India’s recent economic performance has raised significant concerns, triggering a broader conversation among analysts, policymakers, and citizens about the future trajectory of the country’s economy. The latest data from the National Statistical Office (NSO) reveals that India’s Gross Domestic Product (GDP) growth for the second quarter of the financial year 2024-25 has sharply slowed to just 5.4%. This marks a notable drop from 8.1% in the same quarter last year, making it the slowest growth rate in seven quarters. This downturn has sparked debates about the sustainability of India’s economic momentum and the effectiveness of the policies put in place by the government to spur economic growth.
The Numbers Don’t Lie
The most recent economic data from the NSO paints a troubling picture of India’s economic health. Analysts have focused on several key areas that have experienced significant declines, leading to the overall slowdown. Manufacturing, often seen as the backbone of India’s economic engine, experienced a dramatic slowdown, with growth dropping to just 2.2% in the second quarter, down from 14.3% in the same period the previous year. This sharp contraction in the manufacturing sector is particularly concerning, as the sector has traditionally been crucial for job creation and overall economic development in India. Manufacturing growth has been vital not only for driving GDP growth but also for generating employment, particularly in industrial hubs across the country. The slowdown in manufacturing poses a challenge to the government’s ambitious goal of transforming India into a global manufacturing hub.
The mining sector also experienced negative growth, shrinking by -0.1% compared to a healthy growth rate of 11.1% in the same quarter last year. This decline in mining can be attributed to a combination of factors, including disruptions in the global supply chain, rising input costs, and reduced demand for certain commodities. The mining sector is not only crucial for India’s internal economic needs but also plays a significant role in generating foreign exchange earnings through exports. A decline in this sector, therefore, poses risks to India’s trade balance and further weakens growth prospects.
Private consumption, a key driver of India’s economy, also registered a decline in growth. With private consumption accounting for nearly 60% of India’s GDP, this is particularly concerning. Growth in private consumption slowed to 6% in the second quarter, down from 7.4% in the previous quarter. Several factors have contributed to this slowdown, including rising inflation, stagnant wage growth, and increased borrowing costs. The reduction in consumer spending is a clear reflection of the increasing economic strain faced by households, which is making them more cautious about discretionary spending.
Underlying Causes of the Slowdown
There are several underlying factors contributing to this alarming economic trend. Understanding these causes is crucial for formulating effective solutions to address the slowdown.
Inflationary Pressures
One of the most significant factors contributing to the slowdown is the persistent inflationary pressure on the economy. Inflation has hovered around 6% in recent months, significantly eroding disposable incomes and reducing consumer confidence. In particular, food prices have risen sharply, impacting urban consumers who spend a large portion of their income on essential goods like groceries. Inflation also has a wider impact on economic activity, as it increases the cost of living and reduces the purchasing power of consumers, especially in urban areas where the cost of living is already high.
Stagnant Wages
Another critical issue contributing to the economic slowdown is stagnant wage growth. Reports indicate that real wage growth in India has been virtually flat for the past five years, with many workers experiencing declining purchasing power. Despite India’s economic growth over the last decade, wages for a significant portion of the workforce have not kept up with inflation, leaving many workers with less disposable income to spend on goods and services. This stagnation in wages is a key factor behind the slowdown in both private consumption and investment. Without improvements in wages, it will be difficult to foster broad-based growth that benefits the entire population.
High Borrowing Costs
The Reserve Bank of India (RBI) has kept its benchmark interest rates high in an effort to curb inflation. The repo rate, currently at 6.5%, has remained unchanged since May 2020. While the RBI’s policies aim to control inflation, they have also resulted in higher borrowing costs for both businesses and consumers. High-interest rates make it more expensive to borrow for investments, home purchases, and even day-to-day consumption. This, in turn, stifles economic growth by reducing the overall demand for goods and services. As borrowing costs rise, many consumers and businesses scale back on their spending, leading to further slowdowns in economic activity.
