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    Home » India’s Growth Slowdown: Understanding the Key Issues
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    India’s Growth Slowdown: Understanding the Key Issues

    Silke MayrBy Silke MayrDecember 14, 2024No Comments3 Mins Read
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    India’s economy slowed to 5.4%, falling short of the RBI’s 7% target, sparking fresh concerns.

    Key Factors Behind the Slowdown

    Consumer demand weakened, and private investment stayed low. Government spending, a key driver, declined before elections. India’s goods exports faced ongoing struggles, holding just 2% of the global share in 2023.

    FMCG companies saw sluggish sales, while wage bills for public firms fell, reflecting weaker urban wages. The RBI cut its growth forecast to 6.6% for 2024-2025. Economist Rajeshwari Sengupta described a “serious demand issue” following the GDP decline.

    Finance Minister Nirmala Sitharaman claimed the dip was due to election-period spending cuts. She predicted a third-quarter rebound. Despite the slowdown, India remains the fastest-growing major economy.

    Some experts blame restrictive interest rates for dampening growth. High rates deter borrowing, cutting consumption and investment. The RBI has held rates steady for two years to combat inflation.

    India’s inflation hit 6.2% in October, breaching RBI’s 4% target. Food prices, especially vegetables, drove inflation. Economists warn rising food costs could affect other core inflation elements.

    However, interest rates alone don’t explain the slowdown. Without demand, lower rates won’t spur growth. Himanshu, an economist at Jawaharlal Nehru University, stressed that demand must exist for investment to follow.

    Outgoing RBI governor Shaktikanta Das said India’s “growth story remains intact” with inflation-growth balance managed. But urban demand weakens, even as retail credit and loans rise. In contrast, rural demand strengthens, helped by strong monsoon rains and higher food prices.

    Divergence Between the Old and New Economies

    India’s economy moves on a “two-speed trajectory”. The old economy, with agriculture and small industries, faces reform delays. Meanwhile, the new economy, driven by booming services exports, thrives.

    Global Capability Centres (GCCs) play a critical role in the new economy. India hosts over 50% of the world’s GCCs, generating $46 billion in revenue. They support urban consumption, boosting luxury goods, real estate, and SUV sales. But as GCCs mature, their impact on urban consumption wanes.

    This two-speed economy lacks a clear growth catalyst. Private investment is essential, but weak consumption prevents firms from investing. Without job growth and higher incomes, consumption remains weak. “It’s a vicious cycle,” says Sengupta.

    Further confusion arises from India’s rising tariffs. Average tariffs jumped from 5% in 2013-14 to 17%, higher than other Asian exporters. High tariffs raise production costs, hurting India’s global competitiveness.

    Economist Arvind Subramanian highlights another problem. While experts call for rate cuts, the RBI sells dollars to support the rupee. This reduces market liquidity, making Indian exports costlier and less competitive globally.

    Critics say the “fastest-growing economy” label delays essential reforms. Economist Sengupta notes India’s per capita GDP remains under $3,000, far below the U.S. at $86,000. Sustained growth is essential to create jobs and raise incomes.

    Boosting growth won’t be easy. Himanshu suggests raising wages via government job schemes. Sengupta recommends reducing tariffs and attracting export investments from firms leaving China.

    The government remains optimistic, highlighting strong banks, solid foreign reserves, and reduced poverty. Chief Economic Adviser V. Anantha Nageswaran urged against overreacting to the GDP dip, claiming India’s “growth story remains intact.”

    Skepticism persists. Sengupta highlights India’s unfulfilled ambitions. “There’s no nation as ambitious for so long without taking adequate steps to fulfill that ambition,” she says. Many await the moment India’s “decade” truly begins.

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    Silke Mayr
    Silke Mayr
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    Silke Mayr is a seasoned news reporter at EuroNews24, specializing in general news with a keen focus on international events. Her insightful reporting and commitment to accuracy keep readers informed on global affairs and breaking stories.

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