India's economic growth, which has been robust in recent years, is set to slow down in the coming months as several risks emerge. Economists are downgrading their forecasts and suggesting potential interest rate cuts, given the challenges posed by subdued consumer sentiment, slow rural recovery, and a weakening global economy.
Key Takeaways:
Growth Forecasts Lowered: Goldman Sachs has trimmed India's growth forecast for the current calendar year by 20 basis points to 6.7%, while Bloomberg Economics has reduced its projection for the fiscal year ending March 2025 to 6.8%, down from 7.2%. The slowdown is attributed to decreased government spending before elections, weaker consumer sentiment, and a global economic downturn.
Subdued Consumer Spending and Investment: Consumer sentiment declined for the second consecutive month in July, impacting private consumption, which constitutes nearly 60% of India’s GDP. Rural spending has yet to recover to pre-COVID levels, and business investments remain low due to muted profitability, higher input costs, and reduced demand.
Pressure on the Reserve Bank of India (RBI): As growth slows, there is increasing pressure on the RBI to cut interest rates after keeping them steady for over 18 months. However, inflation risks, driven by high food prices, have made the central bank hesitant to make such a move.
Impact of Reduced Government Spending: Ahead of elections, government investment slowed, with only 16.3% of budgeted capital spending used in the first quarter of the fiscal year, compared to 27.8% in the same period the previous year. This has contributed to the moderated growth outlook.
Improved Outlook for Agriculture: Better-than-expected monsoon rains have provided relief to the agricultural sector, which could boost rural incomes and help ease food inflation, supporting rural recovery in the coming months.
While India's economic growth remains positive, it is expected to moderate from its previous near-8% pace, with several domestic and global factors contributing to a more cautious outlook.
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