The Indian government is introducing a significant economic stimulus plan aimed at revitalizing its slowing economyThe recent decision by the Reserve Bank of India (RBI) to cut interest rates by 25 basis points marks the first such move in five yearsThis came shortly after Prime Minister Narendra Modi’s administration announced a historic tax reduction package worth ₹1 trillion (approximately $11.4 billion).
The backdrop of these announcements is a noticeable deceleration in India's economic growthDespite India surpassing the UK in 2022 to become the world's fifth-largest economy, growth has dropped from 8.2% in the previous fiscal year to a mere 5.4% as of the summer of this yearProjections for the current fiscal year have been further downgraded to a sluggish 6.4%. As consumers exhibit waning confidence and corporate profits are pressured, compounded by escalating uncertainties in the global trade environment, India faces multiple economic challenges.
Market responses to these stimulus measures have been cautiousFollowing the RBI's announcement of the interest rate cut, the bond market reacted negatively, and the benchmark NSE Nifty 50 index declined by 0.2%. Indian stock markets have already regressed, giving back gains accrued over the past six months, while the rupee continues to depreciate against the dollar, indicating investor concerns regarding the Indian economic outlook.
Indian policymakers have adopted a conservative approach amid the challenging landscapeThe government's inclusion of a ₹1 trillion tax cut in the federal budget aims to stimulate growth, yet the RBI's response remains restrained under the leadership of its new governor, Sanjay MalhotraThe monetary policy committee chose not to shift towards a more accommodative stance, indicating that additional rate cuts may not be forthcoming.
Experts, like Gupta from Shiv Nadar University, note that the RBI's room for maneuver regarding interest rate cuts is limited, especially in the context of the US Federal Reserve halting its easing policies
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Moreover, no new liquidity measures, such as lowering the cash reserve ratio or increasing open market operations, have been introduced to bolster market sentimentEconomists at Nomura have expressed their concerns, stating that India’s growth trajectory remains downward trending and may experience unforeseen downturns.
This economic predicament is becoming increasingly evidentIn 2023, while India celebrated robust GDP growth of 8.2%, projections for the current fiscal year have seen a substantial reduction, with expectations now set at just 6.4%. Such deceleration evokes apprehension among economic observers.
The performance of capital markets also reflects growing worriesRecently, the stock market has retraced its previous six-month gains, making India’s capital market returns appear rather insignificant on a global scaleThis situation is attributable not only to domestic factors but also to structural challenges and policy impasses that hinder more widespread economic recovery.
During Modi's tenure, the number of investment account holders in India surged from 22 million to 150 million, showcasing notable growth in the financial marketHowever, this elevation in market participation is predominantly skewed towards the wealthiest 10% of the population, leaving the vast majority struggling to meet basic living standardsThe government’s fiscal conservatism directed spending primarily towards large-scale infrastructure projects such as bridges and highways, aiming to showcase developmental commitment to entice private investmentNevertheless, this supply-side strategy has come under scrutiny for its effectiveness.
Economist Subramanian from the Peterson Institute for International Economics underscores the reality that inadequate job creation is suppressing incomes
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