India’s Economic Growth Slows to 6.4%, Raising Concerns Amid Global Challenges

India faces economic uncertainty as its growth forecast is downgraded, prompting calls for swift action from policymakers.

Key Points –

1. India’s growth forecast for FY 2025 downgraded to 6.4%.
2. Policymakers urged to ease monetary policies and provide fiscal stimulus.
3. Indian stock market dropped 12%, reflecting economic concerns.
4. Global trade uncertainties and a weakening rupee add pressure.
5. New central bank governor Malhotra to lead growth efforts.

New Delhi, Jan 08: India’s economy, which had been on an impressive growth trajectory in recent years, is now facing a significant slowdown. The government recently forecasted a growth rate of 6.4% for the fiscal year ending in March 2025, marking the slowest pace of expansion in four years. This downgrade reflects a combination of weaker investment, declining manufacturing output, and a challenging global economic environment. The slowdown is also fueled by disappointing corporate earnings in the second half of 2024, raising doubts about India’s ability to meet Prime Minister Narendra Modi’s ambitious economic targets.

Weaker Economic Indicators Fuel Growth Concerns

The slowdown in India’s economic growth is a sharp contrast to the world-beating performance seen in the previous year. While the economy had been one of the fastest-growing major economies, it now faces several headwinds. Disappointing domestic economic indicators, such as a significant drop in corporate earnings and a slowdown in key sectors like manufacturing, have forced investors to rethink India’s earlier economic outperformance. As a result, the country’s ability to maintain robust growth has come under increasing scrutiny.

Moreover, the Indian stock market has also felt the impact of the downturn. The Nifty 50 index, a key benchmark, saw a 12% decline from late September to November 2024, although it managed to recover some ground to end the year with an 8.7% gain. This is a far cry from the 20% surge recorded in the previous year, underscoring the current uncertainties.

Policymakers Urged to Stimulate Growth and Revive Confidence

Amid these challenges, India’s policymakers are under pressure to act swiftly to boost economic sentiment. Analysts have called for the central bank to ease its monetary policies and for the government to slow the pace of fiscal tightening to stimulate demand. Madhavi Arora, Chief Economist at Emkay Global Financial Services, emphasized that reviving India’s “animal spirit” and boosting consumption would be crucial for economic recovery. She suggested that India could consider expanding its fiscal balance sheet or cutting interest rates to encourage spending.

In response, Finance Minister Nirmala Sitharaman has held multiple meetings with businesses and economists to discuss potential measures to support growth. With India’s annual budget scheduled for February 1, 2025, some of the proposals being considered include providing direct financial relief to consumers, reducing taxes, and cutting tariffs. These steps are seen as vital for rekindling demand and boosting economic activity across sectors.

Impact of Global Factors and India’s Trade Position

India’s economic woes are compounded by global uncertainties, particularly regarding U.S. trade policy. Former President Donald Trump’s potential second term could add further complexities to India’s trade relations. Trade experts suggest that India may need to act proactively to protect its interests, especially if Trump’s administration ramps up tariffs or shifts its focus to countries like India.

India’s currency, the rupee, has also been under pressure. The rupee has hit multiple record lows in recent weeks, continuing its seven-year decline, mainly due to the strengthening U.S. dollar. Analysts warn that if the rupee continues to weaken, India’s export competitiveness could be at risk. To mitigate this, India might need to allow the rupee to depreciate further, making its exports more attractive in the global market.

The Role of the New Central Bank Governor and Economic Reforms

To address the economic challenges, Prime Minister Modi appointed Sanjay Malhotra as India’s new central bank governor in December 2024, following the exit of Shaktikanta Das. Malhotra, who previously indicated a desire to support higher growth, is expected to lead the Reserve Bank of India (RBI) in navigating the country’s economic challenges. The central bank’s policies will play a crucial role in determining the future course of India’s economy.

Meanwhile, India’s government continues to prioritize growth alongside price stability, balancing the need for fiscal discipline with the imperative of supporting economic expansion. Economists argue that the government’s fiscal policies must be adjusted to support growth, particularly by making fiscal stimulus a priority in the face of global uncertainties.

Is India’s Growth Sustainable Amid These Challenges?

Despite the slowdown, India remains one of the world’s fastest-growing major economies, but the question remains: Can it maintain growth at 6.5%–7.5%, or will it slow further to 5%–6%? The answer depends on whether India can address its domestic challenges, such as weak demand, low employment growth, and stagnating wages. Economic experts, like Sanjay Kathuria from the Centre for Social and Economic Progress, have warned that India is currently in a “bit of a limbo,” where demand is weak and consumer sentiment is low.

If India is to continue on its path of economic growth, the government must implement robust measures to support consumer spending, increase investment, and maintain its position in the global trade arena. Proactive policies to rationalize tariffs and strengthen India’s position in global value chains could offer a way forward.

As India’s policymakers seek to address these pressing challenges, the country’s economic future will depend on their ability to implement effective measures and manage both domestic and global risks.