Written by Shivangi Acharya and Nikunj Ohri
NEW DELHI (Reuters) – After world-beating economic growth last year, Indian policymakers are seeking to avoid a sharp slowdown as deteriorating global conditions and domestic confidence wiped out a recent stock market rally.
On Tuesday, Asia's third-largest economy expected annual growth of 6.4% in the fiscal year ending in March, which is the slowest in four years and below the government's initial expectations, affected by weak investment and manufacturing.
The downgrade comes in the wake of disappointing economic indicators and a slowdown in corporate profits in the second half of 2024, which forced investors to rethink the country's earlier outperformance and cast doubt on Prime Minister Narendra Modi's ambitious economic goals.
The new concerns are increasing calls for authorities to lift morale by easing monetary settings and slowing the pace of fiscal tightening, especially as a looming second presidency for Donald Trump raises further uncertainty about the global trade outlook.
“You have to revive the animal spirit, and you also have to ensure consumption goes up. It's not that easy,” said Madhavi Arora, chief economist at financial services firm Emkay Global, adding that India could expand its balance sheet or cut interest rates. Rates.
Such calls come amid a flurry of meetings among Indian policymakers as companies grow increasingly concerned about faltering demand.
Finance Minister Nirmala Sitharaman held a series of meetings in December with industry and economists, as is usual ahead of India's annual budget, due on February 1.
Some of the measures proposed in those talks to boost growth include putting more money in the hands of consumers and cutting taxes and customs duties, according to demands from trade and industry associations.
Growing concerns
Concerns about the Indian economy led to the benchmark Nifty 50 index falling by 12% from late September to November. It offset those losses to end 2024 with an increase of 8.7%, a good gain but much less than the previous year’s rise of 20%.
As confidence declines, the political drive to stimulate growth appears to be broadening.
India's monthly economic report published last month said the central bank's tight monetary policy was partly responsible for the demand hit.
Modi has made some notable changes recently that are expected to elevate economic growth as a priority over price stability.
In a surprise move in December, Modi appointed Sanjay Malhotra as the new central governor, replacing Shaktikanta Das, a trusted bureaucrat who was widely expected to get another term of between one and two years as head of the bank after completing six years in office. Bank.
The appointment of Malhotra, who recently said the central bank would strive to support a higher growth trajectory for the Indian economy, came immediately after growth in the September quarter slowed much more than expected to 5.4%.
During the pandemic, Modi has sought to keep the economy growing by increasing infrastructure spending and curbing wasteful spending to keep government finances in good shape.
This has lifted headline GDP growth but has not supported wages or helped consumption maintain an annual expansion of more than 7% over the past three years.
Sanjay Kathuria, a visiting distinguished fellow at the Center for Social and Economic Progress, said that while the Indian economy may still be outperforming globally, the question is whether it can sustain growth of 6.5%-7.5% or slow to 5%. And 6%.
Arora said the country is currently in a “state of limbo” where people are not spending. It expects this to continue if employment does not improve and wage growth remains weak.
Reuters reported last month that the government plans to reduce taxes on some individuals and is preparing to offer tariff reductions on some agricultural products and other goods imported mainly from the United States, to reach an agreement with Trump.
Economists say the government will have to slow down some fiscal tightening measures to support growth, as the success of such measures depends on the extent of the cuts.
On trade, analysts say India needs a credible plan to fight Trump's tariff wars.
Economists said that if China remains the main target of Trump's tariffs, it could represent an opportunity for India to strengthen its trade position, although it would also need to allow the rupee to fall further to make its exports more competitive.
Kathuria, who is also an assistant professor at Georgetown University, said India needs to “seriously implement tariff rationalization to help integrate itself deeper into global value chains.”
This could include tariff reductions aimed at preemptively avoiding punitive tariffs from the Trump White House.
“India should announce some proactive measures to US powers to make concessions to the US instead of waiting for the new administration to announce its steps,” said Sachin Chaturvedi, head of the New Delhi-based Research and Information System for Developing Countries.
