India’s Economic Growth: Signs of Deceleration Amidst Challenges

Is the world’s fastest-growing major economy losing momentum? Recent gross domestic product (GDP) figures present a concerning outlook. Between July and September, India’s economy experienced a decline to 5.4%, its lowest point in seven quarters, falling significantly below the Reserve Bank of India’s (RBI) projected 7%. While this rate remains robust compared to developed nations, the statistic indicates a slowdown. Economists attribute this trend to several factors. Consumer demand has weakened, private investment has been sluggish for years, and government spending—a crucial driver in recent times—has been curtailed. India’s goods exports have consistently struggled, with their global share standing at a mere 2% in 2023. Companies in the fast-moving consumer goods (FMCG) sector are reporting subdued sales, while the total salary expenditures of publicly traded firms, an indicator of urban wage trends, decreased last quarter. Even the Reserve Bank of India (RBI), which previously held an optimistic outlook, has adjusted its growth forecast to 6.6% for the financial year 2024-2025. “All hell seems to have broken loose after the latest GDP numbers,” says economist Rajeshwari Sengupta. “But this has been building up for a while. There’s a clear slowdown and a serious demand problem.” Finance Minister Nirmala Sitharaman presented a more optimistic assessment. She indicated last week that the downturn was “not systemic” but rather stemmed from reduced government expenditure during a quarter focused on elections. The minister anticipated that growth in the third quarter would compensate for the recent decline. Sitharaman affirmed that India is likely to maintain its position as the fastest-growing major economy, notwithstanding obstacles such as stagnant wages impacting domestic consumption, a deceleration in global demand, and climate-related disruptions in the agricultural sector. Certain individuals, including a senior federal government minister, economists, and a former member of the RBI’s monetary policy committee, contend that the central bank’s emphasis on controlling inflation has resulted in overly stringent interest rates, which could be hindering economic expansion. Elevated interest rates increase the cost of borrowing for both companies and individuals, potentially leading to decreased investments and reduced consumption, both of which are vital for economic growth. The RBI has maintained steady interest rates for almost two years, largely due to escalating inflation. Official statistics indicate that India’s inflation rate climbed to 6.2% in October, surpassing the central bank’s 4% target ceiling and marking a 14-month peak. This surge was predominantly fueled by food prices, which constitute half of the consumer price index basket; for instance, vegetable prices increased by over 40% in October. Furthermore, increasing evidence suggests that rising food costs are now impacting other routine expenses, contributing to core inflation. However, elevated interest rates might not be the sole explanation for the deceleration in growth. “Lowering rates won’t spur growth unless consumption demand is strong. Investors borrow and invest only when demand exists, and that’s not the case now,” says Himanshu, a development economist at Delhi’s Jawaharlal Nehru University. In contrast, Shaktikanta Das, the outgoing governor of the RBI, expressed confidence that India’s “growth story remains intact,” further asserting that the “balance between inflation and growth is well poised.” Economic experts observe that urban demand is diminishing, even though retail credit has reached record levels and unsecured loans are increasing, suggesting that individuals are borrowing to fund consumption despite high interest rates. Conversely, rural demand presents a more positive outlook, bolstered by favorable monsoon conditions and elevated food prices. Ms. Sengupta, an associate professor at the Indira Gandhi Institute of Development Research in Mumbai, informed the BBC that the current economic challenges are evidenced by India’s economy functioning on a “two-speed trajectory,” characterized by disparate performances in its “old economy and new economy.” The “old economy,” which encompasses the extensive informal sector, including medium and small-scale industries, agriculture, and the conventional corporate sector, continues to await long-overdue reforms. Conversely, the “new economy,” identified by a surge in services exports following the Covid-19 pandemic, demonstrated strong growth during 2022-23. “Outsourcing 2.0” has served as a primary catalyst, positioning India as the leading global center for global capability centers (GCCs), which perform advanced offshore services. The consulting firm Deloitte reports that more than 50% of global GCCs are currently located in India. These centers specialize in research and development, engineering design, and consulting services, contributing $46 billion (£36 billion) in revenue and providing employment for up to 2 million highly skilled professionals. “This influx of GCCs fuelled urban consumption by supporting demand for luxury goods, real estate and SUVs. For 2-2.5 years post-pandemic, this drove a surge in urban spending. With GCCs largely established and consumption patterns shifting, the urban spending lift is fading,” says Ms Sengupta. Consequently, the “old economy” seems to be without a growth stimulant, concurrently with a deceleration in the “new economy.” Private investment is essential, yet businesses will refrain from investing in the absence of robust consumer demand. If investment does not occur to generate employment and increase incomes, consumer demand will be unable to rebound. “It’s a vicious cycle,” says Ms Sengupta. Additional perplexing indicators are also present. India’s average tariff rates have increased from 5% in 2013-14 to 17% currently, surpassing those of its Asian counterparts engaged in trade with the United States. Within the context of global value chains, where exporters depend on imports from various nations, elevated tariffs raise the cost of trade for companies, thereby impeding their ability to compete internationally. Economist Arvind Subramanian identifies another development he terms a “new twist in the tale.” Despite increasing demands to reduce interest rates and enhance liquidity, the central bank is supporting a depreciating rupee by selling dollars, an action that constricts market liquidity. The RBI has utilized $50 billion from its foreign exchange reserves since October to safeguard the rupee. To acquire dollars, buyers are required to pay in rupees, which consequently diminishes market liquidity. Sustaining a robust rupee via interventions lessens competitiveness by increasing the price of Indian products in international markets, resulting in decreased export demand. “Why is the central bank shoring up the rupee? The policy is bad for the economy and exports. Possibly they are doing it because of optics. They don’t want to show India’s currency is weak,” Mr Subramanian, a former economic adviser to the government, told the BBC. Critics caution that the “hyping up the narrative” portraying India as the fastest-growing economy is impeding crucial reforms necessary to stimulate investment, exports, and job creation. “We are still a poor country. Our per capita GDP is less than $3,000, while the US is at $86,000. If you say we are growing faster than them, it makes no sense at all,” says Ms. Sengupta. Essentially, India needs a substantially elevated and consistent growth trajectory to create additional employment opportunities and increase earnings. Stimulating growth and consumption presents short-term challenges. Given the absence of private investment, Himanshu proposes increasing wages via government-operated employment programs to boost incomes and stimulate consumption. Conversely, individuals such as Ms. Sengupta recommend lowering tariffs and drawing export-oriented investments that are relocating from China to nations like Vietnam. The government maintains an optimistic outlook on India’s economic narrative, citing strong banks, robust foreign exchange reserves, stable finances, and a reduction in extreme poverty. Chief economic adviser V Anantha Nageswaran advises against over-interpreting the most recent GDP data. “We should not throw the baby out with the bathwater, as the underlying growth story remains intact,” he said at a recent meeting. Evidently, an acceleration in the growth rate would be beneficial. This explains the persistent skepticism. “There’s no nation as ambitious for so long without taking [adequate] steps to fulfill that ambition,” says Ms Sengupta. “Meanwhile, the headlines talk of India’s age and decade – I’m waiting for that to materialise.”