What lies ahead for India after a big GDP growth miss?

People buying vegetables at a local market in Noida, Uttar Pradesh on August 22, 2023. (Photo by Chandradeep Kumar/ The India Today Group via Getty Images)

The India Today Group | The India Today Group | Getty Images

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

The big story

When India’s new fiscal year began in April, the expectation was that the next 12 months would bring strong economic growth, impressive stock market returns, and a leg-up towards its target of becoming the world’s third largest economy by 2027.

Few anticipated the plot twist in India’s latest gross domestic product (GDP) numbers that was befitting of a Bollywood blockbuster.

India’s growth came in at 5.4% for the quarter ended September, according to figures released on Nov 29. This was the slowest pace of expansion in the last seven quarters and comfortably below a growth rate of 6.5% anticipated by economists in a Reuters poll.

To be sure, analysts were anticipating a modest slowdown compared to the 6.7% growth generated in the June quarter, partly due to the impact of higher inflation on spending by households and businesses. Few thought the slowdown would be this severe.

According to analysts at Macquarie, growth was compromised by a “slowdown in urban consumption demand.” India’s burgeoning middle-income class has been touted as the nation’s growth engine, with spending on goods and services critical in shoring up consumption levels – and corporate earnings.

India’s retail inflation rate rose to a 14-month high of 6.2% in October on the back of an exponential rise in the prices of vegetables, a staple in most Indian households. Vegetable prices surged 42.2% from a year ago in October, having risen by 36% in September.

Corporates too, have felt the pinch of reduced spending by India’s households, with many reporting weak earnings momentum in the September quarter, Macquarie’s analysts noted.

The analysts added that other factors, such as sluggish capital expenditure, investment activity, slower exports and a significant slowdown in credit growth, further weighed on India’s economy.

Overall credit growth, which “drives GDP” according to Macquarie analysts, stood at approximately 11% in the September quarter, slower than a 16% expansion a year ago, the analysts added.

It’s worth noting that the latest GDP data hasn’t sparked undue alarm.

The benchmark Nifty 50 index has risen modestly since the GDP release and is up 13.7% since the start of the year. For comparison, the MSCI Asia ex Japan index – which allocates nearly 23% of its funds to India – is down around 12% so far this year.

The Reserve Bank of India, which announces its latest rate decision on Friday, is also expected to keep interest rates steady.

What lies ahead?

Divining the outlook for the rest of the financial year is tricky.

To Alicia Garcia Herrero, India’s economy is “certainly” heading into a slower growth environment in 2025.

“When we say slower growth, we don’t mean like a collapse. We just mean something heading towards a 6% – 6.4% is our current forecast [but] it could well be a 6%,” Natixis’ chief Asia-Pacific economist told CNBC’s Squawk Box Asia last week, hours before the GDP numbers were announced.

Krishna Bhimavarapu, APAC economist at State Street Global Advisor expects some “downside risks” to India’s economy in the months ahead. While he does not expect “that big of an implication” over a longer-term horizon spanning around 20 years, Bhimavarapu stressed the need for policy action to address gaps in the economy to avert further downside risks.

Investors hoping for the Indian growth story to remain intact would be betting on avoiding a sequel to the September numbers.

Need to know

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What happened in the markets?

Indian stocks continued their gains this week. The Nifty 50 index has risen 2.4% this week at 24,708.40 points. The index has risen 13.7% this year.

The benchmark 10-year Indian government bond yield has moved lower by more than 10 basis points to 6.67% since the end of last week on account of the slowing GDP growth rate.

On CNBC TV this week, Jae Lee from TCW Group said that India “shouldn’t be a direct target for Trump and the tariffs that are likely ahead.” However, if China’s yuan depreciates in the face of tariffs, it’s difficult for India to maintain a strong currency, Lee added.