India's economic landscape is currently facing significant challenges, with GDP growth slowing to 5.4% in the July-September 2024 quarter, the lowest rate in seven quarters and below the Reserve Bank of India's (RBI) forecast of 7% [1f36e458]. This decline is attributed to various factors, including reduced government spending following the recent elections, as noted by Union Finance Minister Nirmala Sitharaman [1f36e458]. The Ministry of Finance anticipates full-year GDP growth to be between 6.5% and 7% [1f36e458].
The slowdown in growth comes at a time when the economic environment is already strained, with the US economy projected to grow at 2% in 2025 and China's GDP growth expected to be around 5% for 2024 [c603cd60]. India's GDP growth for the July-September 2024 quarter has been reported at 5.4%, marking the slowest growth in seven quarters [f9ddefe3].
Despite these challenges, domestic consumption remains a driving force, accounting for approximately 70% of GDP [1f36e458]. The central government's capital spending has significantly increased, from Rs 4.39 lakh crore in 2020-21 to Rs 11.11 lakh crore in 2024-25, aimed at stimulating economic activity [1f36e458]. Additionally, corporate tax rates have been reduced to encourage investment [1f36e458].
However, the economic growth narrative is complicated by rising income inequality. An Oxfam report highlights that the top 100 richest individuals in India hold 25% of the country's GDP, raising concerns about wealth distribution and its implications for sustainable growth [1f36e458]. Arvind Panagariya has also pointed out the increasing inequality, noting that while BSE 500 companies' profits have doubled from Rs 480,000 crore in 2017-18 to Rs 1,000,000 crore in 2021-22, high dividend payouts to shareholders have often come at the expense of worker income [1f36e458].
The Indian economy is grappling with weak gross capital formation, which stands at 5.4%, and muted export growth of only 2.8% [bb1465af]. Merchandise exports from April to October 2024 grew by 7.28%, totaling USD 468.27 billion, but the trade deficit has widened by 5.36% to USD 63.24 billion during the same period [bb1465af].
The slowdown in GDP growth is attributed to various factors, including a significant decline in the manufacturing sector's growth, which has dropped to 2.2% compared to the previous year's double-digit growth [8d1afb7b]. In contrast, the agriculture sector has shown resilience, with growth rising to 3.5%, up from 1.7% last year [f9ddefe3]. The construction sector also performed well, growing by 7.7% in Q2 FY25, while the services sector expanded by 7.1%, with trade and transport sectors exceeding 6% [f9ddefe3].
High food inflation, which reached 10.87% year-on-year in October, has significantly impacted urban consumption, contributing to the overall economic slowdown [2658705a]. Rising food prices and stagnant real wage growth have dampened consumer confidence, leading to reduced private consumption, which constitutes 60% of GDP [8d1afb7b][ced3dd8c]. The Reserve Bank of India's (RBI) November bulletin noted that while private consumption is now driving demand, the overall economic performance remains under pressure [39c02dde].
Despite the challenges, Nageswaran pointed to positive signs in agriculture and construction, with record kharif foodgrain production and promising rabi crop prospects expected to boost rural demand [f6fe28b0]. He also highlighted the importance of investments in infrastructure and financial inclusion over the past decade, as well as the need for investments in recycling solar panel and wind turbine waste to achieve India's goal of net-zero carbon emissions by 2070 [23f1fe0c]. Improvements in the labor market, including decreasing unemployment and an increasing formal workforce, further support this outlook [f6fe28b0]. Low global crude oil prices are also seen as favorable for economic stability [f6fe28b0].
Corporate earnings data has been disappointing, reflecting weaker urban demand, with analysts attributing the slowdown to monsoon vagaries and slackening consumption [2658705a]. Additionally, government spending has been weak, further exacerbating the situation [2658705a].
S&P Global Ratings has revised India's GDP growth forecast for FY26 to 6.7% and FY27 to 6.8%, citing high interest rates and a lower fiscal impulse as significant factors impacting future growth [ee2d23ad]. The agency has maintained its GDP growth forecast for FY25 at 6.8%, while projecting a rebound with a growth rate of 7% in FY28 [ee2d23ad]. Despite these challenges, S&P anticipates that the Indian economy will benefit from a rebound in household consumption and moderating inflation as key drivers [ee2d23ad].
The RBI has maintained its GDP growth forecast for the fiscal year at 7.2%, down from an earlier estimate of 8.2% [ced3dd8c]. ICRA had projected earlier that India’s real GDP growth for the September quarter of FY25 would slip to 6.5%, mainly due to adverse weather conditions affecting agricultural output and weaker corporate performance [12f583af]. However, ICRA has kept its overall growth estimate for FY25 at 7%, aligning with the RBI's forecast [12f583af].
Moody's Ratings also forecasted a GDP growth rate of 7.2% for 2024, highlighting a rebound in household consumption and moderating inflation as key drivers [346e7bf8]. The report emphasized strong festival season demand and rural spending, which are expected to bolster consumption despite inflation risks stemming from geopolitical tensions and extreme weather events [346e7bf8].
In a recent session at the 10th Times Network India Economic Conclave held on December 13, 2024, author Hamish McRae predicted that India's economy could match China's by the end of the century. He emphasized that India's growth from $4 trillion to $5 trillion will depend on innovation and emerging sectors, leveraging its demographic advantage and the strength of its service sector compared to China's manufacturing focus [c34d0bee].
The RBI's bulletin pointed out that while festival spending has significantly boosted real activity in Q3, there is a growing economic divide, with affluent consumers thriving while many others struggle to meet basic needs [0665d10d]. The banking sector is experiencing mixed conditions, with private banks facing challenges in retail lending, while business credit is on the rise [0665d10d].
As India navigates these economic challenges, the interplay between growth and inflation will be critical in shaping its economic future, particularly as the country aims to enhance public investment and foster private sector growth [f0a1093b]. Understanding GDP and its calculation is essential for grasping the broader economic landscape and the implications for government policies and financial markets [77117424].
China, on the other hand, is expected to contribute nearly 30% of global growth, with plans to boost consumption and domestic demand as a long-term strategy. The Chinese government intends to issue more debt and loosen monetary policy to stabilize growth amid ongoing trade tensions with the U.S. [c603cd60]. The IMF has warned of risks to Asia's economy due to these trade tensions and soft growth, while China's foreign exchange reserves are expected to remain above $3.2 trillion [c603cd60].