Is the fastest-growing large economy losing steam?

Is the globe’s fastest-growing large economy losing steam?

The latest GDP numbers paint a sobering picture. Between July and September, India’s economy slumped to a seven-quarter low of 5.4%, well below the safety net lender of India (RBI) projection of 7%.

While it is still robust compared with developed nations, the figure signals a slowdown.

Economists attribute this to several factors. customer demand has weakened, private resource has been sluggish for years and government spending – an essential driver in recent years – has been pulled back. India’s goods exports have long struggled, with their global distribute standing at a mere 2% in 2023.

quick-moving customer goods (FMCG) companies update 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 projection to 6.6% for the budgetary 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 obvious slowdown and a solemn demand issue.”

Finance Minister Nirmala Sitharaman paints a brighter picture. She said last week that the decline was “not systemic” but a outcome of reducing government spending during an election-concentrated 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 elder minister in the federal government, economists and a former member of RBI’s economic strategy throng – debate that the central lender’s focus on curbing worth rise has led to excessively restrictive yield rates, potentially stifling growth.

High rates make borrowing more expensive for businesses and consumers, and potentially reduce investments and dampen consumption, both key drivers of market advancement. The RBI has kept yield rates unchanged for nearly two years, primarily because of rising worth rise.

India’s worth rise surged to 6.2% in October, breaching the central lender’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 customer worth basket – vegetable prices, for example, rose to more than 40% in October. There are also growing signs that food worth hikes are now influencing other everyday costs, or core worth rise.

But lucrative investment rates alone may not fully explain the slowing growth. “Lowering rates won’t spur growth unless consumption demand is powerful. Investors borrow and invest only when demand exists, and that’s not the case now,” says Himanshu, a advancement economist at Delhi’s Jawaharlal Nehru University.

However, RBI’s outgoing governor, Shaktikanta Das, believes India’s “growth narrative remains intact”, adding the “settlement between worth rise and growth is well poised”.

Economists point out that despite record-high retail capital 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 excellent monsoon and higher food prices.

Ms Sengupta, an associate professor at Mumbai-based Indira Gandhi Institute of advancement Research, told the BBC that the ongoing crisis was borne out by the truth that India’s economy was operating on a “two-speed trajectory”, driven by diverging performances in its “ancient economy and recent economy”.

The ancient economy comprising the vast informal sector, including medium and tiny scale industries, agriculture and traditional corporate sector, are still waiting for long-pending reforms.

In contrast, the recent 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 globe’s largest hub for global capability centres (GCCs), which do high-complete offshore services work.

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

“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.

So the ancient economy appears to lack a growth catalyst while the recent economy slows. Private resource is crucial, but without powerful consumption demand, firms will not invest. Without resource to make jobs and boost incomes, consumption demand cannot recover. “It’s a vicious pattern,” 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 market activity with the US. In a globe of global worth chains, where exporters depend 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 calls a “recent twist in the account”.

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

Buyers must pay in rupees to purchase dollars, which reduces ability to pay in the trade. Maintaining a powerful rupee through interventions reduces competitiveness by making Indian goods more expensive in global markets, leading to lower demand for exports.

“Why is the central lender shoring up the rupee? The policy is impoverished for the economy and exports. Possibly they are doing it because of optics. They don’t desire to display India’s liquid assets is frail,” Mr Subramanian, a former economic adviser to the government, told the BBC.

Critics alert that the “hyping up the narrative” of India as the fastest-growing economy is hindering essential reforms to boost resource, exports and job creation. “We are still a impoverished country. Our per capita GDP is less than $3,000, while the US is at $86,000. If you declare we are growing faster than them, it makes no sense at all,” says Ms. Sengupta.

In other words, India requires a significantly higher and sustained growth rate to generate more jobs and raise incomes.

Boosting growth and consumption will not be straightforward in the short term. Lacking private resource, Himanshu suggests raising wages through government-run employment schemes to boost incomes and spur consumption. Others like Ms Sengupta advocate for reducing tariffs and attracting export investments moving away from China to countries like Vietnam.

The government remains upbeat over the India narrative: banks are powerful, 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 narrative remains intact,” he said at a recent conference.

Clearly the pace of growth could do with some picking up. That is why scepticism lingers. “There’s no country as ambitious for so long without taking [adequate] steps to fulfill that aspiration,” says Ms Sengupta. “Meanwhile, the headlines talk of India’s age and decade – I’m waiting for that to materialise.”