By Shivangi Acharya and Nikunj Ohri
NEW DELHI (Reuters) – After last year’s world-best economic growth, Indian policymakers are scrambling to stave off a sharp slowdown as worsening global conditions and domestic confidence nullify recent stock market gains.
On Tuesday, Asia’s third-largest economy forecast annual growth of 6.4% in the fiscal year ending in March, the slowest in four years and below initial government projections, weighed down by weaker investment and output.
The downgrade followed disappointing economic indicators and a slowdown in corporate earnings in the second half of 2024, prompting investors to reassess the country’s past performance and casting doubt on Prime Minister Narendra Modi’s ambitious economic goals.
The fresh concerns are fueling calls for authorities to improve sentiment by loosening monetary policy and slowing the pace of fiscal tightening, especially as Donald Trump’s looming second presidency brings more uncertainty about the global trade outlook.
“You have to revive the animal spirit and you also have to make sure that consumption grows. It’s not that easy,” said Madhavi Arora, chief economist at Emkay Global Financial Services, adding that India could expand its fiscal balance sheet or cut interest rates.
Such calls come amid a series of meetings by Indian policymakers with companies increasingly worried about weak demand.
Finance Minister Nirmala Sitharaman held a series of meetings with industry and economists in December, as is customary ahead of India’s annual budget due on February 1.
Some of the measures proposed in those talks to boost growth include putting more money in the hands of consumers and cutting taxes and duties, in line with demands from trade and industry associations.
A GROWING CONCERN
Concerns about India’s economy sent the benchmark Nifty 50 down 12% from late September to November. It recouped those losses to end 2024 up 8.7%, a decent gain, but a far cry from the 20% gain of the previous year.
As confidence declines, the political drive to boost growth appears to be spreading.
India’s monthly economic report released last month said the central bank’s tight monetary policy was partly responsible for the drop in demand.
Modi has recently introduced some significant changes that are expected to prioritize economic growth over price stability.
In a surprise move in December, Modi appointed Sanjay Malhotra as the new central governor, replacing Shaktikanta Das, a trusted bureaucrat who was expected to get one to two more years as bank chief after completing six years at the bank.
The appointment of Malhotra, who recently said the central bank would seek to support a higher growth path for the Indian economy, came just after growth slowed much more than expected to 5.4% in the September quarter.
During the pandemic, Modi has sought to keep the economy growing by increasing infrastructure spending and curbing wasteful spending to keep state finances in good shape.
That lifted overall GDP growth, but did not support wages or help consumption sustain annual growth of more than 7% over the past three years.
While India’s economy may still outperform the global economy, the question is whether it can sustain growth of 6.5%-7.5% or slow to 5%-6%, said Sanjay Kathuria, visiting senior fellow at the Center for Social and economic progress.
Arora said the country is currently in “a bit of limbo” where individuals are not spending. She expects this to continue if employment does not improve and wage growth remains weak.
Reuters reported last month that the government plans to cut taxes for some individuals and is preparing to offer to cut tariffs on some farm and other goods that are mainly imported from the US in order to strike a deal with Trump.
Economists say the government will need to slow some of its fiscal austerity to support growth, and the success of such measures depends on the extent of the cuts.
On trade, analysts say India needs a credible plan to fight Trump’s tariff wars.
If China remains the main target of Trump’s tariffs, it could present an opportunity for India to boost its trade profile, although it should also allow the rupee to fall further to make its exports more competitive, economists say.
India needs to “seriously implement tariff rationalization to embed itself more deeply in global value chains,” said Kathuria, also an adjunct professor at Georgetown University.
This could include tariff reductions aimed at pre-empting punitive tariffs from the Trump White House.
“India should announce some proactive measures to get the US suo-moto to make concessions to the US, rather than waiting for the new administration to announce its moves,” said Sachin Chaturvedi, head of the New Delhi-based Research and Information System for Developing Countries.
