India's GDP Growth Hits 15-Month Low Due to Election Spending Cuts: RBI Gov

India's economic growth decelerated to a 15-month low of 6.7% in the April-June quarter, attributed to reduced government spending due to the enforcement of the model code of conduct for the Lok Sabha elections, according to RBI Governor Shaktikanta Das on Saturday. The Reserve Bank had initially projected a growth rate of 7.1% for this period.

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Factors Affecting GDP Growth

Das highlighted that key components driving GDP growth, such as consumption, investment, manufacturing, services, and construction, all showed growth exceeding 7%. However, he noted that government expenditure at both central and state levels and the agriculture sector were the primary factors pulling down the growth rate.

The National Statistical Office's first advance estimation data revealed a growth rate of 6.7% for the first quarter. This was lower than the Reserve Bank's projection of 7.1%. Das explained that government expenditure was low during this period, likely due to elections and the operation of the model code of conduct by the Election Commission.

Government Spending and Agriculture Sector

Das expressed optimism that government expenditure would increase in the coming quarters, providing necessary support for growth. He also mentioned that the agriculture sector recorded minimal growth of around 2% in the April-June quarter. Despite this, he remained positive about future prospects due to favourable monsoon conditions across most parts of India.

The RBI Governor asserted confidence in achieving an annual growth rate of 7.2%, as projected by the Reserve Bank. He believed that with improved government spending and better agricultural performance, this target is attainable in the upcoming quarters.

Major Reforms and Inflation Control

Addressing a national conference of chartered accountants (CAs), Das discussed significant reforms over the past decade, including GST, inflation targeting framework, and the Insolvency & Bankruptcy Code (IBC). He emphasised that maintaining price stability while fostering growth is a primary function of the RBI, as defined in its preamble.

"The primary functioning of the RBI, as defined in its preamble, is to maintain price stability while keeping in mind the objective of growth. This was a major structural reform made by the government in 2016 by amending the RBI Act," Das stated. The amendment mandates the RBI to maintain price stability with an inflation target of 4%, allowing a leeway of 2 percentage points on either side.

Impact of Global Events on Inflation

Das pointed out that during Covid-19, the RBI reduced the repo rate by 250 basis points. Similarly, when inflation rose to 7.8% following international factors like the Ukraine war and domestic weather events, the central bank swiftly increased interest rates.

He also stressed the importance of audit quality in organisations. Addressing CAs, he advised them to diagnose a company's health accurately, akin to how doctors diagnose patients.

The economic slowdown in India during April-June was primarily due to reduced government spending amid election-related constraints. However, with expectations of increased expenditure and favourable agricultural conditions, there is optimism for achieving projected annual growth rates.