India’s slowdown flashes an early-warning signal

India’s world-beating economic growth is getting a reality check. Output rose 5.4% during the three months to the end of September, its slowest pace in nearly two years, belying hopes that a good monsoon would boost spending. Perhaps it’s a blip. But there are looming pressures that could all deal blows to rosy assumptions about the world’s fifth-largest economy.

Weak factory production and consumer demand dinged the Reserve Bank of India’s 7% headline estimate. Manufacturing crawled in at 2.2% in the country which aspires to assemble a quarter of all iPhones by 2028, up from 14% in the last financial year. Earnings at top companies disappointed too: only around half the firms in the Nifty 50 index .NSEI beat analysts’ estimates, the lowest since March 2020, per data compiled by LSEG. Tight-fisted shoppers ate into profits of giants like Reliance Industries RELI.NS and Hindustan Unilever HLL.NS.

A national election in April and May caused New Delhi to hit the brakes on infrastructure spending, a heavy lifter of growth in recent years. Some of the country’s 28 states have been cutting back capital expenditure to offer election-winning cash handouts. All that coincided with a clampdown on unsecured credit by the central bank, which now finds itself squashed between inflation running at 6.2%, above the target range, and sliding economic growth. Its rate-setting panel is scheduled to meet this week.

Prime Minister Narendra Modi’s administration calls the latest print a one-off and hopes festive spending and benign crude will lift the number in the second half of the financial year. A more sceptical view is that India has returned to its pre-Covid slow lane after three years of revenge spending. Market shares are churning too, with some demand moving to smaller players in the informal economy which the data is less good at capturing.

More pain looms. U.S. prosecutors’ indictment of Gautam Adani on fraud charges, which he denies, is likely to curb expansion by his conglomerate, a rare private-sector contributor to investment spending. The threat of higher levies under the Trump administration could increase dumping of Chinese goods in India and hurt exports. Cooling growth might accelerate outflows of offshore funds in favour of the People’s Republic, which is administering boosters to shore up its economy.

The shock data print will lead to questions about whether bets on the $3.7 trillion economy are tracking the right indicators. India’s moment is getting a bit of reckoning.
Source: Reuters Breakingviews (Editing by Antony Currie and Ujjaini Dutta)