Why is India's economy taking a break this year? Where is it going wrong?

Is the fast-growing Indian economy now losing its growth momentum? The reason for this question is that the recent GDP figures are creating a worrying picture.

India's economy has reached a seven-quarter low of 5.4 percent between July and September.

This figure is much lower than the Reserve Bank of India's (RBI) estimate of 7 percent.

But even so, India's economy is still in a strong position compared to other developed countries. Still, these figures are indicative of a slowdown in the economy.

Economists say that many factors are responsible for this. There has been a decline in demand for goods or products from consumers. Private investment has been low for the past several years.

Along with this, government spending, which is important for the economy, has also decreased in recent years. India's export sector is also facing long-term problems. In 2023, India's share in global exports remained at only 2%.

There was no significant increase in sales of FMCG (fast-moving consumer goods) companies. There was also a decline in the number of salaries paid by companies that play an important role in the city's economy.

Not only that, the Reserve Bank, which had predicted a good growth rate for the 2024-25 financial year, has now revised it to 6.6 percent growth.

Economist Rajeshwari Sengupta says, "The latest GDP figures have created a lot of anxiety and confusion. However, these problems have not started now, they have been increasing for some time. It is clearly visible that the economy is slowing down and there is a shortage in demand, which is a big problem."

On the other hand, Finance Minister Nirmala Sitharaman, however, paints a picture of everything being fine.

Last week, she said that the decline in GDP figures is not a big problem facing the entire economy. The government had cut spending during the election period in the last quarter, which is why this happened.

She expects the growth in the third quarter to make up for the decline. She also said that India will remain the fastest growing major economy despite the challenges of reduced purchasing power due to stagnant wages, a slowdown in global demand and challenges to agriculture due to weather disruptions.

According to some, including senior government ministers, economists and former members of the RBI's monetary policy committee, the Reserve Bank of India's focus is on controlling inflation. Therefore, the limits on interest rates are likely to hinder growth.

High interest rates make it more expensive for businesses and the general public to borrow. This can lead to a decline in investment as well as sales (consumption of goods). However, both are important for economic growth.

The Reserve Bank of India has kept interest rates unchanged for almost two years due to rising inflation.

Inflation in India reached 6.2 per cent in October. This figure was the highest in the last 14 months, exceeding the 4 per cent target set by the Reserve Bank of India.

The main reason behind this was the price of food grains. For example, in October, vegetable prices rose by 40 per cent. The increase in food grains prices is also affecting other daily expenses. Therefore, overall, it is seen to have an impact on core inflation.

However, the increase in interest rates alone cannot provide a clear picture of the slowdown in growth. "Even if rates are cut, growth will not be boosted unless demand increases. Investors will borrow and invest only if there is good demand. But demand alone is not enough," says Himanshu, an economist at Jawaharlal Nehru University in Delhi.

"India's growth momentum is still intact," says the recently-resigned RBI governor Shaktikanta Das. "Moreover, the balance between inflation and growth is good."

According to economists,

People are borrowing more for their expenses despite high interest rates. According to economists, even with high borrowing, demand in cities is declining. However, the picture in rural areas is improving due to a relatively good monsoon and food prices.

 an associate professor at the Indira Gandhi Institute of Development Research in Mumbai. She said that India's economy is moving on a 'two-speed path'. That is, the old economy and the new economy are performing differently. That is why this current economic crisis has arisen.

The old economy includes the unorganised sector, small and medium enterprises, agriculture and traditional businesses. These sectors are still awaiting long-awaited reforms.

In contrast, the new economy has witnessed a boom in the service export sector post-COVID. As a result, these sectors have registered strong growth in 2022-23. Outsourcing 2.0 has played a major role in this growth.

India is now emerging as the world’s largest hub for Global Capacity Centres (GCCs). As India has become a supplier of high-quality services to other countries.

Consulting firm Deloitte says that more than 50 per cent of the world’s Global Capacity Centres (GCCs) are now in India.

These centres work on research and development, engineering design and consulting services. Their revenue is worth $46 billion. They also provide employment to about 2 million skilled workers.

Sengupta says, “GCCs (Global Capability Centres) have increased urban purchasing power. This has increased the demand for luxury goods, real estate and SUVs.

In the last two to two and a half years after the Corona pandemic, spending in urban areas has increased. Now most of the GCCs have stabilized, due to which the purchasing power pattern of consumers is changing, due to which the growth in urban spending is decreasing.”

While the old economy is not growing much, the growth rate in the new economy has slowed down. Private investment is important for growth. But, without demand, even private businessmen will not be able to invest.

Without investment, it will not be possible to create new jobs or earn more income. In short, without jobs and income, demand cannot be restored. This, “creates a ‘vicious cycle’,” says Sengupta.

There are some other confusing symptoms too. India's average tariff (import tax) has increased to 17 percent from 5 percent in 2013-14. This is higher than many Asian countries that trade with the United States.

In the 'global value chain', exporting companies depend on imports from different countries. These high tariffs make goods more expensive for companies to trade, making it harder for them to compete in the global market.

However, according to economist Arvind Subramanian, there is a twist in this too.

Many are calling for lower interest rates and more liquidity in the economy. However, to support the falling rupee, the Reserve Bank of India is selling dollars. This actually reduces liquidity.

'Liquidity' means the money available in the economy. Since October, the RBI has spent $50 billion from its foreign exchange reserves to help the rupee recover.

Buyers have to spend in rupees to buy dollars. This reduces the amount of money available in the market. In short, liquidity is reduced. If such interventions are supported by keeping the rupee strong, Indian goods become more expensive in the global market. As a result, demand for exports decreases.

“Why is the Reserve Bank of India supporting the rupee? This policy is harmful to the economy and exports. The possibility is that they are doing it just for show. They do not want to show that India is in a slump.”

India’s self-pity as the fastest growing economy is harmful from a development perspective. Critics also warn that this is a major obstacle to the reforms needed to boost investment, exports and job creation.

"We are still a poor country. Our per capita GDP (Gross National Product) is still less than $3,000. On the other hand, the US has a per capita GDP of $86,000. If you are saying that we are moving faster than them, that makes no sense," says Sengupta.

In other words, India needs a very significant and sustained growth rate to create more jobs and increase income.

It is not easy to increase growth and demand in the short term. Given the lack of private investment, Himanshu suggests increasing employment through government schemes to boost income and demand.

On the other hand, other economists like Sengupta suggest reducing import tariffs. They also recommend increasing export investment from countries like Vietnam, excluding China.

The government, however, still believes that the banks are strong, foreign exchange reserves are abundant, the economy is stable, and extreme poverty has reduced.

Chief Economic Advisor V. Anantha Nageswaran says we should not overanalyze the latest GDP figures. “We should not give up on everything because of one bad thing. India’s overall growth momentum is still strong,” he believes.

It is clear that India’s economic growth needs to gain more momentum. That is why skepticism remains. "No country can remain merely ambitious for so long without putting in the effort to achieve its goals," says Sengupta.

She adds, "On the one hand, there is a lot of talk about India's age and future, but I am waiting for it to become a reality."