Until this year, India was considered the world’s fastest-growing major economy. But growth has slowed markedly as consumers spend less and demand for exports decreases. Car sales have declined by double-digit percentages over the same months in 2018.
The latest GDP figure was “definitely much lower than what we expected,” said Dharmakirti Joshi, chief economist at Crisil, an Indian ratings agency whose majority shareholder is Standard & Poor’s. Of particular worry was the weak activity in the manufacturing sector and the slowdown in private consumption, which Joshi described as the “bulwark of the Indian economy.”
Prime Minister Narendra Modi won reelection in a landslide in May in a campaign focused more on national security than bread-and-butter issues, but the state of the economy has emerged as his biggest challenge.
India needs its economy to expand at elevated rates for a sustained period of time if it is to eliminate poverty and generate jobs for the millions of young people who enter the workforce each year. The unemployment rate jumped to a 45-year high in 2018.
Modi has promised to turn India into a $5 trillion economy by 2024, but that goal is impossible at current growth rates. The government recently created a high-level cabinet committee to find ways to spur the economy and create jobs. It has also eased restrictions on foreign investment in certain industries in a bid to attract funds.
On Friday, it announced a move to consolidate India’s sprawling public sector banks, mandating several mergers that will reduce the number of government-owned banks to 12, down from 27 in 2017. Economists welcomed the step as a way to make such banks more efficient and financially sound.
The sharpness of the slowdown in GDP growth came as a “surprise,” K.V. Subramanian, India’s chief economic adviser, told reporters on Friday. In the prior quarter, the economy had expanded by 5.8 percent. The government is “taking all the necessary steps both in the short and medium run … to take care of the situation,” Subramanian said.
Absent more dramatic policy reforms by the government, it is not clear how the economy will make a speedy return to its prior health, some economists say. “I don’t see how this is going to turn around” in the near term, said Santosh Mehrotra, a labor economist. “We will have to wait for at least a year, if not more, before we begin to see an upswing.”
Niha Masih contributed to this report.