4th February 2025 (12 Topics)
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India's Economic Slowdown
Context
India's economic growth appears to be losing momentum. After achieving 8.2% growth in 2023-24, the economy grew by only 5.4% in the second quarter of 2024, marking the slowest pace in six quarters. While a growth rate above 6% is seen as aspirational for most economies, for India, this rate is insufficient to meet the ambitious goal of becoming a developed nation by 2047.
What is Economic Slowdown?
- An economic slowdown is a period of slower economic growth, typically characterised by a decrease in the rate of growth of real gross domestic product (GDP).
- It means the production and earnings of these economies are not growing at the same pace as, say, last year.
- Causing factors: Declining consumer and business confidence, rising unemployment, and slowing global trade.
Key Contributing Factors to the Slowdown
- Weak Demand Side: The main factor behind the slowdown is the weakness in domestic demand, particularly in consumption expenditure and investment.
- Private Consumption: This remains sluggish, especially after the pandemic stimulus packages ended. It has stayed below 60% of GDP for most of the past two years, further dipping to 53% in Q3 of 2023-24.
- Fixed Capital Formation (Investment): Public investment, initially expected to spur private investment, has also slowed. Government capital expenditure dropped by over 12% in the first eight months of 2024 compared to the previous year.
- Declining Private Investment: Despite corporate tax cuts before the pandemic, private investment has been declining, particularly in 2024. There are signs that public investment is also slowing, undermining the expectation that it would "crowd in" private investment.
- Wage Squeeze and Inflation: The workforce, particularly in the informal sector, faces stagnant or declining real wages. A report showed that while nominal wages increased slightly in key sectors, inflation, especially food inflation, outpaced wage growth. This disparity between wage growth and inflation is curbing purchasing power, leading to sluggish demand.
- Corporate profits, however, have surged, exacerbating income inequality and dampening overall demand.
- Labour Market Issues: Data from the Periodic Labour Force Survey shows that only 20% of India’s workforce has regular, salaried jobs, with many lacking job security or social benefits. The majority of workers in the informal sector face uncertainty and low wages, which hinders overall consumption.
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