Indian economy faces five headwinds that leave no margin for error

Markets look calm, but five forces-rising debt, slowing revenues, weak savings, geopolitics and populism-signal a tougher growth phase for India

For a country facing multiple headwinds, India looks oddly relaxed. The stock market still hovers near record highs. Shopping malls are busy. Interest rates are stable. Sales of cars and bikes are rising. High-end property sales are strong. To investors and policymakers, this feels like smooth sailing. That confidence could be misleading. Beneath the surface, India is entering a slower phase — one defined by five forces. These are high government debt-to-GDP (gross domestic product), a slowing domestic revenue engine, lower household savings, and a more hostile geopolitical environment, all of which will lead to populist politics. India has managed each of these forces separately in the past. But together, they threaten to undo the growth narrative on which today’s optimism rests. 

Debt-to-GDP 

The finance minister (FM) has declared that reducing the debt-to-GDP ratio will be her core priority. According to the International Monetary Fund (IMF), India’s debt-to-GDP ratio is above 80 per cent of GDP, which includes the combined debts of the central and state governments. But how will the government reduce debt? According to several fiscal estimates, four fixed overheads — salaries (around 28 per cent), pensions (15 per cent), interest on the existing debt (25 per cent), and subsidies and welfare (15 per cent) — together absorb more than 80 per cent of government revenues, leaving little room for debt reduction. In a recent meeting with the Prime Minister, economists argued for reducing capital expenditure (capex) to cut debt. But since government capex has been the single-most important engine pulling the economy for the past three years, what will happen to GDP growth if government capex is cut? We are indeed between a rock and a hard place. 

Slower revenue growth 

Debt would not have been a problem if India’s revenue base were robust. But after three years of growth, India’s main revenue engine is losing momentum. In December, net collection from goods and services tax (GST), the most reliable real-time indicator of economic activity, grew only about 2.2 per cent. Underneath this headline, nearly half of India’s states are stagnating or shrinking. Big consumption states such as Tamil Nadu, Kerala, and Madhya Pradesh have recorded declines. What is propping up the aggregate number is a narrow set of manufacturing and logistics hubs that benefit from import-linked taxes and integrated GST (IGST) settlements. Refunds are rising. Consumption is no longer driving revenues the way it should in a healthy, expanding economy. A government that wants to reduce debt cannot do so on a revenue base that is slowing down. 

Lower household savings 

India’s growth model depends on domestic savings. For decades, households provided a deep pool of capital that funded government borrowing, corporate investment, and bank lending. But household financial savings have fallen from around 10 per cent of GDP to barely 7 per cent. This is an ominous sign. Household savings are down because employment is sluggish and real wages are stagnant. This is also borne out by slow mass-consumption growth. 

Geopolitics 

The fourth force is external, and one that has blindsided India the most. When Donald Trump came to power, a section of Indians in the United States (US) and in India celebrated, banking on his friendship with the Indian Prime Minister. But Mr Trump has turned out to be a nightmare for most countries. While many of them have managed to negotiate their way out of high import duties, India is one of the few large economies not to have secured a durable trade accommodation with the US. India’s exports of roughly $50 billion to the US have faced mounting pressure. Mr Trump has also upped the ante enormously, and is no longer seen as all noise and no action. He ordered that the Venezuelan President be picked up and brought to the US to face trial; next, he is planning to annex Greenland, and has Canada, Colombia, and Mexico in his crosshairs. He has backed proposals to impose extremely high tariffs on countries importing Russian oil, which would include India. Meanwhile, Indian policymakers have remained confident about free-trade agreements and export opportunities outside the US. They look increasingly naïve in the face of Mr Trump’s willingness to use coercion for economic ends. He has publicly mocked the Indian Prime Minister and shown little patience for strategic niceties. India, unlike China, lacks the scale, leverage, and financial firepower to absorb such blows. 

Domestic populism 

When growth slows and jobs disappoint, the response is rarely fiscal prudence. It is populism. Subsidies, loan waivers, cheap credit, and public hiring are the tools through which Indian politicians buy stability and win elections. The Eighth Pay Commission looms, which will push fixed overheads even higher. Cutting debt, as the FM wants to do, is sensible. Competitive politics makes it extremely difficult. For example, while the Reserve Bank of India (RBI) has cut policy rates by 125 basis points and is signalling easier monetary conditions, government-backed small-savings schemes continue to offer high, tax-advantaged returns, limiting the ability of banks to pass on rate cuts. 

Put together, these five forces will reduce economic growth, given that India is not becoming significantly more productive or more export-competitive. For the government, slower growth will hurt revenues, constrain spending, and keep debt and interest payments high, leading to further borrowing. Companies will continue to shy away from expansion. For households, it will mean suppressed wages, slower consumption and savings, and rising borrowings. None of this is yet fully visible in India’s headline numbers, but the signs are emerging. India is heading into a period in which the margin for error has vanished. 

The writer is editor of www.moneylife.in and a trustee of the Moneylife Foundation; @Moneylifers