India: Is the world’s fastest-growing big economy losing steam?

Is the country’s fastest-growing large business losing heat?

The most recent GDP figures paint a depressing image. Between July and September, India’s economy slumped to a seven-quarter low of 5.4 %, well below the Reserve Bank of India ( RBI ) forecast of 7 %.

While it is still strong compared with designed nations, the determine signals a slowdown.

Economics attribute this to a number of elements. Government spending has decreased, private investment has been slow for centuries, and consumer demand has decreased. India’s goods exports have long struggled, with their share sitting at a mere 2 % in 2023.

Fast-moving consumer goods (FMCG) companies report tepid sales, while salary bills at publicly traded firms, a proxy for urban wages, shrank last quarter. Even the previously bullish RBI has revised its growth forecast to 6.6% for the financial year 2024-2025.

” All heaven seems to have broken free after the latest GDP quantities”, says analyst Rajeshwari Sengupta. However, this has been growing steadily for some time. There’s a distinct downturn and a major demand problem”.

Finance Minister Nirmala Sitharaman paints a brighter picture. She said last week that the decline was “not systemic” but a result of reducing government spending during an election-focused quarter. She expected third-quarter growth to offset the recent decline. India will probably remain the fastest-growing major economy despite challenges like stagnant wages affecting domestic consumption, slowing global demand and climate disruptions in agriculture, Sitharaman said.

Some – including a senior minister in the federal government, economists and a former member of RBI’s monetary policy group – argue that the central bank’s focus on curbing inflation has led to excessively restrictive interest rates, potentially stifling growth.

Higher prices could reduce purchases and lessen consumption, both important factors in the growth of the economy, and create borrowing more expensive for businesses and consumers. Interest rates have remained constant for almost two years thanks largely to rising prices.

India’s inflation surged to 6.2% in October, breaching the central bank’s target ceiling (4%) and reaching a 14-month high, according to official data. It was mainly driven by food prices, comprising half of the consumer price basket – vegetable prices, for example, rose to more than 40% in October. There are also growing signs that food price hikes are now influencing other everyday costs, or core inflation.

However, high interest rates by themselves may never fully account for the sluggish growth. ” Lowering costs won’t stimulate growth unless use demand is strong. Investors use and spend only when demand exists, and that’s not the case today”, says Himanshu ( he uses just one name ), a development analyst at Delhi’s Jawaharlal Nehru University.

But, RBI’s outgoing government, Shaktikanta Das, believes India’s “growth history remains intact”, adding the “balance between inflation and growth is also poised”.

Economists point out that despite record-high retail credit and rising unsecured loans – indicating people borrowing to finance consumption even amidst high rates – urban demand is weakening. Rural demand is a brighter spot, benefiting from a good monsoon and higher food prices.

Ms Sengupta, an associate professor at Mumbai-based Indira Gandhi Institute of Development Research, told the BBC that the ongoing problems was borne out by the notion that India’s business was operating on a” two-speed trajectory”, driven by diverging appearances in its “old market and new business”.

The old business comprising the huge informal industry, including medium and smaller scale industries, agriculture and traditional business sector, are still waiting for long-pending reforms.

In contrast, the new economy, defined by the boom in services exports post-Covid, experienced robust growth in 2022-23. Outsourcing 2.0 has been a key driver, with India emerging as the world’s largest hub for global capability centres ( GCCs ), which do high-end offshore services work.

According to Deloitte, a consulting firm, over 50% of the world’s GCCs are now based in India. These centres focus on R&D, engineering design and consulting services, generating $46bn (£36bn) in revenue and employing up to 2 million highly skilled workers.

” This influx of GCCs fueled urban consumption by boosting the demand for SUVs, real estate, and luxury goods. 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.

Thus, while the new economy is sluggish, the old economy appears to lack a growth catalyst. Private investment is crucial, but without strong consumption demand, firms will not invest. Consumption demand cannot recover without investments to create jobs and increase incomes. ” It’s a vicious cycle”, says Ms Sengupta.

There are other confusing signals as well. India’s average tariffs have risen from 5% in 2013-14 to 17% now, higher than Asian peers trading with the US. In a world of global value chains, where exporters rely on imports from multiple countries, high tariffs make goods more expensive for companies to trade, making it harder for them to compete in global markets.

Then there is what economist Arvind Subramanian refers to as a “new twist in the tale.”

Even as calls grow to lower interest rates and boost liquidity, the central bank is propping up a falling rupee by selling dollars, which tightens liquidity. Since October, the RBI has spent $50bn from its forex reserves to shield the rupee.

Buyers are required to pay in rupees for purchases of dollars, which lessens the amount of market liquidity. Maintaining a strong rupee through policy changes makes Indian goods more expensive on global markets, which results in a lower export demand.

” Why is the rupee being stabilized by the central bank?” The policy has negative effects on both the economy and exports. Perhaps 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 warn that the “hyping up the narrative” of India as the fastest-growing economy is hindering essential reforms to boost 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.

In other words, India needs a significantly higher and more consistent growth rate to increase its workforce and increase its income.

Short-term goals for boosting growth and consumption won’t be easy. Lacking private investment, Himanshu suggests raising wages through government-run employment schemes to increase incomes and spur consumption. For example, Ms. Sengupta advocates for lowering tariffs and attracting export investments moving away from China to nations like Vietnam.

The government remains upbeat over the India story: banks are strong, forex reserves are robust, finances stable and extreme poverty has declined. Chief economic adviser V Anantha Nageswaran says the latest GDP figure should not be over-interpreted. “We should not throw the baby out with the bathwater, as the underlying growth story remains intact,” he said at a recent meeting.

Evidently, the rate of growth could use some improvement. That is why scepticism lingers. ” 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”.