GDP growth is impressive, but demand in rural areas remains worrying

India’s economic growth seems to be heading towards gangsters. After almost a decade of waiting, real GDP growth has crossed the 8 percent mark, reaching 8.2 percent in 2023-24. The last time this rate exceeded 8 percent was in 2015–2016. Preliminary data from the Central Statistical Office also showed that gross value added – after taking into account subsidies and taxes, and therefore considered a better measure of economic activity – increased by 7.2%. However, growth in the fourth quarter slowed to 7.8 percent compared to the more than 8 percent recorded in each of the previous three quarters. Moderation in growth in the last quarter was visible in the industrial and services sectors and even in investment, which continued in the period from April to December 2023.

While the headline growth number is reassuring, its components aren’t actually flashing green. The dismal growth of 2.1% in agriculture and allied sectors in 2023-24 is most disappointing and in case the monsoon causes havoc, it does not bode well for the overall economy. While domestic investment demand remains resilient amid strong business and consumer sentiment, growth in private and government consumption leaves much to be desired. Consumption, the backbone of domestic production, was just 4 percent, while government spending, which has been a relief pitcher since the pandemic, rose by a near-zero 2 percent. On the supply side, the services sector has underperformed in growth in the last fiscal year. In other words, the high level in 2023-2024 was not only due to excellent sector performance, but also to lower subsidies and higher taxes.

So will the growth rate sustain this budget? Analysts do not think so and estimate it will be a more moderate 6.8%, taking into account geopolitical tensions, divergences in the monetary policies of major central banks and other internal and external factors. Even if strong corporate and bank balance sheets maintain investment appetite, it remains to be seen whether the government will continue to increase capital spending. Both are necessary to maintain momentum in sectors such as construction, steel and manufacturing. Above all, private consumption must show proof of life and that is why the rural economy needs an urgent revival. While high-frequency indicators such as two-wheeler sales saw improved performance in the second half of the fiscal year, rural demand slack is present and real. The government should focus on improving village income sources.