Is the fastest growing major economy losing momentum?

Is the world’s fastest growing major economy losing momentum?

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

Although still strong compared to developed countries, the figure indicates a recession.

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 merchandise exports have been struggling for a long time, with their global share expected to drop to just 2% in 2023.

Fast-Moving Consumer Goods (FMCG) Companies Report slow salesWhile wage bills at publicly traded firms are a proxy for urban wages, shrink away last quarter. Even the already upbeat RBI has revised its growth forecast for fiscal year 2024-2025 to 6.6%.

“After the latest GDP data, it seems everything is over,” says economist Rajeshwari Sengupta. “But it has been rising for some time. There is a clear slowdown and a serious demand problem.”

Finance Minister Nirmala Sitharaman has presented a bright picture. He said last week that there has been a decline “Not systemic” But this is a result of reduced government spending during the election-centric quarter. He expects third-quarter growth to offset recent declines. Sitharaman said India will likely remain the fastest growing major economy despite challenges such as stagnant wages impacting domestic consumption, weak global demand and climate-related disruption in agriculture.

Some – including a senior Minister In the federal government, economists And Former member of the Monetary Policy Group of RBI – Argues that the central bank’s focus on curbing inflation has led to interest rates becoming overly restrictive, potentially stifling growth.

Higher rates make it more expensive for businesses and consumers to borrow, and potentially reduce investment and consumption, both key drivers of economic growth. The RBI has kept interest rates unchanged for almost two years mainly due to rising inflation.

India’s inflation increased to 6.2% The inflation rate breached the central bank’s target (4%) in October and hit a 14-month high, according to official data. This was mainly driven by food prices, which comprise half of the consumer price basket – for example, vegetable prices rose more than 40% in October. There are also growing signs that rising food prices are now impacting other everyday costs, or core inflation.

But higher interest rates alone cannot fully explain slow growth. Himanshu, a development economist at Delhi’s Jawaharlal Nehru University, says, “Lowering rates will not spur growth unless consumption demand is strong. Investors borrow and invest only when the demand is there, and that is now the case.” Not there.”

However, outgoing RBI Governor Shaktikanta Das believes India’s “growth story remains intact”, adding that “the balance between inflation and growth is well struck”.

Economists say that despite record-high retail lending and rising unsecured loans – Urban demand is weakening – a sign of people borrowing to finance consumption even amid high rates. Rural demand is a bright spot, benefiting from good monsoon and high food prices.

Ms Sengupta, an associate professor at the Mumbai-based Indira Gandhi Institute of Development Research, told the BBC that the current crisis stems from the fact that India’s economy is running on a “two-speed trajectory”, driven by its varying performance . “The Old Economy and the New Economy”.

The old economy with a huge informal sector including medium and small scale industries, agriculture and the traditional corporate sector is still waiting for long pending reforms.

In contrast, the new economy, defined by a post-Covid surge in services exports, is projected to experience strong growth in 2022-23. Outsourcing 2.0 has been a key driver, with India emerging as the world’s largest hub for Global Competence Centers (GCCs) that undertake high-end offshore services.

according to DeloitteA consulting firm, more than 50% of the world’s GCCs are now located in India. These centers focus on R&D, engineering design and consultancy services, generate $46bn (£36bn) of revenue and employ 2 million highly skilled workers.

“This influx of GCCs boosted urban consumption by supporting demand for luxury goods, real estate and SUVs. For 2-2.5 years after the pandemic, this led to an increase in urban spending. Large-scale establishment and consumption of GCCs With the change in patterns, the increased urban spending is vanishing,” says Ms Sengupta.

Therefore the old economy appears to lack growth catalysts while the new economy slows down. Private investment is important, but without strong consumption demand companies will not invest. Consumption demand cannot improve without investment to create jobs and increase incomes. “It’s a vicious cycle,” says Ms. Sengupta.

There are other misleading signals as well. India’s average tariff increased from 5% to 5% in 2013–14 17% Now, there are more Asian competitors doing business with the US. In a world of global value chains, where exporters rely on imports from many countries, higher tariffs make trade more expensive for companies, making it harder for them to compete in global markets.

Then what economist Arvind Subramanian calls “a new twist in the story” happened.

Even as calls grow to reduce interest rates and boost liquidity, the central bank is supporting the falling rupee by selling dollars, thereby strengthening liquidity. Since October, RBI has spent 50 billion dollars From your foreign exchange reserves to save Rs.

Buyers will have to pay in rupees to buy dollars, which reduces liquidity in the market. Keeping the rupee strong through interventions reduces competitiveness by making Indian goods more expensive in global markets, thereby reducing demand for exports.

“Why is the central bank promoting the rupee? The policy is bad for the economy and exports. Probably they are doing it for cosmetic reasons. They do not want to show that India’s currency is weak,” said Mr Subramaniam, a former economic adviser. ” To the government, told the BBC.

Critics warn that the “promotion of the story” of India as the fastest-growing economy is hindering reforms needed to boost investment, exports and job creation. Ms Sengupta says, “We are still a poor country. Our per capita GDP is less than $3,000, while America’s GDP is $86,000. If you say we are growing faster than them, then there is no does not make sense.”

In other words, India needs a much higher and sustained growth rate to create more jobs and increase incomes.

Boosting growth and consumption in the short term will not be easy. Due to lack of private investment, Himanshu suggests raising wages through government-run employment schemes to increase income and consumption. Others, like Ms. Sengupta, advocate reducing tariffs and attracting export investment from China to countries like Vietnam.

The government remains excited about this story of india:Banks are strong, foreign exchange reserves are strong, finances are stable and extreme poverty has declined. Chief Economic Advisor V Ananth Nageswaran says the latest GDP data should not be overinterpreted. “We should not throw out the baby with the bathwater, because the underlying evolutionary story remains intact,” he said at a recent event. meeting,

Obviously the pace of development may accelerate to some extent. That is why doubt remains. “No nation can be that ambitious for so long without taking (adequate) steps to realize that ambition,” Ms Sengupta says. “Meanwhile, the spotlight is on India’s coming of age and decade – I’m waiting for it to materialize.”