducive environment for growth.
• Monitor Global Developments: Policymakers need to remain vigilant regarding global economic trends that could impact India’s economy, including potential trade wars or geopolitical tensions. Preparing contingency plans will be crucial in mitigating risks associated with global volatility.
• Strengthen Domestic Demand: Given the uncertain global environment, strengthening domestic demand through targeted fiscal policies will be essential for sustainable growth. This includes measures that directly enhance consumer spending power.
• Long-Term Growth Strategy: A comprehensive strategy focusing on enhancing productivity across sectors, investing in infrastructure, and fostering innovation will be critical for raising India’s potential GDP growth over the long term.

Mains PYQ:

Q Despite India being one of the countries of Gondwanaland, its mining industry contributes much less to its Gross Domestic Product (GDP) in percentage. Discuss. (UPSC IAS/2021)

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