Weak consumption, low investment & inflation drag Indian economy

The decision by the Reserve Bank of India to hold the repo rates despite a sharp slowdown in the economy worsens the future for the economy as growth is anyway projected to be headed lower for the next two years. Weak consumption, low investment and sustained inflation make the add to the troubles for the government.

Defying market expectations and rumoured pressure from the finance ministry, in its latest meeting of the Monetary Policy Committee (MPC), the Reserve Bank of India, the country’s central bank, has decided to hold the repo rate at 6.5 pc, citing continued high inflation that recently reached a 14-month high.

The decision by RBI to stand up to pressure, political and market, adds gloom to the economic environment as even before the meeting, India’s economic challenges appeared to be deepening, weeks after government data on Gross Domestic Product revealed a sharp slowdown in growth for the September quarter of 2024. The country’s GDP growth for Q2 FY2024-2025 dropped sharply to 5.4 pc, a two-year low and continuing a concerning trend of consecutive annual slowdowns. 

The latest figure of economic growth represents a significant decline from the 8.1 pc recorded in the same quarter of FY2023-2024. In the first quarter of the current financial year, GDP growth stood at 6.7 pc. 

Despite various analysts and stakeholders predicting a growth rate of around 6.5 pc for Q2, the actual figure fell far short of expectations, including even the RBI’s own projection of 7 pc. This marks the third consecutive year of GDP slowdown.

The growth is said to be weighed down by weak urban consumption, which has taken a big hit in the recent following months the sharp rise in food prices and inflation on other goods forcing people to cut back even on essentials; subdued real wage growth, and a significant drop in the growth of the manufacturing sector to 2 pc in Q2, from 7 pc in the previous quarter.

This soft expansion in GDP growth has prompted economists from Goldman Sachs Group to Barclays to lower their full-year growth estimates.

“GDP slowdown in Q2 can be attributed to multiple factors but a major factor that influenced it was the policy vacuum during the election period, as the Model Code of Conduct delayed critical decisions and spending. This pause disrupted momentum, particularly in sectors like manufacturing. Additionally, sluggish urban consumption, subdued private investment and global headwinds compounded the challenges,” Afaq Hussain, Director, Bureau of Research on Industry and Economic Fundamentals (BRIEF) tells Media India Group.

Corporates under economic distress

According to data compiled by Bloomberg, a financial news service, for the September quarter, more than half of Nifty50 companies, a group of the top 50 blue-chip stocks in India ranked by market capitalisation, reported lower than expected net profits, signalling, what is being called a broad-based slowdown of the Indian economy by analysts.

According to multiple reports, public sector giants NTPC and Coal India showed the largest discrepancies between actual and estimated financial performance. Other companies, including Maruti Suzuki India, Ultratech Cement, Adani Enterprises, Bajaj Auto, and Adani Ports, reported net profits below estimates by 5 pc, 19 pc, 10 pc, 9 pc, and 7 pc, respectively.

More than 15 Tata Group companies, including Tata Consultancy Services, Tata Motors and Tata Power have reported single-digit growth in revenue in the first half of FY25.

According to a report by Motilal Oswal, top Indian companies registered their worst quarterly showing in more than four years for the July-September period, raising concerns that a lurking economic slowdown had begun to affect corporate earnings. Nifty earnings are projected to grow by a modest 5 pc in FY25.

In addition, India’s core infrastructure sectors also saw a sharp slowdown with a modest 3.1 pc growth in October 2024, marking a sharp decline from 12.7 pc growth seen in the same month last year. However, this figure is an improvement from 2.4 pc in September 2024.

The sectors witnessing slower growth include coal which grew at 7.8 pc, down from 18.4 pc last year, while fertiliser and steel output which rose by a marginal 0.4 pc and 4.2 pc, respectively, compared to 5.3 pc and 16.9 pc a year ago. Cement production growth dropped significantly to 0.6 pc from 20.4 pc in October 2023.

Electricity sector saw a substantial slowdown, with production rising by only 0.6 pc in October, in comparison to 20.4 pc growth recorded last year. Not just domestically, India’s export performance was also slack as exports growth declined to 2.8 pc from 5 pc during the same period last year.

According to a recent poll by Reuters, India’s inflation rate rose to 6.21 pc in October, a 14-month high and breaching the Reserve Bank of India’s target range of 2-6 pc leading economists to push their forecasts of a rate cut by the central bank in December to early next year.

Ultimately, the RBI MPC decided by a 4 to 2 majority to keep the policy repo rate unchanged at 6.5 pc. 

Silver linings

As per a recent report by HSBC Global Research, despite recent fluctuations, a major part of the Indian economy, about 55 pc, is witnessing an upward trend. The report also notes that the economy was falling into a moderate track following a period of rapid stock market gains and robust GDP growth.

“India must adopt a targeted approach to reignite economic momentum. Domestic manufacturing sector needs to be focussed on with specific policy measures. MSMEs and SMEs, the backbone of India’s employment and industrial base, need specific interventions. Simplifying access to credit, offering tailored financial packages, and streamlining compliance requirements are essential steps to provide much-needed liquidity and confidence to these enterprises,” says Hussain.

“The present government’s return offers a window for continuity and renewed momentum on economic reforms. Policies aimed at boosting investment, maintaining fiscal discipline, and fostering structural changes are likely to resume with greater vigour. Despite these hurdles, India’s fundamentals such as its domestic demand base and relatively robust service sector remain resilient. This transition phase, while difficult, sets the stage for fresh measures to sustain economic stability and long-term growth,” adds Hussain.

Another report by Morgan Stanley, a financial services company, highlights positive trends in October and November, driven by a strong festive and wedding season, forecasting GDP growth to average 6.6 pc in the second half of FY25.

“India’s economic outlook is marked by both significant risks and transformative opportunities. On the one hand, challenges such as logistical inefficiencies, external geopolitical uncertainties, and subdued private-sector investments pose challenges. On the other, India has a unique chance to establish itself as a global manufacturing hub,” Hussain adds.