Is the largest economy with the fastest rate of growth in the world losing steam?
The most recent GDP figures present a depressing image. India's economy fell to a seven-quarter low of 5.4% between July and September, much below the 7% anticipated by the Reserve Bank of India (RBI).The number indicates a slowdown, even if it is still strong when compared to developed countries.
This is due to a number of variables, according to economists. Private investment has been slow for years, consumer demand has declined, and government spending, which has been a key engine in recent years, has decreased. India has historically had trouble exporting commodities; in 2023, their share of the world market was only 2%.
While compensation bills at publicly traded companies, which serve as a proxy for urban salaries, decreased last quarter, fast-moving consumer goods (FMCG) companies report weak sales.For the fiscal year 2024–2025, even the once-bullish RBI has updated its growth prediction to 6.6%.
According to economist Rajeshwari Sengupta, "all hell seems to have broken loose after the latest GDP numbers." However, this has been accumulating for some time. There is a noticeable slowdown and a significant demand issue.
A more optimistic picture is presented by Finance Minister Nirmala Sitharaman. Last week, she claimed that the drop was "not systemic" and was instead the consequence of government spending cuts made during an election-focused quarter. She anticipated that the recent drop will be countered by growth in the third quarter. Despite obstacles including stagnating wages impacting domestic consumption, decreasing global demand, and climatic disruptions in agriculture, India is likely to continue to be the major economy with the quickest rate of growth, according to Sitharaman.
A senior federal minister, economists, and a former member of the RBI's monetary policy group are among those who contend that the central bank's emphasis on reducing inflation has resulted in unduly restrictive interest rates, which could impede growth.
High interest rates raise the cost of borrowing for both consumers and businesses, which may discourage investment and slow down consumption—two important factors in economic expansion. For almost two years, the RBI has maintained interest rate stability, mostly due to growing inflation.
According to official figures, India's inflation rate soared to 6.2% in October, surpassing the central bank's goal ceiling of 4% and hitting a 14-month high. Food prices, which make up half of the consumer price basket, were the primary driver; in October, the price of vegetables, for instance, increased by more than 40%.Additionally, there are increasing indications that increases in food prices are now impacting core inflation, or other regular expenses.
However, the slowing growth may not be entirely explained by rising interest rates alone. "Unless there is robust consumption demand, lower rates won't promote growth. Only when there is demand do investors borrow and invest, and that isn't the situation right now," says Himanshu, a development economist at Jawaharlal Nehru University in Delhi.
Nonetheless, Shaktikanta Das, the RBI's departing governor, says the "balance between inflation and growth is well poised" and that India's "growth story remains intact".
Urban demand is declining, according to economists, despite record-high retail credit and an increase in unsecured loans, which show that consumers are borrowing to pay their consumption even in the face of high interest rates. A strong rainfall and rising food prices have improved demand in rural areas.
Ms. Sengupta, an associate professor at the Indira Gandhi Institute of Development Research in Mumbai, told the BBC that India's economy was running on a "two-speed trajectory" which was caused by the "old economy and new economy" performing differently.
Long-overdue reforms are still lacking in the old economy, which includes the sizable informal sector, agricultural, medium- and small-scale enterprises, and the traditional corporate sector.
On the other hand, the post-Covid surge in services exports, which characterized the new economy, grew rapidly in 2022–2023. One of the main drivers has been outsourcing 2.0, with India being the largest worldwide hub for global capability centers (GCCs), which provide high-end offshore services.
More than half of the GCC countries are now headquartered in India, according to consulting firm Deloitte. These R&D, engineering design, and consulting centers employ up to 2 million highly qualified professionals and generate $46 billion (£36 billion) in revenue.
"The market for SUVs, real estate, and luxury items was supported by this influx of GCCs, which increased urban consumption. This led to a spike in urban spending for two to three years after the outbreak.The urban spending boost is diminishing as GCCs become more entrenched and consumer habits change, according to Ms. Sengupta.
Therefore, as the new economy slows, the old economy seems to be without a growth stimulus. Although private investment is essential, businesses won't make investments if there isn't a high demand for their products. Consumption demand cannot revive without investment to raise incomes and generate jobs. "It's a vicious cycle," Ms. Sengupta asserts.
There are further perplexing signs. Compared to its Asian counterparts that trade with the US, India's average tariffs have increased from 5% in 2013–14 to 17% at now. High tariffs make it more costly for businesses to trade commodities in a world of global value chains where exporters depend on imports from several nations.hindering their ability to compete in international markets.
What economist Arvind Subramanian refers to as a "new twist in the tale" follows.
The central bank is selling dollars to support a declining rupee, which tightens liquidity even as calls to cut interest rates and provide liquidity increase. The RBI has used $50 billion of its foreign exchange reserves to protect the rupee since October.
To buy dollars, buyers must pay in rupees, which lowers market liquidity. Interventions to keep the rupee strong lessen competitiveness by raising the cost of Indian goods on international markets, which decreases demand for exports."Why is the rupee being supported by the central bank? Exports and the economy are negatively impacted by the policy. They can be acting in this way for aesthetic reasons. "They do not wish to demonstrate that India's currency is weak," Mr. Subramanian, a former government economic adviser, told the BBC.
Critics caution that crucial reforms to increase investment, exports, and job creation are being hampered by the "hyping up the narrative" of India as the economy with the fastest rate of growth. "Our nation is still impoverished. The US has a per capita GDP of $86,000, whilst ours is less than $3,000. It is completely nonsensical to claim that we are expanding more quickly than they are," Ms. Sengupta argues.
To put it another way, India needs a far faster and more consistent growth rate in order to create more employment and increase incomes.
It won't be simple to increase demand and growth in the near future. Himanshu recommends increasing wages through government-run employment programs in the absence of private investment in order to boost incomes and encourage consumption. Others, like Ms. Sengupta, support lowering tariffs and luring export capital to nations like Vietnam from China.
The administration is nonetheless optimistic about India's situation, citing strong banks, healthy foreign exchange reserves, stable finances, and a decrease in extreme poverty. V Anantha Nageswaran, chief economic adviser, advises against overinterpreting the most recent GDP statistic.He stated at a recent meeting that "the underlying growth story remains intact, so we shouldn't throw the baby out with the bathwater."
It's obvious that the growth rate needs to step up. For this reason, skepticism persists. "There's no nation as ambitious for so long without taking [adequate] steps to fulfill that ambition," adds Sengupta. "Meanwhile, the headlines talk of India's age and decade - I'm waiting for that to materialise."
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