Why is India’s GDP Growth Declining?

India’s economy has been facing numerous changes and challenges in recent years. As a result, the country’s GDP growth has been steadily declining, which is concerning for both the national economy and the stock market. But what exactly has caused India’s GDP growth to hit its lowest level in the past two years? Let’s take a closer look.

What’s Happening?

India has long been known for its robust economic growth. However, recent data shows that India’s GDP growth was just 5.4% for the July-September 2024 quarter, marking the lowest growth since March 2023, compared to 6.7% in the April-June quarter.

According to a report by the State Bank of India (SBI), GDP growth is expected to remain below 6.5% for FY25, as growth in Q2 was only 5.4%. The report also mentioned that in the first half of FY25 (H1 FY25), real GDP growth stood at 6.0%, while for the second half, it is expected to range between 6.5% and 6.8%.

This data signals signs of a slowdown in the country’s economic condition and indicates the need for improvement in the coming quarters.

Key Reasons for the Decline in GDP Growth

According to Business Standard, economists point out that inflation has significantly impacted consumer spending power. Retail food inflation hit 10.87% in October, and the overall inflation rate remained at 6.2%, which is above the Reserve Bank of India’s target range of 2-6%.

In Q2, corporate performance also took a hit, with major companies reporting their worst quarterly results in the last four years. Private consumption, which accounts for 60% of GDP, remained sluggish due to high borrowing rates and stagnant real wage growth. However, there are signs of improvement in rural demand.

Sectoral Insights

According to the National Statistical Office (NSO), the Gross Value Added (GVA) in Q2 was 5.6%, compared to 6.8% in Q1. Breaking down the performance by sectors:

• The agriculture sector showed positive trends with a 3.5% year-on-year growth, improving from 2% in the previous quarter.
• The manufacturing sector saw a sharp slowdown, growing just 2.2%, down from 7% in Q1 and 14.3% in the previous year.
• The mining sector contracted by 0.1%, following a 7.2% growth in the previous quarter and 11.1% last year.
• The export sector also faced a downturn, growing just 2.8% YoY, significantly lower than 5% last year and 8.7% in the previous quarter.

These figures highlight that the decline in India’s GDP growth is largely due to the uneven performance across various sectors.

What Does This Mean for Investors?

A decline in GDP growth directly impacts investors. When the economy slows down, company earnings are usually affected, leading to increased market volatility. Weak consumer demand and low production have put many industries in a tough spot. However, some sectors, such as technology and healthcare, are still showing stability.

Given the current economic slowdown, FII (Foreign Institutional Investors) sell-offs, and global tensions, the Indian stock market is facing volatility. Therefore, it would be prudent for investors to focus on stocks with strong fundamentals and adopt a long-term investment approach.

What’s Next?

Morgan Stanley had previously forecast India’s GDP growth at 6.7%. However, after the Indian GDP hit a seven-quarter low in the July-September period, the firm revised its FY25 growth estimate down to 6.3%. Similarly, Nomura has lowered its GDP growth estimate for FY25 to 6%, which does not bode well for India’s economy.

In summary, India’s GDP growth slowdown is a complex issue influenced by inflation, weak consumption, and underperforming sectors. Investors should carefully navigate the current economic landscape and look for opportunities in more stable sectors while keeping a long-term investment perspective.

This article is for informational purposes only. This is not investment advice. Disclaimer: Teji Mandi Disclaimer