India's economy has been growing at a rapid pace, but analysts are questioning whether the momentum can be sustained over the coming months, as factors including inflation, global weakness and the weather, start to bite in Asia's third-largest economy.
India's latest gross domestic product data showed 7.8 per cent growth in the April to June quarter compared to a year earlier, which was the country's fastest expansion in a year. The rise was driven by India's services sector and government capital expenditure.
However, more recent economic indicators, including export numbers and consumer confidence surveys, suggest that the economy may be coming off the boil, economists say.
"GDP growth of 7.8 per cent in the quarter ending June 2023 is unlikely to be sustained for the entire year," says Sujan Hajra, chief economist and executive director at Mumbai-based Anand Rathi Shares and Stock Brokers.
“We forecast 6.2 per cent annual GDP growth in India for the fiscal year ending March 2024.”
“The current year's subnormal monsoon and its impact on India's agriculture and consumer demand, high crude oil prices, a weak global economy, increased protectionism globally, and the impact on India's exports are also factors which would play roles in slowing down growth for the reminder of the year,” he adds.
This comes as India's economy has been something of a bright spot in an otherwise relatively gloomy global economic landscape. India is the world's fastest growing major economy and it is the fifth-largest in the world.
In the long term, the outlook remains favourable.
Goldman Sachs forecasts that India will become the second-largest economy by 2075.
The country this year became the world's most populous nation, with more than 1.4 billion people, and factors including a growing middle class and India's young demographics are helping the economy to grow.
Under Prime Minister Narendra Modi's government, there has been a focus on expanding the country's manufacturing sector.
India came into the limelight over the weekend, as it hosted the G20 leaders summit, with US President Joe Biden, British Prime Minister Rishi Sunak, and President Sheikh Mohamed among the leaders from the world's largest economies who attended the meeting in New Delhi aimed at international economic co-operation.
But India is not immune to the economic woes of other countries that have already taken a toll on the country's exports, which declined by 16 per cent to $32.25 billion in July from the same month last year, government data showed.
“Exports have already started slowing down,” says Dharmakirti Joshi, chief economist at Crisil, a global analytics firm, which is part of S&P.
“How you swim against the tide in this environment is going to be critical.”
The other major challenge for India's economy is inflation, especially given that India's economy is driven by consumption, he says.
Retail inflation for July came in at 7.44 per cent on the year, which was a 15-month high, pushed up by a surge in food prices.
Extreme weather in India has pushed up prices of vegetables and grains. This includes heatwaves earlier this year as well as some areas receiving excessive rain during this year's monsoon, while others not having received enough, destroying crops.
As prices of staples such as tomatoes, onions and rice spike, this weighs heavily on households and decreases their disposable money, in turn affecting consumer demand.
The Indian government has introduced various export curbs in an effort to tackle high food prices, but it remains a challenge.
“Weak monsoons, higher food inflation, likely slowdown in government capex and sluggish global growth are all signalling a slowdown in domestic demand, going forward,” says Sonal Varma, India chief economist at Nomura.
After rising for almost two years, the Reserve Bank of India's (RBI) survey for July showed that consumer confidence dipped to 88.1 from 88.5 in May, due to pessimism on the employment and economic situation.
In August, there was a rainfall deficiency in India, which does not bode well for crop production.
Mr Joshi of Crisil says he does not see the inflation issues “lasting too long”, but that it is certainly a near-term threat.
“I think managing the food inflation is going to be a challenge because not only from the domestic production point of view, but also from the point of view of some of the inputs, which we heavily depend on, like the edible oils, which come from Indonesia, Malaysia, where again, El Niño can pose a threat,” he says.
The “7.8 per cent growth that we got in the first quarter of the fiscal is unlikely to sustain”, Mr Joshi says.
“The global headwinds will slow us down as well”, along with India's higher interest rates after the RBI introduced a series of hikes – amounting to 250 basis points – last year and earlier this year to help cool inflation, he adds.
Higher inflation and interest rates, along with geopolitical turmoil are going to be a drag on the global economy over the coming months, and in turn, impact India, according to Mr Joshi.
Crisil expects India to grow at 6 per cent in the current financial year, which runs until the end of March. Although this shows a decline from the stellar expansion seen in April to June period, which is the first quarter of the fiscal year, this would still make it the fastest growing G20 country, Mr Joshi says.
The base effect is also playing a role in India's growth losing some momentum, as expansion strengthened throughout last year, which means that growth figures in the later part of this year are compared to higher numbers.
But India has a lot working in its favour, economists say.
“One of the strengths that India currently has is that the corporate balance sheets are quite heavy, the leverage is low, so they can invest going ahead,” says Mr Joshi.
“The financial system is in good health, so it can lubricate the economy better. And then government is focusing on creation of physical infrastructure. And we have moved pretty fast on the digital infrastructure part. So I think all these things make the India narrative strong.”
He adds that factors including investment in infrastructure, including airports, ports, roads, raises the country's growth potential “and makes one optimistic about the medium term”.
Crisil projects that India will log growth of about 6.7 per cent annually until the end of the decade, which will take its GDP from $3.4 trillion to nearly $6.7 trillion in the next seven years.
Experts say that India's long-term growth is not likely to be hampered, even it loses a bit of steam for now.
“I believe that the next two to three decades belong to India, and we will definitely witness a lot of growth,” says Prateek Toshniwal, an angel investor and financial adviser.
“But while there are ample growth prospects, we must address challenges such as the wide income gap, high unemployment rate, and weak agricultural sector to ensure progress.”
In the near term, several sectors are likely to enjoy robust growth in the coming months in India, despite headwinds, as the country continues to weather a tougher economic environment than many other countries, according to Mr Hajra of Anand Rathi.
“On the supply side, we anticipate that the services sector, particularly financial and associated services, trade, transportation and hospitality, will be the primary driver of India's GDP growth for the remainder of the fiscal year,” he says.
“We also anticipate a moderate revival in the industrial sector, particularly manufacturing.”
