India's Q3 GDP Growth Hits Low, Economy Faces Headwinds

The Indian economy, now the world's third largest, is experiencing a significant slowdown in growth, raising concerns across economic circles both domestically and internationally.

Recent statistics released by the Indian Ministry of Statistics at the end of November have painted a worrying picture: India’s GDP growth rate for the third quarter has plummeted to 5.4%. This marks the lowest performance in seven quarters, far from the Reserve Bank of India's optimistic forecast of 7%. Such disappointing figures have prompted economists to delve deeper into the underlying causes of this economic downturn.

Predictions suggest that a confluence of factors has contributed to this decline in economic performanceConsumer demand appears to be weakening, while private investment has remained stagnant for an extended periodMoreover, the government has been reducing its spending—a crucial component in stimulating economic activity

Additionally, India's export of goods has struggled significantly, with its global market share dwindling to a mere 2% by 2023. Rajeshwari Sengupta, an economist, encapsulates this sentiment succinctly: "After the newest GDP figures were released, everything seems to have collapsed."

She further explains that these issues have persisted for some time, emphasizing the severity of demand-related problems that plague the economy.

At the heart of India's economic malaise lies a high interest rate environment, which has adversely affected consumption and investmentOfficial figures indicate that in October, inflation surged to 6.2%, exceeding the Reserve Bank's target of 4% and reaching a 14-month highThis inflation spike is chiefly driven by food prices, which have significantly burdened household budgets; for instance, vegetable prices alone soared over 40% in October.

In response to the inflation crisis, the Reserve Bank of India has maintained a high benchmark interest rate of 6.5% since February of last year in an attempt to stabilize prices

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• India's Q3 GDP Growth Hits Low, Economy Faces Headwinds

However, the ramifications of this policy are concerning; borrowing against gold has skyrocketed by more than 50% annually, indicating that low-income populations are resorting to pledging their limited assets just to make ends meetThis reliance on high-interest loans highlights a troubling trend wherein the most vulnerable are disproportionately shackled by debt.

Calls for the central bank to lower interest rates and inject liquidity into the economy are growing louderHowever, with inflation remaining stubbornly high, the Reserve Bank has recently intensified its efforts to sell dollars in exchange for rupees to bolster the currency's value, inadvertently tightening market liquidityThis maneuver led to a record weekly drop in foreign reserves, decreasing from $704.9 billion at the end of September to $657.9 billion.

Despite concerns about borrowing costs, some economists point out an unusual trend: while retail credit has reached unprecedented heights, unsecured loans have also increased

This suggests that individuals are willing to take on debt to finance consumption, indicating a persistent, albeit fragile, consumer appetiteYet, this does not address the more profound structural imbalances in the Indian economy.

The agricultural sector, which employs 45% of the country's workforce, continues to lag in terms of infrastructure and is highly vulnerable to natural disastersIn contrast, the service sector has emerged as the primary driver of economic growthHowever, the pandemic-induced boom in service exports has exacerbated the unevenness in India's economic structure, resulting in what many describe as a K-shaped recoveryThis phenomenon indicates that the recovery is benefiting capital over labor, large corporations over small businesses, and the affluent over those engaged in the traditional economy.

Sengupta posits that India’s economy can essentially be divided into two categories: the "new economy," characterized by service exports, and the "old economy," which encompasses small to medium-sized industries, agriculture, and significant portions of the informal sector

Both sectors are now facing substantial challengesThe growth stimulus from the service export industry appears to be reaching its ceiling, leading to decreased momentumConcurrently, the old economy is languishing, waiting for numerous delayed reform measures while seeking a catalyst to reinvigorate growth.

Sengupta articulates that while private investment is critical, it cannot flourish without robust consumer demandUnfortunately, the absence of investment means job creation and income enhancement stagnate, further confounding the struggle for recovery in consumer demandThis creates a detrimental cycle where the challenges reinforcing each other become increasingly difficult to overcome.

The vulnerability of the Indian economy is underscored by the difficult balancing act faced by the Reserve Bank between fostering growth and combating inflationThe recent dip in economic performance only heightens the urgency for interest rate reductions

In a significant move, the Indian government has appointed Sanjay Malhotra, the former head of the tax department, as the new Governor of the Reserve Bank, succeeding Shaktikanta Das for a three-year term.

Market observers anticipate that Malhotra’s arrival might pave the way for lower interest rates, as Das is largely viewed as having a hawkish stanceWhile Malhotra has yet to publicly outline his views on growth or inflation, reports indicate his keen focus on economic expansionHe is believed to advocate for aligning the central bank's policies with government strategies to better manage inflation across the board.

Despite the anticipated boost to the economy that liberalized financial conditions may afford, it is pivotal to consider that a potential drop in the rupee's value following any rate cuts could introduce new uncertainty into the inflation outlook.

Nomura securities has suggested that the new appointment heralds a near-certain interest rate cut in February, forecasting that the dollar may exchange at 85.6 rupees by next quarter