Reams of news space were occupied this week by the analysis of the growth snafu that India has hit. The first set of advance estimates for FY25 has pegged India’s real GDP growth at 6.4 per cent. It is of course a marked slowdown compared to the 8.2 per cent growth reading of the previous year. It is also lower than the Reserve Bank of India’s current projection of 6.6 per cent. Large-sized knocks are foreseen in manufacturing. In fact, there’s a lower growth prediction in every sector, other than agriculture.
But the average Indian didn’t need those estimates to spell out that slowdown: a rise in retail-loan defaults, even as personal loan growth has almost halved from a year ago; continually gloomy news on how consumer spending is sputtering; a wash-out year for entry-level cars; and the steady and intense pinch of household inflation. The writing has been on the wall, for those who choose to read it.
There’s also a high likelihood that these numbers will be worse than the first set of estimates. It was markedly tepid during the festive period from October to December and revisions are likely heading lower rather than higher.
For many economists, India now is in what they call a “cyclical growth slowdown”: essentially a slump in demand that causes a temporary bump on the road. This may be the more optimistic take. We were here not long ago; growth saw a deep dive through 2019 and 2020, as India emerged from the COVID pandemic. Stretch that timeline further and it is clear India has been struggling on key fronts for some years now: investment, exports and increasingly, consumption.
Doom Trumps
Two factors are not going in India’s favour this year. First, there is an impending sense of doom across the trade winds as President-elect Donald Trump continues to throw tariff threats fast and furiously.
India is not as large as some of America’s other trade partners such as China, Mexico, or the European Union. But it has certainly come up for sharp criticism in the past on how its high tariffs cause a gating of market access. Redrawing a trade agreement in the backdrop of Trump’s threat to slap 60 per cent tariffs on Chinese imports can be beneficial. It can also be a fairly dire outcome, where India is hit with very high reciprocal tariffs.
The simple fact is, despite the bonhomie between the two leaders (Trump and Modi) it is impossible to gauge how America’s President-elect will choose to respond. After all, in Trump’s previous term, a proposed mini-trade deal between India and the US didn’t ultimately go through.
Another problem for India is with flows. Data shows that net foreign direct investment (FDI) inflows to India fell to a 12-year low in the April to October period of this financial year. Interestingly, an analysis of these outflows points to a dual mix: there has been an upsurge in the amount of money foreign companies are taking out of the country on one hand and a rise in Indian companies choosing to invest abroad on the other.
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What has made matters worse, and raised a lot more interest, is the tumult underway in the Indian stock market. In the first few trading days of January, foreign investors have sold over Rs.19,000 crore even as redemptions from India-focused equity funds hit a three-year high. Nothing grabs headlines like a falling stock market.
Bundling it all, is a currency that knows no floor and is slicing through levels to the US dollar. At this point, where it stops, or stabilises, is anyone’s guess.
An underlying truth
None of these—tariff threats, a sliding rupee or fund outflows—are new problems. What is new, and unknown, is a far more complex geopolitical landscape. There is no telling which way, and how hard, America’s new President pushes with tariff wars. It is something India can ill-afford at the moment, given how fragile the domestic economy looks. It may also be increasingly difficult to be seen as close to both the US and Russia, while seeking deeper trade ties with both. Events in West Asia remain on the boil and closer home, diplomatic relations have been volatile with countries such as the Maldives, Bangladesh, Sri Lanka and Nepal, who must themselves walk a tightrope in managing equations with both India and China.
The underlying truth is that India has had an extremely good run on the foreign policy front thanks to the idea that India could be a counter to China, especially so because of its promise of a booming and fertile consumer market. When growth and prospects for India turn limp, will India remain everyone’s friend and continue to enjoy “multiple options” as Foreign Minister S. Jaishankar has often signalled?
The truth is, no one knows. In a low-intensity election cycle year, the focus may, and should come back, to the nuts and bolts of the economy. So far, on key problems such as unemployment, high food inflation, low private investment and increasing income inequality, none of the Central government’s schemes and projects have moved the needle.
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The difference this year is that there are many more headwinds. Most of these are neither under India’s control nor can we be isolated from the impact. Before a flight, flyers are told about the position to take in preparation for a crash landing. It involves putting your hands over your head to help protect your body. There is unfortunately no way to avoid injury when it comes to economic turbulence. Brace for impact.
Mitali Mukherjee is Director of the Journalist Programmes at the Reuters Institute for the Study of Journalism, University of Oxford. She is a political economy journalist with more than two decades of experience in TV, print and digital journalism. Mitali has co-founded two start-ups that focussed on civil society and financial literacy and her key areas of interest are gender and climate change.