What Economists Say About India's Economic Slowdown

India is grappling with an economic slowdown, reflected in a sharp decline in gross domestic product (GDP) growth, weakening consumer demand, and sluggish industrial output.

Prominent economists have stepped in to explain the causes of the downturn and provide a roadmap to navigate the tough terrain ahead.

Neelkanth Mishra, Chief Economist at Axis Bank and Head of Global Research at Axis Capital, attributes the slowdown to a combination of fiscal and monetary factors.

"India is still consolidating fiscally," he asserts, noting that the central government’s deficit is expected to decrease slightly from 5.6 per cent to 4.9 per cent this year. Meanwhile, projections indicate a largely unchanged state government deficit.

Mishra, however, points to elections as a crucial factor in this economic stagnation. "After the model code of conduct came into play in late February, cabinet meetings were suspended. Files stopped moving," he explains. This administrative pause lasted several months, resulting in delayed government expenditure.

Mishra adds that shifts in key bureaucratic positions further exacerbated the situation. "Personnel changes in critical ministerial roles slowed the pace of decision-making," he says, emphasising that while bureaucrats are adaptable, the transition to new leadership naturally takes time.

Furthermore, fiscal caution, with the government setting aside buffer funds for anticipated programmes that have yet to materialise, has also played a role in the slowdown.

Despite these challenges, Mishra is hopeful about the recovery. "We have hit the bottom, meaning the worst is behind us," he declares. He believes the cyclical nature of the economy suggests a rebound is imminent, particularly as government spending ramps up and the Reserve Bank of India (RBI) concludes its period of quantitative tightening.

"Once government expenditure begins to flow, high-frequency indicators will start to improve significantly, possibly by February or March," Mishra predicts, signalling that the worst may indeed be over.

Acknowledging the slowdown, Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India (SBI), shared with India Today that it is linked to several structural issues, such as reduced capital expenditure by states and delays in central funds disbursement.

India's average growth rate since 1991 has been 6.1 per cent, but over the past decade — excluding global crises — it has averaged closer to 7.2 per cent. The recent 5.4 per cent growth rate is disappointing, but Ghosh remains cautiously optimistic.

Ghosh, who is also a part-time member of the Sixteenth Finance Commission (16th FC), believes that a 6-6.5 per cent growth rate for the current fiscal year is still achievable, despite the challenging global and domestic conditions.

Manufacturing growth, which has dipped to just 4 per cent, is particularly vulnerable due to geopolitical uncertainties and shrinking margins. However, Ghosh highlights a positive trend emerging from global economic shifts.

The "China plus one" strategy is gaining relevance, with India poised to attract more foreign direct investment (FDI) into its manufacturing sector, especially as imminent trade tariffs from the United States (US) under Donald Trump offer new opportunities.

Rahul Bajoria, Head of India and ASEAN Economic Research at BofA Securities, offers a broad analysis of India’s economic deceleration, pointing to multiple factors behind the slowdown.

A key driver is the reversal of pandemic-driven income growth and the subsequent dip in savings, coupled with tightening fiscal and monetary policies. Despite strong post-pandemic recoveries in certain sectors, consumption — particularly in urban areas — has slowed, and income inequality persists.

In an interview with NDTV Profit, Bajoria advocates for a more strategic approach to public capital expenditure, urging the government to prioritise high-value projects that could serve as economic catalysts.

He also emphasises the importance of maintaining fiscal discipline but without sacrificing quality spending while also pushing for a stable, transparent tax system that fosters investor confidence.

Furthermore, he calls for a greater focus on encouraging private sector investment, especially in sectors that have the potential to create jobs and stimulate broader economic activity.

Whether it is in manufacturing, construction, urban demand, or even services, the government's latest estimates raise concerns about growth, says Radhika Pandey, Associate Professor at the National Institute of Public Finance and Policy (NPFP).

According to Pandey, this decline is attributed to subdued exports, uneven domestic consumption, and challenges from China’s economic slump, particularly in the steel and metal industries.

Another issue is the urban-rural consumption divide. While rural consumption remains resilient — partly driven by government income support measures — urban consumption is lagging, squeezed by high food inflation and rising taxes.

In an interview with The Print, Pandey notes that private final consumption expenditure (PFCE) is expected to grow at a healthy rate due to strong rural demand, but urban consumption remains a major drag on the economy.

On the investment front, both public and private capital formation have stalled. Central government capital expenditure is falling short of targets, and private sector investments are seeing a noticeable decline in new project announcements.

Despite these headwinds, Pandey believes that with the right interventions, particularly in urban consumption, India could still turn things around.

"Tax relief for lower-income groups could provide the necessary push to boost urban demand," she suggests. This, in turn, would spark private sector investment, ultimately boosting overall economic growth.

While the fiscal situation remains manageable for now, Pandey stresses that a more balanced approach to consumption and investment is critical to sustaining long-term growth.

Bottom line: While the road ahead for India is tough, a combination of fiscal discipline, strategic government action, and focused interventions could help the country navigate its economic challenges and emerge stronger.