India’s economy slowed to 5.4%, below the central bank’s 7% forecast. The Reserve Bank of India’s (RBI) target missed, raising concerns.
Causes of the Slowdown
Several factors explain the slowdown. Consumer demand declined, while private investment remained weak. Government spending, a key driver, reduced recently. India’s goods exports face persistent challenges, holding only 2% of the global share in 2023.
Fast-moving consumer goods (FMCG) companies saw sluggish sales. Publicly traded firms’ wage bills, a proxy for urban wages, also dropped. The RBI cut its growth forecast to 6.6% for 2024-2025. Economist Rajeshwari Sengupta warns of “serious demand issues” after the GDP decline.
Finance Minister Nirmala Sitharaman offered a more positive outlook. She attributed the dip to reduced government spending during an election-focused quarter. She expects third-quarter growth to compensate for the drop. Despite slower growth, India remains the fastest-growing major economy.
Some experts blame restrictive interest rates aimed at controlling inflation. High rates discourage borrowing, reducing both consumption and investment. Critics say this hampers growth. The RBI has kept interest rates steady for two years due to inflation concerns.
India’s inflation surged to 6.2% in October, breaching the RBI’s target ceiling. Rising food prices, especially vegetables, drove inflation. Economists worry food inflation could spill into core inflation, raising other costs.
However, interest rates alone may not explain the slowdown. Demand must exist for lower rates to stimulate 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” and the balance between growth and inflation is managed. Yet, urban demand weakens despite high retail credit and rising loans. In contrast, rural demand appears stronger, helped by a good monsoon and higher food prices.
Divergence Between the Old and New Economies
India’s economy operates on a “two-speed trajectory”. The old economy includes agriculture, small industries, and the informal sector. It faces long-delayed reforms. The new economy, driven by booming services exports, shows stronger performance.
Global Capability Centres (GCCs) play a crucial role in the new economy. India hosts over 50% of the world’s GCCs, generating $46 billion in revenue. They drive urban consumption, supporting luxury goods, real estate, and SUVs. But with GCCs now established, the urban consumption boost has waned.
This dual-speed economy lacks a clear growth catalyst. Private investment is essential, but weak consumption prevents firms from investing. Without new jobs and higher incomes, consumption stays low. “It’s a vicious cycle,” says Sengupta.
Further confusion arises from India’s rising tariffs. Average tariffs rose from 5% in 2013-14 to 17% now, higher than other Asian exporters. Higher tariffs increase production costs, hurting India’s competitiveness in global markets.
Economist Arvind Subramanian highlights another issue. While experts call for rate cuts, the RBI is selling dollars to prop up the rupee. This action reduces market liquidity. Critics argue this move makes exports costlier and less competitive globally.
Critics also say India’s “fastest-growing economy” narrative delays needed reforms. Economist Sengupta points out India’s per capita GDP is still under $3,000, far below the U.S. at $86,000. Sustained higher growth is essential to create jobs and raise incomes.
Boosting growth will not be easy. Without private investment, Himanshu suggests raising wages through government job schemes. Sengupta advises cutting tariffs and attracting export investments that are leaving China.
The government remains optimistic. It points to strong banks, robust foreign reserves, and reduced poverty as positives. Chief Economic Adviser V. Anantha Nageswaran urges against overreacting to the GDP dip, stating India’s “growth story remains intact.”
Skepticism persists, though. Sengupta highlights 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.