Concerns loom as India's GDP hits a seven-quarter low, raising questions about consumer demand and economic strategies.
India's Economic Growth: Is the Momentum Slowing?
India's Economic Growth: Is the Momentum Slowing?
GDP Numbers Reveal a Potential Slowdown in India's Growth Trajectory
India's economic growth has come under scrutiny as recent data reveals the country's GDP slumped to 5.4% between July and September, marking a seven-quarter low and falling short of the Reserve Bank of India (RBI) forecast of 7%. Although this figure still appears strong when compared to developed economies, it suggests signs of a slowdown.
Economists cite a myriad of factors contributing to this downturn. Weakening consumer demand, sluggish private investments, and a reduction in government spending — a critical growth driver in recent years — are identified as key issues. Moreover, India’s goods exports have struggled, with the country's global share at a mere 2% in 2023, illustrating the challenges faced by the manufacturing sector and its reliance on international markets.
Fast-moving consumer goods (FMCG) companies have reported stagnant sales, while salary expenses at publicly traded companies indicate reductions in urban wages. Remarkably, even the formerly optimistic RBI has revised its growth forecast downwards to 6.6% for the financial year 2024-2025. Economist Rajeshwari Sengupta highlighted that the downturn was not sudden, declaring, "All hell seems to have broken loose after the latest GDP numbers," while stressing a clear and ongoing slowdown in demand.
Conversely, India's Finance Minister Nirmala Sitharaman offered a different outlook, suggesting that the GDP decline is "not systemic." She attributed the downturn to reduced government expenditure during an election period and expressed optimism about growth recovering in the upcoming quarter. Despite facing challenges such as stagnant wages and diminishing global demand, Sitharaman believes India will retain its title as the fastest-growing major economy.
The latest inflation figures also add to the context, with inflation rising to 6.2% in October, driven by increasing food prices—veggies price hikes, for instance, surpassed 40%. While some analysts, including a senior government minister, claim that the central bank's focus on controlling inflation has led to excessively high borrowing rates, others such as Himanshu, a development economist, argue that a strong demand for consumption drives investment, which is lacking currently.
Despite having remained constant on interest rates for almost two years due to inflation concerns, there are signs of business resilience. Record-high retail credit and an uptick in unsecured loans indicate that consumers continue to shop, despite high rates. Nonetheless, while urban demand may be declining, rural demand holds stronger, supported by favorable monsoon conditions enhancing agricultural output.
Sengupta pointed to a dual economic trajectory within India; the traditional sectors, comprising the informal economy, agriculture, and small-scale industries, still await vital reforms. Meanwhile, the post-COVID boom in services exports has propelled the newer segments of the economy, notably the emergence of Global Capability Centres (GCCs), which have seen significant growth.
Yet, with the establishment of these GCCs, the urban spending surge seems to be waning, leaving the older economy at a standstill without growth catalysts. Critics of the economic narrative argue that without substantial reforms aimed at boosting investment, exports, and job creation, India might be overlooking its true economic requirements.
Economist Arvind Subramanian recently suggested that the RBI's strategy of supporting the rupee might be detrimental, as high tariffs could render Indian goods less competitive globally. Despite complex economic signals, some voices in the government remain hopeful, asserting that India’s underlying economic story persists. As challenges mount, increasing growth through recommendations such as raising wages via employment schemes or lower tariffs may prove essential for recovery.
Thus, skepticism around the sustainability of India’s growth narrative lingers as experts call for improved strategies that truly capitalize on the nation’s ambition for a robust and inclusive economy in the long term.
Economists cite a myriad of factors contributing to this downturn. Weakening consumer demand, sluggish private investments, and a reduction in government spending — a critical growth driver in recent years — are identified as key issues. Moreover, India’s goods exports have struggled, with the country's global share at a mere 2% in 2023, illustrating the challenges faced by the manufacturing sector and its reliance on international markets.
Fast-moving consumer goods (FMCG) companies have reported stagnant sales, while salary expenses at publicly traded companies indicate reductions in urban wages. Remarkably, even the formerly optimistic RBI has revised its growth forecast downwards to 6.6% for the financial year 2024-2025. Economist Rajeshwari Sengupta highlighted that the downturn was not sudden, declaring, "All hell seems to have broken loose after the latest GDP numbers," while stressing a clear and ongoing slowdown in demand.
Conversely, India's Finance Minister Nirmala Sitharaman offered a different outlook, suggesting that the GDP decline is "not systemic." She attributed the downturn to reduced government expenditure during an election period and expressed optimism about growth recovering in the upcoming quarter. Despite facing challenges such as stagnant wages and diminishing global demand, Sitharaman believes India will retain its title as the fastest-growing major economy.
The latest inflation figures also add to the context, with inflation rising to 6.2% in October, driven by increasing food prices—veggies price hikes, for instance, surpassed 40%. While some analysts, including a senior government minister, claim that the central bank's focus on controlling inflation has led to excessively high borrowing rates, others such as Himanshu, a development economist, argue that a strong demand for consumption drives investment, which is lacking currently.
Despite having remained constant on interest rates for almost two years due to inflation concerns, there are signs of business resilience. Record-high retail credit and an uptick in unsecured loans indicate that consumers continue to shop, despite high rates. Nonetheless, while urban demand may be declining, rural demand holds stronger, supported by favorable monsoon conditions enhancing agricultural output.
Sengupta pointed to a dual economic trajectory within India; the traditional sectors, comprising the informal economy, agriculture, and small-scale industries, still await vital reforms. Meanwhile, the post-COVID boom in services exports has propelled the newer segments of the economy, notably the emergence of Global Capability Centres (GCCs), which have seen significant growth.
Yet, with the establishment of these GCCs, the urban spending surge seems to be waning, leaving the older economy at a standstill without growth catalysts. Critics of the economic narrative argue that without substantial reforms aimed at boosting investment, exports, and job creation, India might be overlooking its true economic requirements.
Economist Arvind Subramanian recently suggested that the RBI's strategy of supporting the rupee might be detrimental, as high tariffs could render Indian goods less competitive globally. Despite complex economic signals, some voices in the government remain hopeful, asserting that India’s underlying economic story persists. As challenges mount, increasing growth through recommendations such as raising wages via employment schemes or lower tariffs may prove essential for recovery.
Thus, skepticism around the sustainability of India’s growth narrative lingers as experts call for improved strategies that truly capitalize on the nation’s ambition for a robust and inclusive economy in the long term.
