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One shouldn’t get over pessimistic about the slower-than-expected growth, since even at 7 percent growth India is still the world’s fastest growing major economy. Also, the country’s chances to emerge stronger from the current slowdown phase are brighter compared with most other economies.

India’s gross domestic product (GDP) growth at 7 percent in the April-June quarter is lower than the 7.5 percent growth recorded in the preceding quarter but higher than the 6.7 percent growth logged in the corresponding quarter last year.

But, the figures re-emphasize the notion that growth revival in the economy wouldn’t be quick. There is still pain left in the economy on the ground level. The factors that should give critical impetus to reboot the economy -- fresh private investments and higher government spending -- are still muted. This is where the real problem lies.

Investors are not putting money on the table. On the other hand, the government spending too hasn’t picked up as expected before. This was evident from the continuing slowdown in the core sector growth as well. The growth in eight major core sectors in July fell to 1.1 percent compared with 3 percent in the previous month. These eight sectors together constitute 38 percent of the country’s factory output.

The growth contraction was shown in segments such as steel and cement.

There were indications that the government has started spending beginning this fiscal year but the GDP numbers do not reflect it yet.

“Government expenditure as represented by public administration, defence etc. witnessed low growth of just 2.7 per cent, which is contrary to the impression gotten from the fiscal numbers which show that the government has started spending money,” said economists at Care rating agency in a note.

Similarly, gross fixed capital formation numbers too have disappointed economists, with the rate continuing to decline to 27.8 percent in the quarter from 29.2 percent a year ago.

The immediate problem the economy faces is the absence of fresh investments. As Firstpost has noted before, in the backdrop of lacklustre response from the private sector, the onus of kick-starting the growth engine primarily lies with the government through higher public spending. This is something both the Reserve Bank of India (RBI) and government’s economic advisor have pointed out repeatedly.

Sprucing up public spending is critical particularly because bank credit growth hasn’t picked up significantly and is unlikely to show any significant up-move unless bad loan burden on the books of banks eases in a meaningful manner. So far, the stock of non-performing assets (NPAs) continues to stay high, so is the portion of restructured assets (together they constitute about 11 percent of the bank loans).

State-run banks, which typically lend to long-gestation high-risk infrastructure projects, are capital-constrained. Rating agencies have noted that even the recently announced Rs 70,000 crore capital infusion by the government might not be sufficient to fill the gap of capital requirement of state-run banks since they need to set aside money on losses on bad assets, besides meeting the Basel-III requirement norms.

More pressure on Rajan

The weak growth is heightening pressure on RBI governor Raghuram Rajan to cut rates further. Finance Minister Arun Jaitley has already made a strong pitch for a rate cut citing a declining inflation scenario.

“In a scenario where inflation is under control, the quantum of interest rate cut is "the prerogative of the RBI", Jaitley said. "And therefore I do see RBI as a very professional institution which will certainly take note of all these factors when it decides its next stand."

The RBI has already indicated that it would consider cutting rates further after looking at the inflation trend. It has cut rates thrice this year by a cumulative 75 basis points.

But, when it comes to reviving growth, a rate cut is unlikely to be of much help since the main problem for industries lies in factors other than the interest cost burden.

For instance, for infrastructure companies interest cost as a percentage of total cost constitutes about 12-13 percent, while many projects are stuck with issues pertaining to land acquisition, environmental clearances and scarcity of fresh investments.

As Firstpost has highlighted in the past, investor confidence can be revived only with critical reforms in the areas of land acquisition, tax and labour laws, where the government needs to work hard.

The positive part is that the government has shown willingness to ramp up spending in infrastructure, but economists note that the spending has to pick up in a much more significant manner if the government wants to arrest the economic slowdown. The April-June quarterly numbers offer clear evidence.