India’s Economic Growth Slows: Analysts Cut Forecasts Amid Rising Challenges

India’s economic growth slow down has hit a stumbling block, with GDP growth slowing to a seven-quarter low of 5.4% during the July-September quarter. This figure, significantly lower than both consensus estimates and the Reserve Bank of India’s (RBI) projection of 7%, has prompted leading economists and financial institutions, including Goldman Sachs and Barclays, to sharply revise their growth forecasts for the fiscal year ending March 2025.

Revised Growth Projections

Goldman Sachs economists Santanu Sengupta and Arjun Varma have lowered their growth estimate from 6.4% to 6%, citing weaker-than-expected performance in the manufacturing sector. Similarly, Madhavi Arora, lead economist at Emkay Global Financial Services, adjusted her projection to 6% from 6.5%, attributing the slowdown to subdued urban consumption and stagnating incomes. She noted that rural consumption, while showing signs of improvement, remains cyclical and unsustainable without broader economic recovery.

Key Factors Behind the Growth Slowdown

The economic deceleration has been driven by several factors:

1. Falling Wages: Real income growth has stagnated, affecting consumer spending.
2. Slumping Corporate Profits: Weaker earnings have curtailed investments and job creation.
3. High Inflation: Persistent price pressures have eroded purchasing power, compounding economic challenges.

These issues have fueled demands from various government quarters for an interest rate cut to spur growth. However, RBI Governor Shaktikanta Das has resisted easing borrowing costs, citing the risks associated with persistent inflation. The RBI’s next monetary policy meeting, scheduled for December 6, will be closely watched for any indications of a shift in strategy.

Policy Implications and Forecast Adjustments

Economists from Standard Chartered highlighted the need for fast-tracking government capital expenditure to offset the slowdown in manufacturing, which they believe will not recover quickly. Anubhuti Sahay and Saurav Anand from Standard Chartered warned that the current conditions could necessitate alternative liquidity measures, such as reducing the cash reserve ratio for banks, to boost lending capacity.

IDFC First Bank economist Gaura Sen Gupta added that while a rate cut in December isn’t guaranteed, it remains a distinct possibility. Policymakers might also explore liquidity-enhancing measures to stimulate borrowing and investment.

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Challenges for the RBI

The disappointing GDP data has put pressure on the RBI to revise its projections for inflation and growth. Actual price pressures have outpaced the central bank’s forecast of an average 4.5% inflation for the financial year, and the GDP growth for the quarter has significantly underperformed. According to Madan Sabnavis, chief economist at Bank of Baroda, these revised projections will be critical in shaping the RBI’s policy direction in the coming months.

Looking Ahead

India’s economic trajectory in the near term depends heavily on both monetary and fiscal policy responses. While the government may need to increase capital spending, the RBI faces the dual challenge of addressing inflation and fostering growth. The upcoming policy meeting could signal the central bank’s willingness to pivot its approach, potentially marking the start of a new phase for India’s economic recovery.

By addressing key economic concerns and adopting corrective measures, India could stabilize its growth trajectory and build resilience against global uncertainties. Stakeholders across sectors will be keenly observing the developments as policymakers grapple with these pressing challenges.