India’s economy expanded at its slowest pace in seven quarters, with GDP growth recorded at 5.4% year-on-year in the July-September quarter. This was significantly below analysts’ expectations of 6.5% and marked a sharp decline from the 6.7% growth seen in the April-June period. The downturn was primarily driven by sluggish manufacturing activity and subdued private consumption.
Key Highlights:
- Manufacturing Slump: Growth in the manufacturing sector fell sharply to 2.2% from 7% in the previous quarter, as inflation, weak real wage growth, and high borrowing costs dampened urban demand.
- Consumption Weakens: Private consumption, contributing 60% to GDP, grew only 6%, a decline from 7.4% in the prior quarter, signaling reduced demand for both durable and non-durable goods.
Why This Matters:
Economic Challenges:
The data underscores rising challenges to India’s economic momentum, with mounting pressures on consumer spending, industrial output, and policy decisions.
- Inflation Woes: Persistent inflation, hovering near 6%, has eroded disposable incomes and shaken consumer confidence.
- Policy Dilemma: The Reserve Bank of India (RBI) faces heightened scrutiny over its monetary stance. While the repo rate has remained steady at 6.5% since 2020, calls for rate cuts to stimulate demand and investment are growing louder.
- Global Risks: Weak export demand, compounded by geopolitical uncertainties, has further weighed on growth.
Political Stakes:
The slowdown adds to the challenges faced by Prime Minister Narendra Modi’s government as it prepares for key elections. Rising costs of living, joblessness, and economic uncertainty have become critical voter concerns.
Expert Opinions:
- Upasna Bhardwaj, Kotak Mahindra Bank: “The lower-than-expected GDP figures reflect disappointing corporate earnings. Manufacturing took the largest hit.”
- Harry Chambers, Capital Economics: “Growth is likely to remain subdued due to moderating household consumption and easing investment growth under high-interest rates.”
- Aditi Nayar, ICRA: “A February 2025 rate cut is likely if inflation trends downwards, despite current challenges.”
- Sakshi Gupta, HDFC Bank: “The softer growth stems from weak manufacturing, electricity, and mining sectors, coupled with a slowdown in urban demand.”
- Radhika Rao, DBS Bank: “This quarter likely marks the bottom of the cycle, with modest recovery expected in the coming months.”
Big Picture:
While India remains one of the fastest-growing economies globally, the slowdown reflects both domestic and global vulnerabilities:
- Domestic Constraints: Inflation and high interest rates have curbed demand and private investment.
- Global Headwinds: Export-driven industries continue to struggle amid subdued international trade.
Looking Ahead:
Economists are divided on the recovery trajectory. While some predict a gradual pick-up in the second half of the fiscal year, others warn that growth may remain modest and uneven.
The RBI’s monetary policy meeting on December 6 will be pivotal, with markets closely watching for signs of a rate cut. While immediate rate cuts appear unlikely, the central bank may consider easing its policy stance by early 2025 if inflation recedes toward its 4% target.
What Lies Ahead?
With fiscal and monetary interventions expected, the second half of FY25 will be crucial for stabilizing India’s growth trajectory. Policymakers face the daunting task of balancing inflation control with fostering economic recovery, especially as political and economic pressures mount.