India’s economy grew 5.4%, falling short of the central bank’s 7% forecast. Concerns over growth momentum are rising.
Reasons for the Slowdown
Multiple factors contribute to the slowdown. Consumer demand dropped, private investment stayed low, and government spending decreased recently. India’s exports continue to struggle, with only 2% of the global market share in 2023.
FMCG companies reported weak sales, while public firms’ wage bills, a key urban wage indicator, also fell. The RBI lowered its growth projection to 6.6% for 2024-2025. Economist Rajeshwari Sengupta noted growing demand issues after the GDP report.
Finance Minister Nirmala Sitharaman offered optimism. She blamed reduced government spending during elections for the drop. She expects third-quarter growth to recover the loss. Despite slower growth, India remains the fastest-growing major economy.
Experts criticize tight interest rates aimed at controlling inflation. High rates discourage borrowing, reducing consumption and investment. Critics believe this stifles growth. The RBI kept interest rates unchanged for two years to manage inflation.
India’s inflation rose to 6.2% in October, exceeding the RBI’s 4% target. Rising food prices, especially vegetables, drove inflation. Economists warn food inflation could raise other costs, driving core inflation higher.
Interest rates alone may not explain the slowdown. Demand is essential for lower rates to boost growth. Himanshu, an economist at Jawaharlal Nehru University, emphasized that without demand, businesses won’t borrow or invest.
Outgoing RBI governor Shaktikanta Das believes India’s “growth story remains intact” with a balance between growth and inflation. Yet, urban demand weakens despite higher retail credit and growing loans. In contrast, rural demand appears stronger, supported by a good monsoon and higher food prices.
Old Economy vs. New Economy
India’s economy runs on two tracks. The old economy, including agriculture, small industries, and informal sectors, faces delays in reforms. The new economy, driven by booming service exports, performs better.
Global Capability Centres (GCCs) play a major role in the new economy. India hosts over 50% of the world’s GCCs, generating $46 billion in revenue. GCCs drive urban consumption, supporting luxury goods, real estate, and SUVs. However, with GCCs now established, the urban consumption boost has faded.
This two-track economy lacks a clear growth catalyst. Private investment is essential, but weak consumption deters firms from investing. Without new jobs and higher incomes, consumption stays low. “It’s a vicious cycle,” says Sengupta.
Rising tariffs add complexity. Average tariffs increased from 5% in 2013-14 to 17% now, higher than Asian exporters. Higher tariffs raise production costs, making Indian exports less competitive globally.
Economist Arvind Subramanian highlights another issue. While experts urge rate cuts, the RBI sells dollars to support the rupee. This action reduces market liquidity. Critics argue this makes exports costlier and less competitive internationally.
Critics say India’s “fastest-growing economy” narrative delays essential reforms. Economist Sengupta highlights India’s low per capita GDP, under $3,000, compared to the U.S. at $86,000. Sustained higher growth is essential to create jobs and raise incomes.
Boosting growth requires policy shifts. Without private investment, Himanshu suggests raising wages through government job schemes. Sengupta recommends cutting tariffs and attracting export investments that are leaving China.
The government remains optimistic. Officials highlight strong banks, robust foreign reserves, and reduced poverty as economic strengths. Chief Economic Adviser V. Anantha Nageswaran advises against overreacting to the GDP dip, emphasizing that India’s “growth story remains intact.”
Skepticism persists. Sengupta criticizes India’s unfulfilled ambitions. “There’s no nation as ambitious for so long without taking adequate steps to fulfill that ambition,” she says. Many await the day when India’s “decade” truly arrives.
