What is the outlook for India after a sharp decline in GDP growth?

People buy vegetables at a local market in Noida, Uttar Pradesh, on August 22, 2023.

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When India’s new fiscal year begins in April, expectations are that the next 12 months will deliver strong economic growth, decent stock market returns and help achieve its goal of becoming the world’s third-largest economy by 2027.

Few expected India’s latest gross domestic product (GDP) figures to feature a plot twist worthy of a Bollywood blockbuster.

According to data released on November 29, India’s quarterly growth rate through September was 5.4%. in a Reuters poll.

To be sure, analysts expect economic growth to slow slightly from the 6.7% expansion in the second quarter, in part due to the impact of rising inflation on household and business spending. Few expected the economic slowdown to be so severe.

Macquarie analysts said growth was affected by “slowing urban consumer demand”. India’s booming middle-income class is hailed as the country’s growth engine, and its spending on goods and services is crucial to supporting consumption levels and corporate profits.

India’s retail inflation rises to Growth in October was 6.2%, a 14-month high Vegetables are a staple food in most Indian households as their prices are rising exponentially. Vegetable prices increased by 42.2% in October compared with the same period last year and by 36% in September.

Businesses are also feeling the pinch from lower household spending in India, with many reporting weak profit momentum in the September quarter, Macquarie analysts noted.

Analysts added that other factors such as sluggish capital expenditure, investment activity, slowdown in exports and a sharp slowdown in credit growth are further weighing on the Indian economy.

Macquarie analysts said overall credit growth “driven GDP”, with credit growth in the September quarter at around 11%, down from 16% a year ago, they added.

It is worth noting that the latest GDP data did not cause undue panic.

The benchmark Nifty 50 index has edged higher since the GDP release, rising 13.7% since the start of the year. By comparison, the MSCI Asia ex-Japan index, which allocates nearly 23% to India, is down about 12% year to date.

The Reserve Bank of India announced its latest interest rate decision on Friday and is also expected to keep interest rates stable.

What will happen in the future?

Forecasting the outlook for the rest of the fiscal year is tricky.

For Alicia Garcia Herrero, the Indian economy will “definitely” enter a slowdown in growth in 2025.

“When we say growth is slowing, we don’t mean the economy collapses. We just mean the economy will grow at 6% – our current forecast is 6.4% (but) it could very well be 6%,” said Natixis Asia Pacific CEO The economist told CNBC’s Squawk Box Asia last week, hours before the GDP data was released.

Krishna Bhimavarapu, Asia Pacific economist at State Street Global Advisors, expects the Indian economy to face some “downside risks” in the coming months. While Bhimavarap doesn’t expect “that big of an impact” over the long-term horizon of around 20 years, he stressed the need for policy action to address economic gaps to avoid further downside risks.

Investors hoping that India’s economic growth story remains unchanged will be betting on avoiding a follow-up to September’s data.

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What happened to the market?

Indian stocks continued their gains this week. this nifty 50 The index rose 2.4% this week to 24,708.40 points. The index has gained 13.7% this year.

Due to slowing GDP growth, India’s 10-year government bond benchmark yield has fallen more than 10 basis points to 6.67% since the end of last week.

TCW Group’s Jae Lee told CNBC this week that India “should not be a direct target of Trump and possible future tariffs.” However, if the yuan weakens due to tariffs, it will be difficult for India to maintain a strong currency, Li added.