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Why India’s Economic Growth dropped to 5.4%?


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India’s economy is facing a slowdown, marked by a decline in growth indicators and increasing challenges. The Gross Domestic Product (GDP) for the July-September quarter of 2024 dropped to 5.4%, the lowest since the COVID-19 pandemic, despite earlier predictions by the Reserve Bank of India (RBI) of nearly 7% growth for the year.

Key Factors Behind the Slowdown

Decline in Consumer Spending: Consumption, a key driver of economic growth, has been sluggish. Nestlé India reported its slowest quarterly growth in eight years in October 2024, attributing this to the shrinking middle class. Private spending is also growing at less than 5% annually, reflecting weak consumer confidence.

Adding to the woes, the RBI’s restrictions on loan disbursements by certain Non-Banking Financial Companies (NBFCs) have made it harder for middle-class Indians to access credit cards and personal loans, further dampening spending. This has affected sectors like domestic travel and delayed infrastructure projects, including airport developments in smaller towns.

Stagnant Wage Growth: While unemployment has decreased from 8.003% in 2023 to 7.8% in 2024, wage growth has not kept pace. Salaried individuals saw a wage increase of only 5.3% in the first quarter of FY25, compared to 7.8% in the same period of FY24. Chief Economic Adviser V. Anantha Nageswaran has warned that inadequate wages could harm the corporate sector in the long term.

Decline in Foreign Investments: Foreign Direct Investment (FDI) fell sharply to $2.1 billion during April-October 2024, compared to $7.7 billion in the same period last year. The overvaluation of Indian stock markets, particularly small- and mid-cap funds, has deterred foreign investors.

The number of Indian investment account holders has surged from 22 million to 150 million in the last decade, making India one of the world’s most expensive stock markets. This has led to foreign portfolio investors (FPIs) withdrawing ₹44,396 crore from Indian equities as of January 17, 2025.

Currency and Global Pressures: The Indian rupee has weakened against the dollar, becoming the worst-performing currency in Southeast Asia. Foreign exchange reserves have also fallen to a 10-month low of $625.87 billion as of January 10, 2025.

High US interest rates have increased the cost of servicing India’s debt, which is among the highest in emerging markets. Additionally, a potential devaluation of the Chinese yuan and cheaper Chinese exports are intensifying competition for Indian industries both domestically and globally.

Signs of Recovery and Optimism

Despite the challenges, there is hope for recovery. Experts believe increased agricultural production and higher consumption could drive economic growth in the coming quarters.

A report by UBS Investment Bank predicts India’s fiscal deficit will shrink to 7.4% of GDP, with headline inflation decelerating to 4–4.5% year-on-year. The report also forecasts India maintaining a potential real GDP growth of 6.5% annually between FY26 and FY28.

Government initiatives to attract foreign investments by raising limits and removing regulatory hurdles are expected to boost investor confidence.

Outlook for 2025

India’s economic slowdown reflects a mix of domestic and global challenges, including weak consumer spending, declining foreign investments, and global economic headwinds. However, experts remain optimistic about a turnaround, supported by policy reforms, increased agricultural output, and a gradual rise in consumer confidence.

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