Navigating the Challenges: Revitalizing India's Economic Growth Amid Slowdown

India's GDP growth rate for the second quarter of fiscal year 2024-25 is 5.4%, a seven-quarter low, which is concerning compared to the 8.1% growth rate in the same period last year. The government views this decline as temporary and cyclic, expecting a recovery in the third quarter. However, economists criticize this optimistic outlook, emphasizing the need for structural reforms to boost investment, exports, and job creation.

GDP growth primarily depends on four factors: consumption, government investment, business investment, and Balance of trade. Let's dive into these factors to understand the reasons behind the slowdown in GDP growth.

Consumption

Consumption significantly contributes to GDP, but it is facing weak urban demand. This is evident from the growth reports of various consumer-oriented companies. For instance, there is a decline in the consumption of FMCG products; McDonald's and KFC reported lower footfall and smaller order sizes; Voltas and Whirlpool reported lower demand growth in tier-1 cities; real estate transactions fell by 71%; and the automobile sector witnessed a slowdown in sales. All this is due to low disposable income in the hands of people in urban areas. Low disposable income results from inflation, stagnant salaries in both the public and private sectors, and expensive loans due to a stagnant repo rate of 6.5% for two years.

Business Investment

Business investment has also declined in the present fiscal year, partly due to weak urban demand. Expensive loans have led to a decline in investment by companies, impacting job creation. Average tariffs increased from 5% to 17%, higher than in other Asian countries, making India less favorable for FDI. Additionally, bureaucratic hurdles and regulatory challenges have deterred businesses from expanding their operations. The high cost of raw materials and energy has also contributed to reduced business investment. Furthermore, political instability and policy uncertainties have created an environment of caution among investors. The lack of sufficient technological infrastructure and skilled labor has further impeded business growth and investment.

Government Investment

Government investments also declined due to elections in the first quarter. Additionally, there has been a reduction in government expenditure on infrastructure, mining, and power generation due to a heavy monsoon. This reduction in spending has delayed several critical projects, impacting overall economic activity. Political uncertainty during the election period also caused a slowdown in decision-making and project approvals. Furthermore, funds were redirected to election-related expenses, leaving less budget for developmental projects. The heavy monsoon not only disrupted construction activities but also led to increased costs for disaster management and relief efforts, further straining government resources.

Balance of trade

Exports have declined due to the weakening rupee against the dollar, resulting in less demand for Indian products as their prices rise. Additionally, the ongoing geopolitical situation, such as the Russia-Ukraine war, is impacting exports. The global supply chain disruptions caused by the pandemic and geopolitical tensions have further strained India's export sector. High freight costs and logistical challenges have made it difficult for exporters to compete in the global market. Moreover, India's export basket is relatively narrow, relying heavily on a few key sectors such as textiles, pharmaceuticals, and IT services. Diversifying the export portfolio could help mitigate these challenges. Furthermore, trade barriers and tariffs imposed by other countries have created additional hurdles for Indian exporters. The limited access to advanced technologies and innovation in the manufacturing sector also hampers the competitiveness of Indian products on the international stage.

To address India's GDP growth slowdown, practical solutions can be applied to key areas: consumption, business investment, government investment, and balance of trade. For consumption, increasing disposable income through tax cuts, lowering loan costs by reducing the repo rate, providing targeted subsidies, and encouraging wage increases can boost spending. For business investment, easing bureaucratic processes, lowering tariffs, improving access to affordable credit, investing in infrastructure and skill development, and ensuring policy stability can encourage growth. Government investment can be improved by prioritizing infrastructure projects, allocating separate funds for disaster management, ensuring transparent fund allocation, and developing long-term plans for sustained investment. To improve the balance of trade, export promotion schemes, currency stabilization, diversifying the export portfolio, improving logistics, negotiating favorable trade agreements, and promoting technological advancement in manufacturing are essential. These measures require coordinated efforts from the government, businesses, and other stakeholders to create a conducive environment for sustainable economic growth. By addressing these challenges, India can work towards reversing the GDP growth slowdown and achieving long-term prosperity.