India’s booming economy has been the envy of many. But early signs of an economic slowdown have emerged beyond expectations. Any cooling, mainly if driven by inequalities, would challenge Prime Minister Narendra Modi as he seeks a third term in next year’s general elections. It would also increase the chances of the central bank cutting interest rates earlier than anticipated.

India’s growth was 6.1% in the first quarter of March compared to the previous year, well above economists estimated 5%, driven by increased service exports and government spending. However, according to McKinsey, India needs 8% to 8.5% annual growth to employ the 90 million new non-agricultural workers who will join the workforce by 2030.

Likely, rising borrowing costs and a global growth slowdown will affect exports. Statistics also show a sharp increase in luxury goods and a decline in more standard products. Private consumption fell by 3.2% in the first quarter. Even spending by the 65% of the population living in rural areas is expected to slow due to climate change. El Niño is causing drought, disrupting the monsoon season, which plays a vital role in the lives of hundreds of millions of people dependent on agriculture. Two-wheeler vehicle sales, a key indicator of rural demand, remain below pre-Covid levels.

The easing of liquidity pressure in the Indian banking sector and the withdrawal of INR 2,000 banknotes could reduce banks’ reliance on certificates of deposit for funding. However, banks will need more deposits to finance proper credit utilization in the fiscal year 2024. Analysts are expected an 8-10 basis point decrease in the sector’s average interest margins compared to the fiscal year 2023.

In a tense geopolitical context, a global slowdown, and upcoming elections in a social environment strained by religious divides, 2024 could be challenging for India.