Moderation in India’s Growth Story?

S&P Global Ratings gave a thumbs up to India’s economic growth during FY24 when another survey of top economists indicated a brief slowing down during the September quarter. Maybe that’s the reason the ratings agency lowered its growth projection for fiscal year 2025 to 6.4% from the earlier estimated 6.9%. 

Of course, there’s hardly a cause for alarm in this scenario given that the December quarter usually shows a bump followed by a petering out in the final quarter of the fiscal year. S&P Global revised the GDP growth projection for the current fiscal year to 6.4% from its earlier projection of 6% and cited strong domestic tailwinds for the bump up. 

The note from the rating agency said, “We have revised up our projection for India’s GDP growth for fiscal 2024 (ending in March 2024) to 6.4%, from 6%, as robust domestic momentum seems to have offset headwinds from high food inflation and weak exports. In India, there was a transitory spike in food inflation in the July-September quarter, but it appears to have had little effect on the underlying inflation dynamics.” 

Growth rate slows down a bit in September quarter

Meanwhile, a Reuters poll conducted with 55 economists said India’s growth could be moderate but will remain strong in the September quarter based on solid urban demand and a growth in services activity. The global slowdown will hamper export growth which could be a cause for the slowing down of the GDP to 6.8% in July-September from 7.8% in the previous quarter. 

However, most of the economists who partook in the survey said this was a minor slowdown following an exceptionally strong quarter. In spite of the erratic monsoons and the spike in inflation during the period did not dampen consumer demand, which accounts for around three-fifths of India’s growth numbers. 

The report further noted that the growth forecast for the year ranged between 5.6% to 7.4% amongst the economists. They held the view that headline growth would remain resilient as utilities, services and construction industries showed robust numbers. As always, domestic demand would be the key in the wake of weakening exports. 

Will the demand surge continue in 2024?

However, what remains to be seen over the next three months is how much surplus funds get used in fuelling this domestic demand, given that the ripples of the global economic slowdown has been felt for several months now. The GDP growth now is forecast to average around 6.4% for the current financial year and 6.3% in the following year, as per the Reuters poll.

Of course, what’s bringing some smiles to the faces of policymakers is that India’s expected growth, even with a bit of a slowdown, is still outpacing most other economies, where growth has been reduced to a snail’s pace following the inflationary pressures and bank lending rate cuts that were put in place to counter the rate of price rise.

The poll also saw economists peg capital expenditure at around $59 billion during the first six months of the fiscal year, which was higher than the number from last year. They predict that capital spending would spike further in the wake of next year’s national elections in May. Over the next few months, they expect government spending and consumption to be the major drivers of growth. 

However, there are some causes for concern. Given that consumer demand is skewed heavily in favor of the urban centers, the data could be glossing over the fact that two-thirds of India live outside cities and the July-September numbers for rural demand took a major blow due to higher prices on everyday commodities.

The survey asked economists whether the gap between rural and urban consumption would narrow over the coming few years and a robust 69% agreed that this could happen. They argued that the improvement in the purchasing power coming at a time when core inflation is showing signs of moderation could fuel rural consumption again.