GDP slowdown: Did everyone miss the woods for the trees?

The week started with a startling news of India’s GDP growth slipping from an anticipated 7.2% to an underwhelming 5.4%. So, what went wrong and how did everyone fail to spot a growth slowdown?

Economic slowdown is rarely a sudden occurrence. They are built brick by brick, over months and even years through compounding signals that often go unnoticed or unaccounted. In India’s case, it wasn’t just the RBI that missed the forest for trees, it was the government, businesses, many analysts and even consumers to an extent. Let’s break it down.

The RBI’s MPC (Monetary Policy Committee) will soon hold its last scheduled meeting for this year. So far, RBI’s resilient growth approach has led to an unchanged repo rate. This was essentially done to attain a durable alignment of inflation with the 4% target.

The RBI seemed worried about the second-round effects of food inflation that could spill over core inflation. However, on hindsight, the macroeconomic scenario changed dramatically since the last meeting of MPC in June. Growth has slowed down while inflation edged upwards. So, the question is, did RBI keep interest rate too high for too long? The answer is not so simple when looking at the Big Picture.

Everyone Had a Role to Play

1. Central Bank Optimism

The RBI clung onto its optimism considering two primary factors, increasing rural spending and private investments. However, this approach overlooked key headwinds and skepticism.

First, urban consumption fatigue i.e. sluggish demand of goods in cities. Second, export slowdown that led to weakening of global markets denting India’s exports. Lastly, sectoral downturns such as decline in sales of automobile purchases, air travel, and dip in the manufacturing sector. While the 4% inflation target demanded high interest rates, the long-term effect on the growth seemed underestimated.

2. Business Sector Shortsightedness

The Corporate India while being vocal about the pain points didn’t unanimously ring the alarm bell. FMCGs like Hindustan Unilever flagged weaking urban demand only during their recent earning calls while real estate and automobile players banked on festive season uptick, ignoring the broader consumption slowdown. Overall, the industry had murmurs and whispers where there should’ve been a full-throated outburst about the state of the economy.

3. Lenders’ Tunnel Vision

Festive driven demand also prevented NBFCs and MFIs from addressing the underlying signals while they tried to push credit aggressively. The borrowing fatigue emerged among the urban consumers struggling with high EMI due to prolonged rate hikes. Lending rates in risky segments also soared with some NBFCs charging upwards of 28%, making borrowers defer credit-dependent purchases. Due to these oversights, rural recovery would not sustain borrowing appetite.

4. Businesses and Borrowers in Denial

While bigger corporates were cushioned with cash reserves and low-cost legacy loans, smaller businesses and individuals bore the brunt of tightened rates. The paradox was credit was available but not affordable. Borrowers’ hesitation led to a credit slowdown in discretionary consumption.

5. Analyst & Investor Biases

Market analysts and investors are often an economy’s early warning system. With conflicting signals from the central bank and projected sense of stability, the forecast dropped after the slowdown was entrenched, putting policy credibility at stake.

Signals Everyone Overlooked

Sectoral Weaknesses

• Manufacturing: Factory activity weakened since mid-2024, with marginal rebounds masking underlying softness.

• Consumption: Urban demand stagnated, evidenced by two months of falling car sales and subdued air travel.

• Exports: Global headwinds and weaker demand from key markets like the US and Europe shrank India’s export footprint.

Real Economy Impact

High interest rates and missed signals create a vicious cycle:

• Businesses cut investments.

• Consumers rein in spending.

• Job creation slows.

• Overall economic momentum weakens further.

India, as the "world’s fastest-growing major economy," is under the microscope. A slowdown reverberates globally, impacting investor sentiment and trade partnerships.

It's time to shift focus from siloed signal to comprehensive data like urban and rural consumption, exports, and sector-specific trends. Sole dependence on headline GDP growth numbers can be misleading. Additionally, the RBI needs to consider striking a balance between inflation control and growth support.

The Big Picture

Policymakers risk losing public and market trust if they are seen as overly optimistic or slow to react. Businesses, analysts, and policymakers need better alignment in identifying warning signals. Real-time, data-driven forecasting can reduce blind spots.

India’s slowdown isn’t just a macroeconomic story; it’s a cautionary tale of borrowing fatigue, lending stress, and policy inertia. Lending serves as the economy’s lifeline, when borrowing costs soar and credit demand falters, the slowdown deepens.

This isn’t just about the central bank’s stance. It’s about how every player, governments, businesses, and lenders need to align their strategies to reignite the borrowing ecosystem. A robust lending framework isn’t just a lever for growth; it’s a shield against stagnation.

Let’s not miss the woods for the trees again.