India’s economy is projected to have slowed down in the July-September quarter, experiencing the slowest growth in the last 18 months.
This slowdown has been attributed to weak urban consumption, which was impacted by rising food prices, despite an increase in government spending.
Dear Lykkers! A Reuters poll of economists estimated a 6.5% year-on-year GDP growth for the three months through September, falling short of the central bank's forecast of 7% and 6.7% in the previous quarter.
Weak Urban Consumption Amid Rising Food Prices
Private Consumption Affected by Inflation
Private consumption, which accounts for around 60% of India’s GDP, has been significantly affected by a slowdown in urban spending. The rise in food inflation, along with increased borrowing costs and sluggish real wage growth, has put pressure on household budgets. Retail food prices, which make up nearly half of the consumption basket, saw a sharp 10.87% rise year-on-year in October, further eroding purchasing power. Despite signs of recovery in rural demand, urban consumers have faced challenges in maintaining spending levels.
High-Frequency Indicators Show Slowing Momentum
Recent high-frequency indicators such as industrial output, fuel consumption, and bank credit growth have also indicated a slowdown. Corporate earnings for top Indian companies posted their worst performance in over four years for the July-September period, raising concerns about the emerging economic slowdown affecting corporate earnings and investment plans.
Impact of Government Spending and Rural Recovery
Government Spending Fails to Offset Slowdown
While government spending has accelerated in the July-September quarter, it has not been enough to counterbalance the slowdown in high-frequency data, suggesting that underlying private sector momentum has softened. Despite this, the Reserve Bank of India (RBI) is expected to maintain its GDP growth forecast for the fiscal year at 7.2%, down from 8.2% in the previous fiscal year.
Expectations for a Recovery in the Second Half
Economists remain hopeful that India’s economy could regain momentum in the second half of the fiscal year. A pickup in state spending after recent elections, coupled with higher rural demand due to a better harvest, could help boost growth. Several economists expect that the economy could experience a recovery, with projections indicating growth of around 6.3% to 6.5% in the September quarter.
What Lies Ahead for India’s Economy?
As India remains the world’s fastest-growing major economy, the outlook for the coming quarters will depend on several factors. Despite challenges in the July-September quarter, government initiatives and rural recovery could play a crucial role in propelling the economy forward. However, high inflation and weak corporate earnings will continue to weigh on growth prospects in the short term.
