Is the fastest-growing big economy losing steam?

Is the world's fastest-growing big 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 Reserve Bank of India (RBI) forecast of 7%.

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

Economists attribute this to several factors. Consumer demand has weakened, private investment 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 share standing at a mere 2% in 2023.

Fast-moving consumer goods (FMCG) companies report 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 forecast to 6.6% for the financial 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 clear slowdown and a serious demand problem."

Finance Minister Nirmala Sitharaman paints a brighter picture. She said last week that the decline was "not systemic" but a result of reducing government spending during an election-focused 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 senior minister in the federal government, economists and a former member of RBI's monetary policy group – argue that the central bank's focus on curbing inflation has led to excessively restrictive interest 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 economic growth. The RBI has kept interest rates unchanged for nearly two years, primarily because of rising inflation.

India's inflation surged to 6.2% in October, breaching the central bank'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 consumer price basket – vegetable prices, for example, rose to more than 40% in October. There are also growing signs that food price hikes are now influencing other everyday costs, or core inflation.

But high interest rates alone may not fully explain the slowing growth. "Lowering rates won't spur growth unless consumption demand is strong. Investors borrow and invest only when demand exists, and that's not the case now," says Himanshu (he uses only one name), a development economist at Delhi's Jawaharlal Nehru University.

However, RBI's outgoing governor, Shaktikanta Das, believes India's "growth story remains intact", adding the "balance between inflation and growth is well poised".

Economists point out that despite record-high retail credit 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 good monsoon and higher food prices.