Is India’s economy slowing down?
Speaking at a conference on India’s economy this week, Narendra Modi, the prime minister, was typically bullish about his country’s prospects. The world, he suggested, is living through an “Indian era”. Rapid growth, favourable demography and an emerging tech industry have put the country at a “sweet spot”, he said.
Recent data, though, suggest that some sourness is creeping in. After roaring growth in recent years, the economy seems to be losing momentum. According to the latest official figures, the annual GDP growth rate eased to 6.7% between April and June, down from 7.8% in the previous quarter. That is the slowest expansion in more than a year.
Data released in the past fortnight suggest that the slowdown has continued. An index tracking output in eight core industries, such as coal, oil and electricity, fell in August for the first time in more than three years. In September car sales, a proxy for consumption, fell by 19% year on year. Growth in collections from the goods-and-services tax, another indicator of economic health, also fell to its lowest level in more than three years. Even India’s stockmarkets, which have been on a tear recently, suffered losses for six consecutive days.
Things could get worse if the conflict in the Middle East escalates and oil prices keep rising. More than 85% of India’s oil consumption is sourced from abroad, making it vulnerable to oil-price shocks. Estimates suggest that a $10 increase in the price of an oil barrel could shave up to 0.4% off India’s GDP. The inevitable rise in fuel subsidies would also crowd out other government spending.
The finance ministry has acknowledged these developments, describing them as “incipient signs of strains”. Nevertheless, few policymakers believe that the new data are more than temporary blips in India’s trajectory. At its latest meeting on October 9th, the Reserve Bank of India chose to leave interest rates unchanged and retain its growth forecast of 7.2% for the current fiscal year. The central bank governor insisted that “India’s growth story remains intact.”
As Mr Modi routinely reminds Indians, their country is the fastest-growing big economy in the world. And even if growth were to fall, it is in no danger of losing that title (see chart). The Congress party, the main opposition group, is sceptical of the government’s “bombastic” talk. Jairam Ramesh of Congress warned that “three dark clouds” loom over the economy: weak private investment, stagnant manufacturing and falling real wages.
These criticisms have some merit. Most concerning for Mr Modi will be the state of manufacturing. Boosting the sector is the centrepiece of his economic agenda for his third term. But growth in factory output is slowing. In September an index tracking manufacturing activity expanded at its slowest rate in eight months. In Tamil Nadu a strike by workers at a Samsung plant, which has now entered its second month, has cast a cloud over Mr Modi’s ambitions to make India an electronics hub.
The country’s labour issues, however, extend beyond pay disputes. Too many people still work on farms. Official data released last month revealed that 46% of the country’s labour force worked in agriculture in 2023-24, up from 43% in 2018-19—an influx of 68m workers. During the same period, the share in manufacturing fell from 12% to 11%. Unemployment is also a big issue. According to the Centre for Monitoring Indian Economy, the jobless rate was 7.8% in September, and has remained around that level for over two years, even as the economy has grown.
A slumbering beast
Mr Modi’s government wants to fix this. In its budget earlier this year it splurged on new schemes, such as an apprenticeship programme, and extended existing ones. But more is needed. Too much of the government’s subsidy pot is directed towards capital-intensive sectors rather than labour-intensive ones, says Abhishek Anand, an economist at the Madras Institute of Development Studies in Chennai. And policymakers should make it easier for firms to scale up operations. In a new study, Mr Anand and colleagues document the growing trend of firms operating multiple small factories within a state to diversify risk and comply with regulations—but these firms tend to be less productive. ■
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