India’s economic slowdown: What’s working and what’s not

The world’s fastest growing major economy has slowed down significantly. The growth in India’s national income has fallen from 8.2% in the last financial year to 6.7% in June 2024. If the latest corporate earnings are any sign, data to be released on November 29 is likely to show even slower growth in the September quarter too.

“We brought together 100 indicators of growth, many of them are data for October. 55% of indicators are still growing positively. A quarter ago, the number was 65%. This fall from 55% to 51% is affecting the sentiment,” said Pranjul Bhandari of HSBC.

What’s working: Two wheelers, some consumer non-durables, and earnings of farmers have been strong. Construction has been doing well, as also industrial goods manufacturing due to increase in capital expenditure from both central government and states.

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What’s not working: Urban consumption has taken the biggest hit in recent months. People cutting back on expenses is a big worry because private consumption is estimated to account for about 60% of India’s gross domestic product (GDP).

Rising inflation, particularly in food items, has squeezed household budgets forcing people to cut back even on essentials. This is visible in the earnings slowdown for even consumer giants with the lion’s share of the market.

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However, this may be a temporary phenomenon, says Abhishek Upadhyay, ICICI Securities Primary Dealership. As inflation cools, and the RBI decides to ease interest rates, people will have more money to spend.

What stops the RBI from cutting interest rates on December 6?

Even the government’s cash balance has come down from ₹4 lakh crore at the end of September to near zero now, according to Upadhyay. The government’s stash of cash is made of tax receipts and borrowings from the bond market.

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If the government runs out of cash, which is not unusual at all, it borrows from its banker i.e. the RBI. However, when the government takes large sums from the RBI, it reduces the liquidity in the market. RBI  would find it tougher to cut interest rates in such a situation.

On the other hand, both Finance Minister Nirmala Sitharaman and Trade Minister Piyush Goyal have explicitly asked the central bank chief to start cutting rates to revive consumer demand.  Upadhyay doesn’t see the first rate cut before February 2025.

You can watch the whole conversation in the accompanying video.