India’s economic slowdown: The sharp decline in India’s GDP growth rate has sparked debates among policymakers, economists, and industry leaders. With growth dropping to 5.4% in the second quarter of FY25 from 8.1% in the same period last year, and consistently falling for three consecutive quarters, concerns about whether this marks the onset of a long-term trend are valid. Although some experts see this as a temporary phase, others argue it reflects deeper structural issues that warrant immediate attention.
The government attributes the slump to global factors such as geopolitical turmoil and supply chain disruptions, calling it a temporary phase. Officials point to planned infrastructure spending and improving rural demand as drivers of a second-half recovery, framing the slowdown as manageable rather than a crisis.
READ | Shipping Bills: India’s maritime reforms to anchor global ambitions
Decoding the economic slowdown
Private consumption, a key pillar of India’s economy contributing about 60% to the GDP, has witnessed a significant decline due to persistent inflation. Rising food prices have particularly affected household budgets, forcing consumers to cut back even on essential goods. This has created ripple effects across sectors, including FMCG, automobiles, and white goods, all of which reported weak earnings in the second quarter. Urban middle-class households have borne the brunt of the inflation, with real wage growth remaining below 2% for much of 2024, a stark contrast to the 10-year average of 4.4%. Such stagnation has affected discretionary spending, leading to a slowdown.
Another critical factor contributing to the GDP slump is the significant fall in the government’s capital expenditure during the first half of FY25. Capital expenditure growth dropped sharply from 14% in previous years to just 4.4%, delaying much-needed infrastructure projects and public sector-led investments. Although government spending typically increases in the second half of the fiscal year, this sluggish start has already hindered economic momentum, leaving industry leaders uncertain about the year-end recovery.
The manufacturing sector, traditionally a growth driver, has shown worrying signs of contraction. Factory output, as indicated by the Purchasing Managers’ Index (PMI), expanded at its slowest rate in eight months during September. The decline in manufacturing has pushed more workers into agriculture, a low-productivity sector, with official data showing a rise in agricultural employment from 43% in 2018-19 to 46% in 2023-24. At the same time, exports have slowed, hampered by global uncertainties, including geopolitical conflicts and tighter financial conditions in key markets. These trends, coupled with falling wages and stagnant investments, indicate systemic issues in India’s economic framework.
Structural concerns over slowdown
The slowdown in GDP growth has also reignited concerns about deeper structural problems in India’s economy. One pressing issue is the quality of employment. While the agriculture sector has absorbed millions of workers, the shift reflects a lack of opportunities in higher-value sectors like manufacturing and services. This trend is worrying as it signals underutilisation of the workforce and declining labour productivity, key factors hampering sustainable economic growth.
Urban wage stagnation is another significant structural issue. For the first time since the pandemic, real urban wages contracted in the July-September quarter. This contraction, coupled with rising inflation, has squeezed the purchasing power of the urban middle class, traditionally a driver of India’s consumption-led growth. The decline in discretionary spending has not only affected individual households but has also hurt corporate profits, creating a vicious cycle of weak demand and lower investment.
Corporate earnings have also come under pressure, marking their weakest growth in over four years. The Nifty-50 companies posted single-digit earnings growth in the second quarter, a sharp departure from the robust growth seen between FY20 and FY24. Rising input costs, driven by inflation, have squeezed margins across industries, including FMCG and manufacturing. These challenges highlight the broader cooling of India’s economy and raise questions about its long-term resilience.
Silver linings hint at recovery
Amid the gloom, there are signs of potential recovery. The rural economy, buoyed by a robust Kharif crop, offers hope for improved demand in the second half of FY25. Staples and essential goods have shown resilience, with double-digit sales growth in categories such as edible oils, spices, and toothpaste. This suggests that while discretionary spending has slowed, consumer demand for necessities remains strong. Additionally, industry experts anticipate a revival in government spending during the latter half of the fiscal year, which could provide a much-needed boost to infrastructure and public sector projects.
Despite these positives, the scale of the recovery will depend on how effectively policymakers address the structural issues underpinning the current slowdown. If managed well, these green shoots could signal the beginning of a turnaround. However, ignoring these underlying problems may lead to prolonged economic stagnation.
Temporary blip or structural decline
The debate over whether the current slowdown is cyclical or structural continues to divide economists. Some argue that the moderation in GDP growth is a temporary adjustment following an inflated base from previous years. Projections for FY25, revised down to 6-6.5%, remain higher than the growth rates of many emerging economies, suggesting that India’s economic fundamentals are still robust.
Others, however, see the slowdown as a symptom of deeper, more entrenched challenges. Weak private investment, stagnant manufacturing, and declining real wages point to long-standing inefficiencies that need urgent reform. Without addressing these issues, India risks falling into a low-growth trap, undermining its long-term potential.
Addressing the headwinds
To mitigate the current slowdown and ensure sustainable growth, the government must focus on reviving consumer demand, particularly among urban households. Tackling inflation through targeted interventions, such as subsidies on essential goods and measures to boost real wages, could help restore purchasing power. In addition, policies to increase employment opportunities in high-productivity sectors are crucial for improving the quality of jobs and enhancing labour market efficiency.
Reviving private investment is equally critical. The government must create a favourable investment climate by addressing regulatory bottlenecks, offering fiscal incentives, and ensuring stable economic policies. Easing lending norms for small and medium enterprises (SMEs) could also stimulate entrepreneurial activity and job creation.
Accelerating government spending on infrastructure projects is another priority. Increased public investment in sectors like transportation, energy, and healthcare can create jobs, spur demand, and lay the groundwork for sustained economic growth.
India’s current GDP slowdown is both a challenge and an opportunity. While some see it as a temporary phase, others argue that the structural weaknesses in the economy require urgent attention. The government must act decisively to address these challenges, leveraging the crisis as an impetus for reform. As global uncertainties grow, India’s ability to maintain its growth momentum will depend on how well it manages its domestic headwinds. A proactive approach, grounded in structural reforms, will be crucial for ensuring long-term economic resilience and sustaining the country’s journey toward becoming a developed nation.