Policy choices that deepened the slowdown

For years, India has been one of the world's fastest-growing major economies, attracting global investors eager to capitalize on its potential.

- ABHISHEK ANAND

Today, the story is less flattering. Growth has decelerated sharply, with gross domestic product (GDP) expanding by 6.1 per cent in April-December FY25, down from 9.5 per cent during the same period last financial year. Inflation remains stubbornly above the Reserve Bank of India's (RBI's) 4 per cent target, markets are jittery, and foreign investors are pulling out. And just when things couldn't look worse, there's the looming spectre of Donald Trump imposing higher tariffs on Indian exports.

What's troubling is that this slowdown is unfolding despite a broadly stable global economy—no financial crisis, no commodity shock. The International Monetary Fund's latest World Economic Outlook projects resilient global growth, with the US exceeding expectations. Markets reflect these concerns, with the stock market down over 10 per cent since September 2024—far more than in other emerging economies. The issue isn't external; it's domestic. And it's serious.

India's growth slump isn't just a blip—it stems from deeper structural challenges, worsened by policy missteps. A key factor: The simultaneous tightening of fiscal and monetary policies, which has exacerbated the slowdown.

Take fiscal policy. In the first half of FY25, capital expenditure contracted by 15 per cent, leading to a fiscal tightening of a whopping 200 basis points. While elections and post-Covid fiscal adjustments played a role, they don't fully explain the extent of this unusual contraction.