Global Economic Factors
Global economic conditions have also played a significant role in India’s slowdown. Weakening global demand, particularly from major economies like China and the United States, has adversely affected India’s export-oriented sectors. Indian businesses that depend on exports of goods and services are struggling with reduced demand in global markets. Additionally, geopolitical tensions, such as the ongoing trade disputes and economic uncertainty in the Middle East and other parts of the world, have added to the challenges facing India’s external trade. These global factors have made it more difficult for India to sustain its growth momentum, especially in sectors that rely heavily on exports.
Government Response: Is It Enough?
In response to the slowdown, the Indian government has pledged increased public spending to stimulate growth. There has been a focus on infrastructure development, rural spending, and promoting ease of doing business to create a more favorable environment for investment. However, critics argue that the government’s response may not be sufficient to address the scale of the challenges facing the economy.
The opposition Congress party, for example, has been vocal in its criticism of the government’s handling of the economic crisis. They argue that the government is “willfully blind” to the underlying causes of the slowdown, such as stagnant wages and inflationary pressures. According to critics, focusing only on short-term measures, like infrastructure spending, is unlikely to address the root causes of the economic slowdown. Moreover, the government’s emphasis on digitization and making India a global manufacturing hub has not yet delivered the desired results in terms of job creation and sustainable growth.
Economists are divided on the future outlook for India. Some argue that rural demand and increased spending during festival seasons could provide a short-term boost to the economy. Others, however, caution that persistent problems such as high borrowing costs, inflation, and weak urban consumption could continue to weigh heavily on the economy. There is also concern about the sustainability of government spending, particularly in the context of rising fiscal deficits and the global economic slowdown.
The Path Forward: What Needs to Change?
To reverse this troubling trend and restore confidence in India’s economic prospects, several measures must be implemented. Policymakers must adopt a comprehensive approach that tackles both the short-term issues and the long-term structural challenges facing the economy.
Focus on Wage Growth
One of the most pressing issues is wage stagnation. Addressing this should be a priority for policymakers. Initiatives aimed at increasing real wages for workers, particularly in the manufacturing and agricultural sectors, could help boost consumption and drive economic growth. The government could introduce policies that incentivize businesses to raise wages or provide income support to low-wage workers. In the long term, boosting wages would increase disposable income and help stimulate demand for goods and services.
Stimulate Private Investment
The government must also focus on creating an environment conducive to private investment. This involves reducing regulatory burdens, simplifying procedures for starting and operating businesses, and providing tax incentives for companies to invest in expansion. Investment in infrastructure projects, including logistics, energy, and digital infrastructure, could also play a role in attracting both domestic and foreign investment. Encouraging investment will create jobs, enhance productivity, and contribute to long-term growth.
Monetary Policy Adjustments
The Reserve Bank of India may need to consider further adjustments to its monetary policy to address the current slowdown. While inflation control is critical, a more accommodative stance could help stimulate demand by reducing borrowing costs. Lower interest rates would make credit more accessible for businesses and consumers, encouraging investment and consumption. However, any cuts in interest rates must be carefully calibrated to avoid fueling inflation.
Enhance Export Competitiveness
To counter the impact of weak global demand, India must focus on enhancing its export competitiveness. This can be achieved through increased innovation, technology adoption, and improving the ease of doing business for export-oriented industries. Additionally, diversifying export markets and improving the quality of Indian products could help increase India’s share in global markets.
India’s recent GDP growth figures serve as a wake-up call for policymakers and citizens alike. While India remains one of the fastest-growing major economies globally, the sharp decline in growth highlights vulnerabilities that must be urgently addressed. The government’s ability to effectively navigate these challenges will determine not only the short-term economic outlook but also the long-term sustainability of India’s development ambitions. Moving forward, it is imperative for all stakeholders—government, business, and civil society—to engage constructively in finding solutions that foster inclusive growth and resilience in the face of future economic shocks. Without decisive action, India risks losing momentum on its path toward becoming a global economic powerhouse.
