The Middle-Class Squeeze Sees Its Impact On India’s GDP, A Fall From 8.1% To 5.4%. Silent Whispers That The Growth May Indeed Be Negative?

According to the latest data released by the government, India’s GDP growth slowed to 5.4% in the second quarter of FY25, a steep decline from 8.1% in the same quarter last year and 6.7% in the previous quarter. India’s middle class, the backbone of its consumption-driven economy, is feeling the heat—and the numbers show it.

This downturn marks a seven-quarter low, driven by weak manufacturing, sluggish demand, and high inflation. While the Reserve Bank of India (RBI) initially projected a robust 7% growth, even economists’ more conservative estimate of 6.5% was missed. Reuters polls had aligned with these figures, yet the reality turned out worse, fueling doubts about the country’s economic trajectory.

A Closer Look at the Economic Reality

India’s slowdown is not just a statistical blip—it’s a reflection of deep-rooted issues affecting the middle class and several economic factors converge to create this unsettling scenario –

1) Weakening Consumption:
The financial crunch faced by India’s middle class is stifling consumption, traditionally a key driver of economic growth. With inflation eroding purchasing power, the middle class is being forced to prioritize essentials over discretionary spending. High food inflation, rising mortgage rates, and exorbitant costs of essentials have led to a noticeable decline in demand for big-ticket items like homes, cars, and luxury goods.

2) Inflation and Interest Rates:
India’s inflation problem isn’t going away anytime soon. Wholesale Price Index (WPI) inflation is at 6.4%, and Consumer Price Index (CPI) inflation has breached double digits, leading to a ‘stagflation-like’ environment. This low-growth, high-inflation scenario discourages spending and increases the cost of borrowing, further weakening economic momentum.

3) Job Insecurity and Wage Stagnation:
With the rise of artificial intelligence (AI) and automation, job security in India’s coveted service sector is dwindling. AI’s rapid integration has disrupted job markets, particularly in IT, finance, and customer service sectors. Combined with stagnant wages, minimal bonuses, and sluggish new job creation, this has led to a noticeable dip in consumer confidence. Middle-class households, already burdened by high-income tax brackets, find themselves with less disposable income, discouraging them from taking loans or making significant purchases.

4) Global Economic Headwinds:
External factors such as geopolitical tensions, wars, and worldwide economic downturns have also weighed heavily on India’s growth. With global trade slowing down, Indian exports have taken a hit, further dampening the economy. Additionally, the depreciation of the rupee has made imports costlier, worsening the inflationary pressure on domestic goods.

A Case for Negative Growth?

There are whispers that India’s growth rate may, in fact, be negative when adjusted for inflation and other economic pressures. Skeptics argue that the reported 5.4% growth could be overly optimistic given the current environment:

Real vs. Nominal Growth: If inflation-adjusted, the real growth may turn negative. With elevated inflation eroding the value of money, the actual purchasing power of households has significantly reduced, causing consumption—the engine of India’s GDP—to sputter.

Rupee Depreciation: The depreciating rupee has hit imports hard, leading to increased costs of goods and services. This has put additional pressure on businesses and households, further stifling growth prospects.

Corporate Struggles: Across sectors, companies are grappling with reduced profitability, minimal wage growth, and layoffs, leading to reduced contributions to GDP. Slow wage growth is a silent killer of demand, particularly in an economy where consumer spending accounts for a significant chunk of GDP.

India vs. China. A Sharp Contrast

India’s challenges are further magnified when compared to China. While India’s GDP is growing at 5.7% on a GDP base of $3.6 trillion, China is growing at 4.7% on a massive $19.8 trillion base.

Despite its lower growth rate, China’s economic stability, lower inflation, and controlled policy environment give it a strategic advantage over India. The gap between the two economies continues to widen, pointing to the structural challenges India faces in trying to catch up.

The Culprits Behind India’s GDP Slowdown

India’s economic engine is sputtering, and economists have pinpointed several culprits driving the sharp deceleration from 8.1% growth to 5.4%. The decline is far from a minor hiccup—it reveals deeper structural challenges that could have long-term consequences for the country’s growth trajectory.

Again we talk about inflation which is proving to be a silent wealth eroder.

Inflation, particularly food inflation, has spiraled out of control, hitting 10.87% in October 2024. With headline inflation at 6.2%, it has breached the Reserve Bank of India’s (RBI) comfort zone of 2-6%, significantly eroding consumer purchasing power. When everyday essentials become unaffordable, households tighten their belts, curtailing discretionary spending—especially in urban areas, which drive 60% of India’s GDP.

High inflation means more than just pricier groceries. It diminishes real wages, reduces savings, and forces consumers to spend more on necessities, leaving less room for investments in sectors such as housing, automobiles, and durable goods. This ripple effect can stall economic growth by curbing demand across multiple industries.

Second, corporate earnings is weakest in four years!

India’s corporate sector is also feeling the pinch. Leading companies have reported their weakest quarterly earnings in over four years, a worrying sign for future investments.
Weak earnings can often lead to job cuts, reduced bonuses, and wage stagnation—all of which dampen consumer confidence. Additionally, subdued corporate profits limit reinvestment potential, further slowing economic expansion.

Thirdly, the consumption trends indicate a tale of two markets.

Urban consumption, a critical component of India’s economic machinery, remains sluggish due to high borrowing costs and stagnant wage growth.

