Economy recovery hopes amid global uncertainty

The economy was cruising along and all estimates pointed to another year of over 7% growth.

But the July-Sept quarter number stunned everyone as growth slumped to a seven quarter low of 5.4%, prompting a rash of revisions, including by RBI, which lowered its growth estimate to 6.6% for 2024-25 from earlier projection of 7.2%.

The sharp deceleration in growth rang alarm bells and calls for a cut in the key policy rate by the RBI grew louder, with the finance minister and commerce and industry minister backing lowering of rates to revive demand and growth. The signs of divergent views on growth and inflation between the finance ministry and the central bank emerged.

A finance ministry report said a combination of monetary policy stance and macroprudential measures by the central bank, and structural factors, may have contributed to the demand slowdown.

While urban demand seems to have slowed due to a number of factors, rural demand remains buoyant and augurs well for overall growth in the months ahead.

A number of data points in recent months have also signalled to some recovery. Inflationary pressures have also eased, although food inflation particularly vegetables have remained stubborn.

Moderation in inflationary pressures and improving supplies have triggered hopes of a rate cut in Feb but the spillover impact of global monetary policies, particularly in the US, has made it tricky.

Adding to the pressure is global uncertainty and impact of tariff policy of the US under President Donald Trump, who takes office in Jan. While policymakers at home say there could be opportunities for India if US presses ahead with high tariffs on China, some experts have called for preparing the ground to deal with impact of high tariffs on India as well .

At a pre budget meeting with PM Narendra Modi earlier this month, economits and experts have pointed to the need for persisting with reforms across sectors to revive growth against the backdrop of geopolitical tensions and uncertainty.

The Union Budget in Feb is expected to provide clues about govt's intention to revive growth and shield the economy from the storm in the global economy. Hopes of a rationalisation of tax rates have risen, given the need for a helping hand to the middle class to revive urban consumption.