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30th October 2024 (10 Topics)

India’s Cyclical Growth Slowdown

India's economy is facing a significant shift as it appears to have entered a cyclical growth slowdown. Recent analyses by economists from Nomura have indicated that India's GDP growth may dip below 6.7% amid emerging economic challenges. This slowdown has implications for urban demand, wage growth, and overall economic health.

Key Findings

  • Current Growth Projections: Nomura has projected India’s GDP growth at 6.7% for the current year and 6.8% for the next, citing rising risks that could further dampen these forecasts.
    • The Reserve Bank of India (RBI) anticipates a more optimistic growth rate of 7.2% for 2024-25, which Nomura considers overly optimistic.
  • Weak Urban Demand: Urban consumption is showing signs of weakening due to high interest rates and diminishing wage growth. The economists note that urban demand may remain sluggish in the foreseeable future.
    • Factors contributing to this trend include lower real salary hikes and the fading impact of pent-up demand following the pandemic.
  • Salary Trends: Real salary growth for listed non-financial corporations has decreased significantly, with a decline from 10.8% in FY23 to just 0.8% in Q2 FY25 when adjusted for inflation.
  • Tight Credit Conditions: The RBI's tightening of monetary policy has led to reduced lending growth, particularly among non-banking finance companies, further stifling personal consumption.

What is Cyclical Growth Slowdown?

  • A cyclical growth slowdown occurs when an economy experiences a decline in growth due to various external and internal factors.
  • This term refers to a period when economic growth decelerates due to various factors, often related to the business cycle.
  • This can happen during different phases of the economic cycle, often characterized by reduced consumer spending, lower business investment, and tightening financial conditions.

Factors Responsible for the Slowdown

  • High Interest Rates: Increased borrowing costs have deterred consumer spending and investment.
  • Moderating Wage Growth: Slower growth in real wages has limited purchasing power, impacting overall consumption.
  • Decreased Pent-Up Demand: The surge in consumer spending observed post-pandemic is waning, leading to a reduction in economic activity.
  • Tight Credit Conditions: Stricter lending norms and reduced availability of credit have constrained personal and corporate borrowing.
Impact of the Cyclical Slowdown
  • Economic Growth: A slowdown can lead to lower GDP growth, impacting the overall economic stability of the country.
  • Employment: Companies may scale back on hiring or reduce wages, leading to higher unemployment and less disposable income for households.
  • Consumer Confidence: Persistent weak demand can diminish consumer confidence, further impacting spending and investment decisions.
  • Investment Landscape: A declining growth outlook may make investors more cautious, impacting both domestic and foreign investments in India.

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