India’s economy is likely not doing as well as recent GDP numbers indicate, and a growth slowdown is likely in the coming quarters as consumption demand gets cramped by household savings at near all-time lows, global country risk research company BMI said on Tuesday.
It also identified political risks, stemming from the ruling party’s reliance on religious appeals and Hindu nationalism to retain its support base, along with demographic risks linked to youth unemployment as key monitorables for the economy’s growth trajectory in the next few years.
The 8.4% GDP growth reported for the October to December 2023 quarter, is linked to “an unusually large statistical discrepancy”, said Darren Tay, BMI’s head of Asia country risk, adding that discrepancies had contributed up to half of the total GDP growth observed in India between the April and December 2023.
While government officials have attributed the large statistical discrepancies to the reduction in government subsidies paid out for fertilisers, which is not reflected in the production data, BMI said it is inclined to go by GVA or production data instead, which show a marked slowdown at 6.5% growth between October and December from 7.7% in the previous quarter.
“Looking ahead, we see room for the economy to slow slightly further. Household net savings are near all-time lows, which suggests that they will be tightening their belts soon,” Mr. Tay said. If consumers remained stretched because net savings stayed much lower than in the run-up to the pandemic, this would limit the scope for private consumption growth, BMI reckoned. It expects GDP growth to slow to 6.5% in 2024-25 from an estimated 7% in the last fiscal year.
‘Political risks’
“On the political side, the key risk is the government’s preference for religious appeals to maintain the level of support it enjoys. And by that, I refer specifically to its reliance on Hindu nationalism. If the government continues to stir up religious feeling, there’s a risk that sectarian tensions could be pushed beyond a certain point. That then threatens the social stability in India, which could undo a lot of the good work that has so far been achieved in terms of improving its attractiveness to foreign investors,” Mr. Tay argued.
‘Succession risk’
Over the next few months, around the general elections, the Citizenship Amendment Act could also prove to be a flashpoint for social stability as it had attracted large protests in the past, he noted. While BMI expects the BJP-led government to win the Lok Sabha elections ‘handily’, Mr. Tay termed the lack of a succession plan a risk too.
“While Mr. Modi is the most popular and most visible leader that India has had in a generation, there does not appear to be a very clear successor for when he finally steps down from office,” he pointed out.
The BMI official also highlighted that social and economic challenges could be triggered by youth unemployment that remains “stubbornly high”.
“India has a demographic dividend but the key problem is that you have to be able to find gainful employment or jobs for the millions of youth joining the workforce every year. And if this would not be achieved, then you in effect have a big problem, both social and economic, on your hands,” he said.
“It just so happens that the youth unemployment rate in India remains stubbornly high, despite the past 10 years under PM Modi, who came to power promising to reduce youth unemployment,” Mr. Tay said, noting that not much progress had been made.
