Is the world's fastest-growing major economy losing steam?

Is the world's fastest-growing major economy losing steam?

The latest GDP figures paint a sobering picture. Between July and September, the Indian economy fell to a seven-quarter low of 5.4%, well below the Reserve Bank of India's (RBI) forecast of 7%.

While still strong compared to developed countries, this number indicates a slowdown.

Economists attribute this to several factors. Consumer demand has weakened, private investment has been sluggish for years, and government spending – a key driver in recent years – has been withdrawn. Indian goods exports have suffered for a long time, with their share reaching just 2% in 2023.

Fast Moving Consumer Goods (FMCG) Companies Report. Lukewarm salesWhile payroll bills at publicly traded companies are a proxy for wages in urban areas, It shrunk last quarter. Even the previously bullish Reserve Bank of India (RBI) has revised its growth forecast to 6.6% for FY 2024-25.

“All hell seems to have broken loose after the latest GDP numbers,” says economist Rajeshwari Sengupta. “But this has been building for a while. There is a clear slowdown and a serious problem with demand.”

Finance Minister Nirmala Sitharaman paints a brighter picture. She said last week that the decline was “irregular” But as a result of government spending cuts during the election-focused quarter. It is expected that third-quarter growth will compensate for the recent decline. Sitharaman said India will likely remain the fastest growing major economy despite challenges such as stagnant wages affecting domestic consumption, slowing global demand and climate disruptions in agriculture.

Some – including a senior minister In the federal government, Economists and Former member of the Monetary Policy Group at the Reserve Bank of India (RBI). – They claim that the central bank's focus on curbing inflation has led to the imposition of overly restrictive interest rates, which could stifle growth.

Higher interest rates make borrowing more expensive for businesses and consumers, potentially reducing investment and dampening consumption, both major drivers of economic growth. The Reserve Bank of India has kept interest rates unchanged for almost two years, primarily due to high inflation.

Inflation in India rose to 6.2% In October, it exceeded the central bank's target ceiling (4%) and reached its highest level in 14 months, according to official data. This was mainly driven by food prices, which make up half of the consumer price basket – for example, vegetable prices rose more than 40% in October. There is also growing evidence that rising food prices are now affecting other daily costs, or core inflation.

But high interest rates alone may not fully explain the slowdown in growth. “Cutting interest rates will not stimulate growth unless consumer demand is strong,” says Himanshu (uses only one name), a development economist at Jawaharlal Nehru University in Delhi. “Investors only borrow and invest when demand is there, and that is not the case.” “It's the case now.”

However, Shaktikanta Das, the outgoing Reserve Bank of India Governor, believes that “India’s growth story remains sound,” adding that “the balance between inflation and growth is well placed.”

Economists point out that despite the high level of retail credit and High unsecured loans – suggesting that people are borrowing to finance consumption even at high interest rates – demand in urban areas is weakening. Rural demand is a brighter point, benefiting from a Good monsoon High food prices.

Sengupta, an assistant professor at the Mumbai-based Indira Gandhi Institute of Development Research, told the BBC that the ongoing crisis was due to the fact that the Indian economy was operating on a “two-speed track”, driven by mixed performance in its economy. “Old Economy and New Economy”.

The old economy, which includes the vast informal sector, including medium and small industries, agriculture and the traditional corporate sector, is still awaiting long-overdue reforms.

In contrast, the new economy, defined by the post-Covid services export boom, saw strong growth in 2022-2023. Outsourcing 2.0 has been a major driver, with India emerging as the world's largest hub for global capability centres, which provide sophisticated outsourcing services.

according to Deloittea consulting firm, estimates that more than 50% of the world's GCC countries are now located in India. These centers focus on research and development, engineering design and consultancy services, generate revenues of $46bn (£36bn) and employ up to two million highly skilled workers.

“This influx from the GCC has increased urban consumption by supporting demand for luxury goods, real estate and SUVs. Over the course of two to two and a half years after the pandemic, this has led to an increase in urban spending. With the GCC steady to As consumption patterns change, urban spending is fading away, Ms. Sengupta says.

So it seems that the old economy lacks a growth stimulus while the new economy slows down. Private investment is crucial, but in the absence of strong consumer demand, companies will not invest. Without investment to create jobs and boost incomes, consumption demand will not be able to recover. “It's a vicious cycle,” Ms. Sengupta says.

There are other confusing signals as well. Average tariffs in India rose from 5% in 2013-14 to 5% in 2013-14. 17% Now, it is higher than its Asian counterparts that trade with the United States. In the world of global value chains, where exporters depend on imports from multiple countries, high tariffs make goods more expensive for companies to trade, making it difficult for them to compete in global markets.

Then there is what economist Arvind Subramanian calls “the new twist in the story.”

Even as calls to lower interest rates and boost liquidity grow, the central bank is supporting the falling rupee by selling dollars, tightening liquidity. Since October, The Reserve Bank of India has spent $50 billion of its foreign exchange reserves to protect the rupee.

Buyers must pay in rupees to buy dollars, which reduces liquidity in the market. Maintaining a strong rupee through interventions reduces competitiveness by making Indian goods more expensive in global markets, leading to lower demand for exports.

Subramanian, former economic advisor: “Why is the central bank supporting the rupee? This policy is bad for the economy and exports. Maybe they are doing it because of optics. They do not want to show that the Indian currency is weak.” He told the BBC government.

Critics warn that “hyper-hype” about India being the fastest-growing economy is holding back key reforms to boost investment, exports and job creation. “We are still a poor country,” says Ms. Sengupta. “Our GDP per capita is less than $3,000, while the US has $86,000. If you say we are growing faster than them, it makes no sense at all.”

In other words, India needs a much higher and sustainable growth rate to generate more jobs and income.

Boosting growth and consumption will not be an easy task in the short term. In the absence of private investment, Himanshu suggests raising wages through government-run employment schemes to raise incomes and stimulate consumption. Others, like Sengupta, call for lowering tariffs, attracting export investment and moving away from China to countries like Vietnam.

The government remains optimistic about India story: Banks are strong, foreign exchange reserves are strong, financial resources are stable, and extreme poverty has decreased. Chief Economic Advisor V Anantha Nageswaran says the latest GDP figures should not be over-interpreted. “We should not throw the baby out with the bathwater, because the basic developmental story remains intact,” he said recently. interview.

It is clear that the pace of growth can improve with some improvement. That is why doubts remain. “No country is ambitious for long without taking[adequate]steps to achieve that ambition,” says Ms. Sengupta. “Meanwhile, the headlines are talking about India's age and decade – and I'm waiting for that to come true.”