India’s economy, once hailed as the fastest-growing among major economies, appears to be showing signs of strain. The latest GDP figures for the July-September quarter revealed a growth rate of just 5.4%, marking a seven-quarter low and falling well below the Reserve Bank of India’s (RBI) forecast of 7%. While this rate is strong when compared to developed economies, it signals a slowdown for a country accustomed to higher growth rates.
Economists have pointed to several contributing factors. Consumer demand has diminished, private investment has been stagnant for years, and government spending, a key driver in recent times, has been scaled back. Additionally, India’s goods exports remain lackluster, maintaining a mere 2% share of global exports in 2023.
The performance of fast-moving consumer goods (FMCG) companies has been sluggish, and salary expenditures at publicly traded companies—a proxy for urban wages—declined in the previous quarter. The RBI, which initially projected robust growth, has revised its forecast for the financial year 2024-25 down to 6.6%.
Economist Rajeshwari Sengupta highlighted the gravity of the situation, stating, “All hell seems to have broken loose after the latest GDP numbers. But this has been building up for a while. There’s a clear slowdown and a serious demand problem.”
Finance Minister Nirmala Sitharaman, however, remains optimistic, attributing the decline to reduced government spending in a politically charged election quarter. She expressed confidence that third-quarter growth would compensate for the slowdown. Despite challenges such as stagnant wages, slowing global demand, and climate-related disruptions in agriculture, she argued that India would continue to be the fastest-growing major economy.
Some experts believe the RBI’s focus on curbing inflation may have inadvertently hindered growth. The central bank’s decision to maintain high interest rates, aimed at keeping inflation in check, has raised borrowing costs for businesses and consumers. This, in turn, has potentially dampened investment and consumption, two critical drivers of economic growth.
A federal government minister and former RBI monetary policy member noted that high rates could stifle growth further. October’s inflation rate rose to 6.2%, exceeding the RBI’s 4% ceiling and hitting a 14-month high. Food prices, which make up half the consumer price basket, played a significant role, with vegetable prices surging by over 40%. Furthermore, rising food prices have begun to influence core inflation, pushing up costs for other essential items.
Not all economists agree that lowering rates alone will revive growth. Himanshu, a development economist from Jawaharlal Nehru University, argued, “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.”
Despite these concerns, RBI Governor Shaktikanta Das expressed confidence in the resilience of India’s economy, stating that the “balance between inflation and growth is well poised.”
Although retail credit and unsecured loans are at record highs, indicating that people are borrowing to maintain consumption, urban demand shows signs of weakness. On the other hand, rural demand has fared better due to favorable monsoon conditions and rising food prices.
Ms. Sengupta explained the dichotomy in India’s economy, describing it as operating on a “two-speed trajectory.” She said the “old economy,” comprising the informal sector, small industries, agriculture, and traditional corporate sectors, continues to struggle due to the absence of long-overdue reforms. Conversely, the “new economy,” driven by a post-pandemic boom in services exports, experienced significant growth in 2022-23.
India has emerged as a global leader in outsourcing high-end offshore services. Global capability centers (GCCs), which specialize in research, engineering design, and consulting, now account for over half of the world’s GCCs. According to Deloitte, these centers generated $46 billion in revenue and employed up to two million skilled workers, fueling urban consumption and driving demand for luxury goods, real estate, and SUVs.
However, as the GCC boom stabilizes, its impact on urban spending is waning. “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,” said Ms. Sengupta.
This leaves the old economy without a clear growth catalyst while the new economy shows signs of slowing. Private investment remains critical to revitalizing growth, but weak consumption discourages businesses from making investments. As Ms. Sengupta pointed out, “It’s a vicious cycle. Without investment to create jobs and boost incomes, consumption demand cannot recover.”
There are other challenges. India’s average tariffs have risen from 5% in 2013-14 to 17% currently, higher than other Asian economies trading with the US. These high tariffs make goods more expensive and reduce their competitiveness in global markets.
Economist Arvind Subramanian noted another paradox in India’s economic strategy. While calls to lower interest rates grow louder, the RBI has been selling dollars to support the rupee, which tightens liquidity in the market. By doing so, the central bank inadvertently makes Indian exports less competitive, as a stronger rupee raises the price of goods in global markets.
“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,” Subramanian remarked.
Critics argue that the narrative of India as the fastest-growing major economy may obscure the need for critical reforms. “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,” said Ms. Sengupta.
To truly transform the economy, India needs a significantly higher and sustained growth rate to create jobs and raise incomes.
Boosting growth will not be an easy task. Himanshu suggested that the government should consider increasing wages through public employment programs to stimulate consumption. Others, including Ms. Sengupta, called for reducing tariffs and attracting export investments that have been shifting from China to countries like Vietnam.
The government remains optimistic, citing strong banks, robust forex reserves, and declining extreme poverty. Chief Economic Adviser V Anantha Nageswaran urged caution in interpreting the latest GDP figures, saying, “We should not throw the baby out with the bathwater, as the underlying growth story remains intact.”
Nevertheless, the pace of economic growth remains a concern. Ms. Sengupta summed up the sentiment, saying, “There’s no nation as ambitious for so long without taking adequate steps to fulfill that ambition. Meanwhile, the headlines talk of India’s age and decade – I’m waiting for that to materialize.”