India risks losing its fastest growing economy to China

India risks losing its fastest growing economy to China

GDP climbed 5.8% in the past quarter, putting it behind China’s 6.4% growth

India’s gross-domestic-product expansion dipped below 6% last quarter, forcing the country to surrender its title as the world’s fastest-growing large economy as citizens and companies held back on spending.

The GDP of Asia’s third-largest economy climbed 5.8% in the three months through March, putting it behind China’s 6.4% growth for the same period. India still grew more than China for the full calendar year last year and is expected to outpace China eventually this year as well.

For the full fiscal year that ended March 31, India’s economy expanded 6.8%, its slowest since the year ended March 31, 2014.

Prime Minister Narendra Modi, who was sworn in Thursday for his second term, now has to figure out how to deliver on his economic promises to the people who voted him back into power by a surprisingly wide margin.

In his second term, Prime Minister Modi – and his cabinet, which was announced Friday — will need to do more to unleash the growth potential of the South Asian nation.

“He has a great mandate; now what is he going to do with it?” asked Andrew Holland, the Mumbai-based chief executive at hedge fund Avendus Capital Alternate Strategies. “He is going to want to leave a legacy.”

The US and China have been unable to resolve their differences over trade and have imposed tariffs on goods.

The new Modi government faces the task of quickly boosting consumer demand to revive growth while undertaking more structural measures to get private investment moving.

Several other high-frequency indicators such as automobile sales, rail freight, petroleum product consumption, domestic air traffic and imports (non-oil, non-gold, non-silver, and non-precious and semiprecious stones) indicate a slowdown in consumption, especially private consumption. Passenger vehicle sales grew at their slowest in five years, at 2.7% in 2018-19.

Analysts believe the reduction in government spending to meet the fiscal deficit target of 3.4% of GDP may also have contributed to the demand slowdown. Public spending and consumption had been propping up growth amid weak private investment and exports.

State Bank of India (SBI) has projected Q4 GDP growth at 6.1% and value-added growth at 6% or at 5.9% in the worst case. Axis Bank forecast 6.1% GDP growth while HDFC’s estimates are 6.1-6.2% for the March quarter.

Friday’s GDP numbers will set the tone for RBI’s June 6 credit policy meeting. Analysts broadly expect RBI to cut repo rate by 25 basis points to boost growth as inflation has broadly remained within the central bank’s comfort zone.