Is India’s status as the fastest-growing economy in peril?

India is unlikely to sustain the double-digit economic growth recorded in the quarter ended on June 30 as economists expect the world’s fastest-growing major economy to drastically slow its pace to more than halve this quarter and slow further toward the end of the year as interest rates rise.

The $3.3 trillion economy, which is Asia’s third largest, is predicted to record a 6.2 per cent year-on-year growth this quarter from a median forecast of 15.2 per cent in Q2, supported mainly by statistical comparisons with a year ago rather than new momentum, before decelerating further to 4.5 per cent in October-December, according to panelists polled in a survey by Reuters.

Amid global economic uncertainties, India will release its GDP data for the first quarter of the current financial year on Thursday. While the Reserve Bank of India has estimated a 16.2 per cent economic growth for the April to June quarter of the current financial year, the State Bank of India projected the growth rate at 15.7 per cent. According to Barclays, India is expected to register a 16 per cent GDP growth rate in the first quarter. The RBI expects India’s growth rate for the full year to be 7.2 per cent. According to the International Monetary Fund, India will grow at 7.4 per cent in the current financial year.

Economists argue that if the pace of growth slows in the remaining quarters, India’s dream goal of emerging as a $5 trillion economy by 2027-8 will be unattainable.

They reason that India is grappling with persistently high unemployment and inflation, which has been running above the top of the RBI’s tolerance band all year and is set to do so for the rest of 2022. The median expectation for 2022 growth is 7.2 per cent, according to an August 22-26 poll, but economists said that the solid growth rate masks how rapidly the economy is expected to slow in the coming months.

"Even as India remains the fastest-growing major economy, domestic consumption will perhaps not be strong enough to drive growth further as unemployment remains high and real wages are at a record low level," said Kunal Kundu, an economist at Societe Generale.

"By supporting growth through investment, the government has only fired on one engine while forgetting about the impetus which domestic consumption provides. This is why India's growth is still below its pre-pandemic trend."

The panelists believe that India has not grown fast enough to accommodate some 12 million people joining the labour force each year.