Do Turbulence in Economy will make us skilled sailors

The year 2024 can be characterised as a “strong start, weaker finish” for India’s economy. It started with real gross domestic product (GDP) growth closer to 8 per cent and gradually easing inflation. In the last few months, however, policy tradeoffs have worsened, due to a sharper-than-expected slump in GDP growth, higher food inflation, and currency depreciation pressures.

India’s strong post-pandemic rebound was driven by a mix of pent-up demand, a surge in retail credit an aggressive focus on public capital expenditure, and strong exports performance. However, several of these factors are now reversing.

Urban consumption is likely to moderate as post-pandemic pent-up demand fades, monetary policy remains tight, and nominal income growth slows. The Reserve Bank of India’s (RBI’s) tightening policy has sharply contracted credit growth, and loan defaults have risen for credit card and personal loans. As delinquencies tick up, banks are likely to become more risk averse, moderating demand for credit-driven consumer goods. In the case of microfinance, this clampdown means borrowers will no longer be able to roll over multiple loans. Overall, credit conditions are tight, and the household credit cycle is likely to weigh on consumption demand in 2025.

India also faces a threat from China’s overcapacity. In response to Western tariffs, China will likely redirect exports into newer markets, including India. Already India’s economic challenge from imports from China spans low-priced consumer goods, metals and chemicals, including high-tech products. This is having several economic implications, including a worsening trade imbalance, pressure on firms’ profit margins and lower domestic production. An uncertain global environment, softer domestic demand, higher credit costs and rising imports from China are likely to weigh on private capex.

So far, the RBI has heavily intervened to cap rupee depreciation. However, this is tightening banking liquidity and is counter productive when the trade deficit is widening. It is believed that the RBI will allow the rupee to weaken somewhat, as this can act as an automatic stabiliser to cool imports.

The road ahead may be turbulent, but smooth seas never made skilled sailors. S. Verma