India is Growing, But Fast Enough?
Mumbai, India
Goldman Sachs downgraded India’s growth to 6.7 percent in 2024, and 6.5 percent in 2025. Even at a 7 percent growth rate, it will take India 56 years to catch up to the GDP per capita the U.S. enjoys today. Goldman’s downgrade is in part driven by a 35 percent annual decline in government expenditure in the April-June quarter, a reflection of the Modi administration’s aim to reduce the fiscal deficit to upgrade its long-term sovereign debt ratings. RBI has also ramped up its crisis deterrence, ramping up limits on loans to projects under implementation and putting restrictions on domestic and international capital flows.
As discussed previously, India’s banking regulators are worried about the historically high build of bad loans in the financial system, which has now reached lows of around 3 percent; however, as former RBI leaders have argued, India would be able to more easily reduce bad loans by privatizing its large national banks rather than constantly regulating the loan market (Samosa Capital’s piece on privatizing banks). Consumer expansion is continuing to be deterred, after 63 percent of Indians reduced non-essential spending in 2023, by inflation and high rates. 18 months of high RBI rates have put pressure on construction and manufacturing: the manufacturing purchasing managers’ index dropped in July to a three-month low, from 58.1 to 57.9. The index measures various economic factors driving the manufacturing industry, including new orders and output, and is based on preliminary survey results. Manufacturing, which is India’s largest industry, declined for the first time in 11 months, HSBC reports.
India’s companies have been lathering on debt, a 15 percent increase this year. While a strong sign for increasing future growth capabilities, corporate profits are growing more slowly: aggregate corporate earnings have slowed, rising only 4.4 percent this quarter year-over-year, its slowest pace in six quarters. Profits of 40 Indian companies were cut in half in the April-June 2024 quarter due to the rising cost of inputs.
For a non-recessionary year, after three years of easing up supply chain restrictions globally and far higher global demand to manufacture in India to diversify away from China, ~7 percent economic growth is slow, and far delays Modi’s hopes for a developed India by 2047.
India’s growth story is ironic: while most countries struggle to grow because they cannot lure demand, India is limiting its growth by not keeping up with it. Economists have argued that India needs far better ports to become the center of trade foreign investors want it to be, liberalized capital and financial markets so that resources can be organized efficiently, and fewer restrictions on bank loans and deposit return rates so that a growing private banking sector can keep up with credit demand.
