Over the past two years, the Indian stock market has witnessed an extraordinary surge, primarily driven by international investors who see India as the next China, eager to tap into its economic potentialThe Financial Times pointed out on January 1 that this enthusiasm stems from an outlook of robust economic growth, as investors look to reduce their exposure to China amidst the global geopolitical tensions that have been mounting.
However, recent months have shown a troubling shift in this narrative, as various factors have contributed to a slowdown in India's economyWeak data and persistently high inflation have stirred doubts regarding the fundamentals of this G20 economy, which has been touted as the fastest-growing in the worldIn October of the previous year, foreign investors sold off approximately $11.2 billion worth of Indian stocks, marking a record net outflow for the month; this was followed by an additional $2.5 billion in selling in December.
Aditya Suresh, the head of equity research at Macquarie Capital India, stated that there is unanimous recognition of the slowdown in India's economy
He highlighted the pivotal question that now arises: how long will this economic slowdown last? The ongoing economic conditions present a stark contrast to the optimism that has previously characterized perceptions of India's potential post-COVID recovery.
Sincethe onset of the pandemic, the international financial community had expressed much jubilation regarding India's recovery prospectsPrestigious fund management companies, like Franklin Templeton, dubbed India the "next China" as they looked ahead to 2023. Investment bank Morgan Stanley forecasted a decade of prosperity driven by offshore outsourcing, manufacturing, green energy initiatives, and advanced digital infrastructureThese optimistic projections prompted Indian companies to capitalize on an influx of domestic savings into the active public market, allowing them to issue shares enthusiastically.
Additionally, this growth narrative was punctuated by India’s entry into a benchmark bond index, solidifying its status as the fifth-largest economy in the world by 2024. Yet, the recent data trends suggest that this growth is losing its momentum, raising alarms among economists.
As of the last quarter of September, India's GDP growth dropped to 5.4%, marking its lowest level in nearly two years
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In December, the Reserve Bank of India revised its growth forecast for the fiscal year 2024–25 from 7.2% down to 6.6%. Core industries such as mining, manufacturing, and construction also witnessed declines, with the manufacturing value added growth rate plummeting from 14.3% in September 2023 to a mere 2.15% in the following monthsThe construction sector echoed similar trends, reflecting softening activity across major economic segments.
Macquarie analysts identified a host of contributing factors to this economic downturnBudget cuts and a year-long infrastructure development scheme have disrupted economic activities alongside adverse impacts from exceptionally severe monsoon rainsFurthermore, households have faced increasing hardships as wage growth has failed to keep pace with soaring inflation, putting strain on consumer spendingThe Indian central bank's crackdown on unsecured loans and retail credit has compounded these challenges, compelling many families to exhaust their pandemic-depleted savings.
As of October, overall inflation accelerated above 6%, surpassing the Reserve Bank of India's target range of 4% to 6%. Although inflation dipped to 5.5% in December, the central bank has maintained its benchmark lending rate at 6.5% since early 2023, prompting fierce protests from Indian officials who assert that high borrowing costs hinder corporate expansion.
In a reaction to this economic climate, Finance Minister Nirmala Sitharaman stated in December that the slowdown should be viewed as a temporary phenomenon
Yet, several economists contend that the slowdown is indicative of systemic issues rather than seasonal fluctuationsThey cite the plummeting consumer demand amongst urban middle-class citizens and high-leverage urban sectors, leading to a stark declineAccording to Nielsen’s data, the sales growth rate of fast-moving consumer goods decreased from 11% in September of the previous year to just 2.8% in current estimates, with growth in poverty-stricken rural areas now eclipsing urban regions.
The Reserve Bank of India has expressed concerns over the rapid rise in consumer loans and credit card debts over the past year, urging banks to allocate more capital based on their risk exposures to mitigate lending volatility.
Economist Sonal Varma of Nomura Singapore commented on the sluggishness in income and credit availability, emphasizing the significance of urban consumption for economic health
If urban consumption does not pick up, it could lead to stagnant capacity utilization levels and ultimately delay the anticipated private investment cycle that many have hoped would materialize by the following year.
Echoing similar concerns, Suresh noted that inflation in food and beverage prices soared over 35% since 2020, significantly impacting the consumption capacity of millions of impoverished IndiansHe cautioned that simple remedies would not address these challengesEven a strong stimulus would only provide temporary relief rather than resolve the fundamental issues facing the economy, suggesting that the economic recovery could take longer than a few quarters.
In addition to these challenges, some economists point to disappointing earnings and weak investments from Indian firms in the third quarter as contributory factors to the current economic malaise, ultimately hampering the job market domestically
Financial analysis by Motilal Oswal revealed that the share of corporate investments in GDP has noticeably declined over the years, from around 25% in the 2008 fiscal year to approximately 13% to 14% in fiscal year 2020.
Mahesh Vyas, chief executive of the Centre for Monitoring Indian Economy, emphasized the long-standing low levels of investment that have left the economy unable to generate sufficient quality job opportunities necessary to stimulate consumer spending effectively.
Looking forward to 2025, as the new head of the Reserve Bank of India is expected to take office, many economists anticipate a loosening of monetary policy and an increase in government expenditureNevertheless, Varma forecasts that momentum will continue to weaken, at least for another six months, citing that demand has not yet rebounded to levels necessary to trigger new capacity expansions.
Data analyzed by the Washington Post last September noted that as India expands production capabilities in sectors such as smartphones, solar panels, and pharmaceuticals, it has paradoxically made its economy more reliant on imports from China