By Bibhudatta Pradhan / NEW DELHI
India is the world’s fastest-growing major economy and statistically, this claim holds true. However, beneath this optimistic façade lies a more nuanced and challenging reality. Recent data and structural issues indicate that the momentum driving India’s growth is faltering.
While the government projects confidence in the country’s economic trajectory, key indicators reveal that the growth engine is sputtering, necessitating urgent policy recalibrations to prevent further slowdown.
Between July and September, the country’s economy grew at its slowest pace in nearly two years. The gross domestic product expansion fell to a seven-quarter low of 5.4%, down from 8.1% in the same period last year and 6.7% in the previous quarter.
Several factors have contributed to this slowdown, with weak consumer demand emerging as the primary driver. FMCG companies have reported sluggish sales, primarily driven by declining urban demand.
The spending power of the middle class has been eroded by rising real estate costs, food inflation, and slower wage growth. Loans against gold, growing at over 50% annually, highlight the financial strain on lower-income households, leaving them with minimal disposable income for non-essential spending.
Private investment remains sluggish as businesses are reluctant to commit to new projects or expand existing operations, constrained by weak consumer demand and uncertain economic conditions. Government spending, which has been a significant driver of growth in recent years, has also scaled back due to fiscal constraints and a focus on election-related expenditures.
India’s goods exports face persistent challenges due to high tariffs and limited global competitiveness. These barriers make it challenging for Indian products to secure a stronger presence in international markets. Meanwhile, manufacturing output has been on a steady decline since March, further weakening the industrial base.
The slowdown has also been compounded by a lack of robust job creation and persistent inflation. Although retail inflation eased slightly to 5.5% in November, down from a 14-month high of 6.2% in October, it remains close to the central bank’s upper target limit of 6%. Food prices, which account for nearly half of the consumer price basket, continue to exert significant pressure on household budgets.
Some of the blame for the dip in economic growth has been directed at the Reserve Bank of India, which has kept interest rates unchanged for nearly two years in an effort to control inflation.Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal have recently voiced concerns, stating that high borrowing costs are weighing heavily on the economy. While the RBI’s hawkish monetary policy has been effective in curbing inflation, it has also made borrowing more expensive for businesses and consumers, with critics arguing that these elevated rates are stifling economic growth.
In a significant move, the government has appointed career bureaucrat Sanjay Malhotra as the new governor of the RBI, replacing Shaktikanta Das, who served as the central bank’s chief since 2018. In his final policy review, Das maintained the benchmark interest rate but introduced measures to enhance liquidity in the banking system and support the rupee, which has faced downward pressure in recent months. Malhotra’s appointment could signal a possible shift in RBI’s policy direction.
India’s slowing economic growth has prompted economists to lower their growth forecasts, reflecting the mounting challenges facing the economy. The RBI has also revised its growth forecast for the current financial year ending in March, lowering it to 6.6% from the 7.2% projected in October. This sets the stage for significant pressure on the newly appointed Governor Malhotra to take bold steps to revive growth.
The government maintains an optimistic outlook. Finance Minister Sitharaman has attributed the recent slowdown to temporary factors, such as reduced government spending during an election-focused quarter, and anticipates a rebound in growth. Officials also stress that the economy’s fundamentals remain strong, citing a well-capitalized banking system, robust foreign exchange reserves, and stable fiscal conditions.
One notable bright spot has been the boom in services exports, particularly in the post-COVID-19 era. This sector has not only generated significant revenue but also created millions of jobs for highly skilled workers, underscoring its importance as a pillar of economic resilience. Rural demand has also shown promise, bolstered by a good monsoon season and higher agricultural prices.
Despite these bright spots, the sharper-than-expected dip in growth cannot be overlooked. Interest rate cuts by the RBI, while necessary, will not suffice to revive the economy without addressing structural challenges and implementing measures to stimulate consumption.
Relying solely on the narrative of India as the fastest-growing major economy is not enough. For meaningful progress, India must target significantly higher and sustained growth rates, prioritizing job creation and income improvements to ensure long-term economic resilience.
Bibhudatta Pradhan is a senior journalist based in New Delhi