Decoding India’s Economic Slowdown: A Temporary Blip or a Deeper Malaise? 

India’s economic trajectory has hit a rough patch. The first advance estimates for FY25 peg GDP growth at 6.4%, a sharp decline from the previous year’s 8.2%. The Reserve Bank of India’s (RBI) 6.6% projection also seems optimistic, given the headwinds mounting against the economy. With manufacturing taking a substantial hit and consumer spending sputtering, the slowdown raises an uncomfortable question: is this a cyclical downturn or a deeper structural issue at play? 

Warning Signs: The Writing on the Wall 

For the average Indian, the slowdown isn’t merely an economic statistic; it is a lived reality. Retail-loan defaults are rising, personal loan growth has nearly halved, entry-level car sales have slumped, and household inflation continues to squeeze wallets. The festive period of October-December 2024, which typically sees a surge in consumer spending, was tepid at best. Such indicators suggest a more pervasive economic malaise rather than a fleeting blip. 

Several troubling trends underscore this sentiment. GST collections have been slowing, indicating weak consumption. Fast-moving consumer goods (FMCG) sales growth plummeted from 11% in 2023 to just 2.8% during the latest festive quarter. Additionally, foreign investors withdrew over $11.8 billion from the Indian capital markets in October 2024, with another $2.5 billion exiting in November. This capital flight, coupled with a stock market correction and a falling rupee, raises serious concerns about investor confidence in the Indian economy. 

A Trump Card That Might Backfire 

As Donald Trump prepares for another term in the White House, global trade dynamics are poised for turbulence. India, though not as exposed as China, Mexico, or the European Union, has often been in Trump’s crosshairs for its high tariffs. His administration previously scrapped India’s preferential trade status, and another protectionist wave could see heightened tariffs on Indian exports, particularly in key sectors like IT services, pharmaceuticals, and auto components. 

Trump’s proposed 60% tariffs on Chinese imports could present both opportunities and challenges. If India can position itself as an alternative manufacturing hub, it could benefit from trade diversion. However, given its sluggish manufacturing sector and high input costs, India may struggle to capitalize on this shift. Moreover, if Trump imposes retaliatory tariffs on India, it could further strain the country’s trade balance, which has already been under pressure due to a shrinking export base. 

Geopolitical Turbulence: A Rising Threat 

India’s geopolitical positioning has been a double-edged sword. While it has benefited from global attempts to counterbalance China’s influence, its economic resilience is now being tested. Relations with neighboring countries like the Maldives, Bangladesh, Sri Lanka, and Nepal have been volatile, creating uncertainties in regional trade dynamics. 

The ongoing crisis in West Asia, India’s critical energy supplier, could further strain India’s economic outlook. Any escalation in the region could lead to surging oil prices, exacerbating India’s already precarious inflation levels. Additionally, as global supply chains reconfigure in response to shifting geopolitical alliances, India must navigate its position carefully to avoid economic disruptions. 

India’s tightrope walk between the U.S. and Russia also presents challenges. While New Delhi seeks deeper trade ties with both, America’s increasing scrutiny of Russian allies could create friction. The strategic autonomy India has enjoyed in foreign policy may be harder to maintain in an era of heightened global polarization. 

Structural Challenges: The Core Weaknesses 

Beyond global and geopolitical pressures, India’s economic slowdown reveals deep-rooted structural weaknesses. Private investment, which once drove India’s growth story, has been steadily declining. From 25% of GDP in 2008, it now hovers at around 13-14%. Despite surplus liquidity in many businesses, sluggish domestic demand has deterred new investments. 

Abheek Barua, Former Chief Economist of HDFC Bank -  
 
“It’s a combination of both sets of factors. Domestic demand particularly at the lower tiers as well as private investment has been weak for a long time and that has to do with structural factors such as low employment intensity of growth, regulatory hurdles that affect ease of doing business particularly at the state level. This has been compounded by cyclical factors such as high high inflation and interest rates.” 

I think the structural factors that have affected growth do affect the ability to be an alternative to China although a moderate growth slowdown ( if you look at GVA instead of headline GDP the slowdown is much less). We must address the problems that are holding back private investment and FDI — regulation,  skills shortage etc. This is critical because there are economies competing for a share of the pie — Indonesia, Mexico, Vietnam etc.” 

The manufacturing sector’s declining contribution to GDP—from 16% in 1991 to just 13% in 2023—is another red flag. India’s aspirations to become a global manufacturing powerhouse remain unrealized, largely due to high logistics costs, regulatory red tape, and inadequate infrastructure. With global trade slowing, India’s dependency on services (55% of GDP) presents additional vulnerabilities. 

Meanwhile, rising income inequality poses a significant risk to sustained economic growth. The share of India’s top 1% in total income has surged from 10% in 1991 to 23% in 2023, while the bottom 50% has seen its share drop from 20% to 13%. The result? A shrinking middle class with diminishing purchasing power—a worrying trend for an economy reliant on consumption-led growth. 

The Policy Conundrum: Will the Government Act? 

Despite the mounting challenges, government responses have been largely incremental. The Union Budget increased infrastructure spending by 11%, yet broader investment sentiment remains weak. High policy interest rates (6.5%) and tightened bank credit have further constrained liquidity, disproportionately affecting small and medium enterprises. 

Agriculture, which supports nearly 260 million Indians, needs urgent reforms. Rather than a one-size-fits-all approach, policies must be tailored to regional needs. Expanding agro-processing industries, refining the Minimum Support Price (MSP) framework, and incentivizing crop diversification could create a more resilient agricultural ecosystem. 

On the employment front, India’s job market remains constrained. While labor participation rates have increased, real wage growth has stagnated, particularly for lower-skilled workers. The National Rural Employment Guarantee Act (MGNREGA) needs an overhaul to provide real employment security, while an urban employment guarantee scheme could help mitigate rising joblessness in cities. 

Brace for Impact 

With multiple economic, geopolitical, and structural challenges converging, India must brace for turbulence. The cyclical growth slowdown narrative offers temporary reassurance, but deeper systemic issues cannot be ignored. Whether through decisive policy interventions or external tailwinds, India must find a way to reinvigorate investment, spur consumption, and fortify its economic foundations. 

The question remains: will this be a passing phase, or is India at the cusp of a prolonged economic recalibration? The coming months will offer a clearer picture. Until then, India Inc. and its citizens must prepare for a bumpy ride.