The urban middle class, burdened by elevated EMIs and inflation, is cutting back on spending. While rural demand shows some signs of recovery, thanks to a robust kharif crop output, it may not be enough to compensate for the urban slowdown.
Even personal loan growth, a traditional driver of urban consumption, is losing steam. According to ICRA’s chief economist, Aditi Nayar, this could exacerbate the decline in urban spending, impacting sectors like real estate, automobiles, and consumer electronics.

RBI’s Policy Response

The RBI’s Monetary Policy Committee has chosen to keep the benchmark repo rate steady at 6.50%, adopting a wait-and-watch stance. However, with inflation remaining persistently high and growth slowing, pressure is mounting on the central bank to consider rate cuts. The longer the RBI holds back, the more constrained businesses and consumers remain, as borrowing costs stay elevated.

The RBI had initially projected FY25 GDP growth at 7.2%, but economists are now skeptical. Even optimistic projections are being revised downward, with growth now expected to fall below 6.5%. A report by the State Bank of India (SBI) warns that the recent Q2 growth print of 5.4% will weigh heavily on full-year numbers.

FY25 Outlook.

Economists are recalibrating their outlooks, acknowledging that the sharp Q2 slowdown has tilted risks to the downside.
Crisil: DK Joshi, Crisil’s chief economist, noted that the unexpected Q2 slowdown poses significant risks to their earlier growth forecast of 6.8%.

ICRA: Aditi Nayar highlighted risks from slowing personal loan growth, geopolitical tensions, and commodity price volatility, revising the forecast to 6.5%-6.7%.

HDFC Bank: Principal economist Sakshi Gupta warned that while the second half may see a slight recovery, risks persist, and full-year growth could hover closer to 6.5%.

Bank of Baroda: Chief economist Madan Sabnavis projects growth between 6.6%-6.8%, down from the earlier 7% estimate.

Broad-Based Slowdown
India’s economy seems to be hitting the brakes, with manufacturing taking a noticeable hit while services and agriculture are doing their best to keep things afloat. The numbers from the September quarter tell a mixed story.

Manufacturing. Losing Steam
Manufacturing growth slowed dramatically, dropping to just 2.2% from a robust 7% in the previous quarter. This steep decline signals weaker demand and mounting cost pressures, making it harder for manufacturers to maintain momentum. With inflation squeezing consumer wallets and borrowing costs climbing, it’s no surprise that production lines are slowing down.

Agriculture and Services. The Bright Spots
On the brighter side, agriculture showed signs of recovery, bouncing back to 3.5% growth from 2% in the June quarter and 1.7% a year ago. A good monsoon season and solid kharif output played a key role here.

Meanwhile, the services sector remained a steady driver of growth, clocking in at 7.1%. Public administration, defence, and other services led the charge with an impressive 9.2% growth. Financial, real estate, and professional services followed at 6.7%, while trade, hotels, and transport posted a respectable 6%. This performance highlights how services continue to be a crucial pillar for India’s economy, even as other sectors falter.

Investments. A Worrying Slowdown
Perhaps the most concerning figure is the sharp drop in investment growth, which slowed to 5.4% from 7.5% in the previous quarter. Government capital expenditure, a key driver of infrastructure development, hasn’t been as robust this year, leading to a significant slowdown. If this trend continues, it could further dampen business confidence and delay critical infrastructure projects.

Fiscal Deficit. Under Pressure but Manageable
India’s fiscal deficit has also been a point of concern. As of October, the central government’s fiscal deficit reached 46.5% of its annual target, slightly higher than the 45% recorded a year ago. Revenue expenditure has been climbing for three consecutive months, while net tax collections have struggled to keep pace.

However, experts remain cautiously optimistic. Despite the rising deficit, they believe the government can still meet its FY25 fiscal gap target of 4.9% of GDP. One reason is a potential reduction in capital spending from the projected ₹11.11 lakh crore, which could ease some pressure on the budget.

In absolute terms, the deficit stood at ₹7.51 lakh crore by October, down from ₹8.04 lakh crore a year earlier. This dip is attributed to stronger resource collection earlier in the year when general elections held back government spending.

October alone saw the fiscal deficit spike by a staggering 171% year-on-year, reaching ₹2.76 lakh crore. This surge was partly due to a double tranche of devolution to states, which significantly weighed down the Centre’s net tax growth. While August’s post-election revenue spending spree widened the deficit, September saw a slight reprieve before October’s numbers spiked again.

Forex Reserves. Another Cause for Concern

Adding to India’s financial pressures is a sharp drop in foreign exchange reserves. With global economic uncertainty, capital outflows, and a weakening rupee, the decline in forex reserves is a red flag. A dwindling reserve weakens India’s ability to cushion against external shocks and puts further pressure on the rupee, which in turn impacts imports and inflation.

Where Does This Leave India?

The Indian middle class, long considered the country’s economic growth engine, is clearly under pressure. With their purchasing power dwindling, job insecurity rising, and inflation eating away at their savings, the broader economy is feeling the pinch.

The government needs to address these systemic issues urgently—whether through tax reforms, increased spending on job creation, or controlling inflation. Otherwise, whispers of negative growth could turn into a harsh economic reality.

To weather these challenges, the government will need to adopt a balanced approach—stimulating growth through targeted spending while keeping inflation and fiscal prudence in check. The coming months will be crucial in determining whether India can stabilize or if more turbulence lies ahead.