India's Economic Growth: Concerning Slowdown Amidst Outlook of Optimism

India, once celebrated as the fastest-growing major economy, is now facing signs of an economic slowdown, reflected in its latest GDP figures. From July to September, India’s economic growth plummeted to 5.4%, the lowest in seven quarters, falling short of the Reserve Bank of India’s (RBI) projection of 7%. Although still more robust than the growth rates of developed countries, this figure raises alarms about an emerging trend of stagnation.

Experts attribute this downturn to various factors, including diminished consumer demand, longstanding sluggishness in private investment, and a retraction in government spending—once a key driver of growth. Goods exports have been particularly weak, with India’s global market share hovering around 2% in 2023. Fast-moving consumer goods (FMCG) companies reported disappointing sales, further showcasing dim prospects. Additionally, there has been a noticeable contraction in salary expenditures among publicly traded companies, indicative of stagnating urban wages. In light of this context, even the RBI changed its growth outlook for 2024-2025 to 6.6%.

Economist Rajeshwari Sengupta views the recent GDP data as alarming and argues that a more systemic issue is at play, emphasizing that a demand crisis has been developing over time. Conversely, Finance Minister Nirmala Sitharaman maintains a more optimistic stance, asserting that the decline reflects election-period government spending cutbacks and suggesting that the anticipated growth in the next quarter could stabilize the economy.

Despite government reassurances, analysts have raised concerns regarding the RBI’s prolonged focus on inflation control through elevated interest rates, which some argue has hindered economic activity. The RBI has kept interest rates unchanged for nearly two years amidst rising inflation, which reached 6.2% in October—exceeding the central bank’s targeted ceiling. Driven mainly by soaring food prices, inflation poses risks to consumer spending behavior.

The economic landscape reveals significant discrepancies between sectors. Sengupta describes India’s economy as operating on a “two-speed trajectory.” The old economy, characterized by informal employment, traditional manufacturing, and agriculture, languishes due to unaddressed structural reforms. Meanwhile, the new economy—bolstered by robust service exports—has flourished post-COVID, especially in the outsourcing sector. Reports indicate that over half of the world’s global capability centers (GCCs) are now based in India, driving urban spending through luxury goods and real estate consumption.

However, the growth in the new economy appears to be waning. As GCCs stabilize, urban spending is starting to decline, which stalls potential growth and private investment. High tariffs, a serious impediment to trade competitiveness, have escalated from 5% in 2013-14 to a significant 17% today, further complicating export opportunities.

In a complicated twist, economist Arvind Subramanian notes that the RBI’s approach to maintain a strong rupee through forex interventions has inadvertently tightened liquidity and could impede export growth. Critics argue that, despite the optimistic narrative of rapid growth, the reality is more sobering: with a per capita GDP of less than $3,000, India’s challenges necessitate more than just rhetoric around growth.

Economists propose interventions such as government-led wage increases to stimulate consumption and recommend lowering tariffs to attract foreign investment, particularly in the context of shifting supply chains away from China.

Despite these pressing economic challenges, government officials assert that India’s underlying strengths—robust banks, solid forex reserves, and declining extreme poverty—still provide a foundation for future growth. However, skepticism remains prevalent, with analysts warning that without significant reforms, India’s ambitious economic narrative may struggle to materialize. As Sengupta aptly points out, sustained growth is critical for improving job creation and raising income levels; optimism without action may lead to stagnation.