Deepening India slowdown sinks hope for new era of 8% growth

Modi wants to make India a “developed country” by 2047, a goal that requires growth closer to 8%. Most economists and multilateral institutions think the required target will be difficult to achieve consistently in coming years.

By Anup Roy and Dan Strumpf

For years, India’s booming economy fueled exuberance that the South Asian nation had entered a new era of faster growth, powering its markets to new heights and raising expectations it would exit the trenches of developing-nation status in a few decades.

Now, a deepening slowdown is raising concerns that a three-year boom wasn’t the start of a new era but a blip. The latest government figures show the economy will expand at a four-year low of 6.4 per cent in the current fiscal year, a return to a slower pre-Covid norm.

Moreover, analysts say growth in the coming years will likely remain well below the 8 per cent average of the past three years — and the pace Prime Minister Narendra Modi needs to meet his ambitious economic goals.

Concerns about the world’s fifth-largest economy had been mounting for weeks. Business spending has slowed, consumers have cut back as inflation remained high and wages slid, while corporate profits have taken a hit. Investors have already turned bearish, with the S&P BSE Sensex Index falling nearly 9 per cent from its peak in less than a month and the rupee hitting a record low of 85.8725 per dollar on Wednesday.

Credit: Bloomberg

The slowdown is casting doubt on whether the post-pandemic boom years were little more than a short-term rebound in pent-up consumer demand following two years of government-imposed lockdowns.

“What we are seeing now is that the economy is slowly going back to its potential growth rate of 6 per cent-6.5 per cent,” said Gaurav Kapur, chief economist of IndusInd Bank Ltd.

The new, slower rate of growth — still the envy of many nations and a world-beater, to be sure — presents fresh challenges for the Modi government following elections last year in which his Bharatiya Janata Party lost ground in parliament, largely over bread-and-butter economic worries like high inflation, which remains well above the central bank’s 4% target.

Modi wants to make India a “developed country” by 2047, a goal that requires growth closer to 8 per cent. Most economists and multilateral institutions think the required target will be difficult to achieve consistently in coming years.

The International Monetary Fund predicts India’s growth will average 6.5 per cent over the next few years, while the World Bank estimates 6.7 per cent. Goldman Sachs Group Inc. sees growth of just 6% for the current fiscal year ending in March and 6.3 per cent in financial year 2025-26.

Indranil Sen Gupta, economics professor at Shiv Nadar University, sees India’s potential growth rate — the maximum pace the economy can expand without stoking inflation — at around 6.5 per cent through 2040.

“An 8 per cent growth rate is possible only when the global economy is on an upturn,” he said. “That’s not happening anytime soon.”

In the decade until the pandemic struck in 2020, India’s average growth rate was 7 per cent, which the country’s central bank sees as the economy’s potential rate.

Pressure will now build on Modi’s new central bank governor, Sanjay Malhotra, to begin cutting rates sooner rather than later. Under his predecessor, Shaktikanta Das, the Reserve Bank of India has kept interest rates unchanged for almost two years. Economists expect Malhotra — who has pledged that the RBI would remain focused on growth — could cut rates as early as February.

The slowdown also presents challenges for Modi’s economic planners, who have promised to bring down the fiscal deficit to 4.5 per cent of GDP by the next financial year from 4.9 per cent estimated for the current year — a difficult target given that the government needs to step up spending to compensate for lackluster investment by private firms.

India’s slowdown will have “many ramifications for consumer and business confidence, wage growth, corporate revenues, consumption, investment, credit demand and, most importantly, the fiscal arithmetic,” Bank of America’s India economist Rahul Bajoria wrote in a note.

Some economists are more optimistic. Rumki Majumdar, an economist at Deloitte India, called the recent slowdown “an aberration,” with weak private investment driven by last year’s election uncertainties in both India and the US. Citigroup Inc. also continues to see robust corporate earnings growth and double-digit gains for the stock market, even with a sub-par economic performance.

“While geopolitical uncertainties are likely to persist, investors are expected to adapt and proceed with their decisions throughout the year rather than delaying them further,” Majumdar said.