Indian Economy: Cyclical Slowdown or Structural Challenges?

Context

The Indian economy is currently facing significant challenges that raise questions about whether it is experiencing a cyclical slowdown or if it is returning to its pre-pandemic growth trajectory.

Current Economic Growth Trends

• Projected Growth Rate: India’s GDP is expected to grow at 6.4% in the fiscal year 2024-25, marking the slowest pace since the pandemic-induced contraction of 5.8% in 2020-21.
  • This represents a decline from 8.2% growth in 2023-24 and falls short of earlier government forecasts of 6.5%.
• Contributing Factors: The slowdown is primarily attributed to weaker growth in gross fixed capital formation (GFCF), which is expected to drop from 9% to 6.4%, and inventory growth declining from 5.9% to 4.5%.
  • In contrast, private consumption expenditure (PFCE) and government spending are projected to increase

Key Challenges and Indicators

• Weak Consumption Base
  • Limited upward mobility and stagnant real wage growth restrict discretionary spending.
  • The hollowing out of the consumption base is evident in specific markets:
    • Small car sales (sub ₹10 lakh segment):
      • Share declined from 73% in 2014-15 to 46% in 2024-25.
      • Maruti Suzuki: Sales of mini and compact cars in the first half of 2024 lower than 2017-18 levels.
    • Premiumisation in the corporate sector reflects a shrinking market, focusing on the top consuming cohort.
  • Labour Market Issues
    • Limited creation of productive employment opportunities.
    • Rising numbers of self-employed individuals in informal establishments or as unpaid family help.
    • Formal employment largely driven by manpower suppliers and low-skill services (e.g., contractors, security services).
    • Real wage growth remains muted.
  • Rising Household Debt
    • Household debt rose to 43% by June 2024.
    • 60% of borrowers with personal loans already have more than three active loans, reflecting financial strain.
    • Increased debt has failed to significantly boost consumption.

Investment and Policy Challenges

• Muted Investment Activity
  • New project announcements slowing as per CMIE data.
  • FDI levels remain below recent highs.
  • India Inc. expresses concerns over shrinking middle-class demand and questions growth figures.
• Policy Uncertainty and Government Inaction
  • RBI’s monetary policy has been excessively tight, eroding export competitiveness by delaying rupee adjustments.
  • The government is perceived as avoiding risks and shifting responsibility for economic momentum to the central bank.
• Industrial Policy Concerns
  • Industrial policy initiatives like PLIs (Production-Linked Incentives) yet to deliver robust results.
  • Shift by major business houses from industrial sectors to services signals underlying issues in the manufacturing ecosystem.

Structural and Distributional Challenges

• Unequal Growth Structure: Growth post-pandemic primarily benefits a small, highly skilled segment of the labour force.
  • Limited pathways for upward mobility restrict broader consumption and economic dynamism.
• Export Competitiveness Issues: Rupee’s delayed adjustment has weakened export competitiveness, further hindering recovery.
• Sectoral Weaknesses: The GCC boom stabilizing at lower levels exposes deeper economic faultlines.
  • Informal employment and weak real wage growth hinder structural transformation.

Conclusion

• While the economy shows signs of recovery, the evidence suggests structural challenges rather than a purely cyclical slowdown.
• Limited job creation, muted wage growth, shrinking middle-class demand, and subdued investment are significant obstacles.
• The government must adopt targeted reforms to boost productive employment, enhance consumption capacity, and address policy uncertainty to reinvigorate growth.

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