Goldman Sachs lowers India’s GDP forecast for 2 consecutive years, cites contraction in government spending, slowed consumption growth as key factors
India, as one the fastest growing major economies globally, has been a significant destination for global investment, both because of its growth potential and attractive demographic trends. However, Goldman Sachs has recently lowered its GDP growth estimate for India by 20 bps to 6.7% for this year as well as to 6.4% for 2025. This change is likely to be made in the context of changes in economic parameters and new circumstances in the world. According to US Bank’s economist Santanu Sengupta, the current year’s drop is owing to a 35% contraction in government expenditure during the last quarter (April-June) which coincided with the weeks-long general election. As for next year, India’s growth might be slowed down by the government’s commitment to shrink the economy’s fiscal deficit below 4.5% of the GDP.
There are several plausible reasons for this change. Increased prevalence of defaults on debts and credits coupled with increase in unsecured lending have led the central bank to tighten lending policies. This has hindered consumption growth driven by a slowdown in household credit. Also, the inflation, mostly driven by food and fuel, has accelerated further with the Consumer Price Index (CPI) at 6.3% in July 2024 which is above the RBI’s tolerance level of 4-6%. This lowers the purchasing power and brings in a downfall in the sentiments of both the consumer and the businesses which impacts the gross economic growth negatively. The data from the MOSPI also depicts a decline in the indexes that reflect consumer expenditure, which is a major component of the GDP. Additionally, the retail sales declined to 7.2% in Q2 2024, from 8.5% in the prior quarter due to a decline in the confidence level. Moreover, there is decreased economic environment friendliness as the economies of major players in the global economy slow down while geopolitical tensions affect trade and investment in the region. The IMF’s latest projection for actual growth in the world for the year 2024 is 3.2%, which is lower than the previous projection of 3.5%.
This revision, however, brings about various investment and market implications, which are little more than the tightening of the noose around a slowing economy. As market participants react to a slower pace of growth implied by this changing forecast, we may continue to see bouts of rapid risk appetite manifested in the form of sharp swings across the Nifty 50 Index over the coming weeks. Similarly, consumer sectors including retail and FMCG goods are more likely to come under pressure as these are directly linked with domestic consumption. However some other sectors like technology or pharmaceuticals less sensitive to domestic spending might exhibit better resilience. For instance, the Nifty FMCG index has seen a 3% fall in value over the past month reflecting expectations about consumer slowdown. Although India will remain an attractive investment destination as reinforced by Foreign Direct Investment of a whopping $49 billion in FY 2023-24, some investors may re-assess their risk-return profiles across the globe, which might dilute focus from more volatile markets. In the wake of economy-wide effects associated with a slowing forecast, the Indian government and RBI may look for counter-cyclical measures to stimulate demand such as fiscal stimulus packages or ease up liquidity by additional monetary easing. At the same time, weaker growth expectations could weigh on investor confidence and ultimately influence stock prices. India’s longer-term growth potential combined with structural reforms currently underway suggests that some benefits of this economic adjustment may sustain.
