As the new fiscal year commenced in India this April, the air was thick with optimismInvestors, economists, and the general populace expected a period marked by vigorous economic growth, soaring stock market returns, and progress towards India's ambitious goal of becoming the world's third-largest economy by the year 2027. However, what unfolded next could easily be described as a plot twist befitting a Bollywood blockbuster.

On November 29, the latest Gross Domestic Product (GDP) data revealed a jarring reality: India's economy grew at an annual rate of just 5.4% in the quarter ending September—a stark contrast to the 6.5% growth rate anticipated by economists in a Reuters surveyThis figure represents not only the slowest growth rate in seven quarters but also raises questions about the sustainability of the economic momentum that many had hoped would characterize the forthcoming months.

After a rebound of 6.7% in GDP during the previous quarter of June, most analysts had considered a slight moderation in growth to be inevitable, largely due to inflationary pressures eating into household and business expenditures

Yet, few were prepared for a deceleration of this magnitude.

Insights from analysts at Macquarie pointed to a decline in urban consumer demand as a primary factor affecting economic growthOnce hailed as the driving force behind India's economic engine, the rapidly burgeoning middle class has begun to exhibit curtailments in spending on goods and services, threatening recovery in consumption levels and corporate profits.

The rising prices for essential vegetables, which form a staple in most Indian households, have deeply affected the economyOctober saw retail inflation climb to a 14-month high at 6.2%, with vegetable prices surging 42.2% year-on-year following a staggering 36% increase the previous monthThis inflation spike is believed to have had a tangible negative impact on consumer behavior and corporate earnings alike.

Moreover, Macquarie analysts indicated that businesses are also grappling with the repercussions of reduced household expenditures

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The earnings momentum for many corporations has dwindled in the quarter ending September, further signaling a slow-down.

Analysts explain that the current economic picture is further compounded by historically low capital expenditures that have hovered close to stagnation, struggling investment activities, and a palpable slump in exportsIn addition, credit growth has hit a wall, plummeting to levels reminiscent of a sudden brake in momentum, entangling the economic narrative in a web of interrelated adverse events that burden India's economic progress.

The impact on overall credit growth, which they assert has significantly "pushed GDP," has been noticeable—falling to approximately 11% in the September quarter compared to the 16% recorded in the same period last yearSuch diminished credit growth raises alarms about the robustness of the economic recovery.

Despite the disheartening GDP data, it’s noteworthy that this revelation did not induce widespread panic in the markets

Following the data release, the benchmark Nifty 50 index recorded a modest uptick, reflecting a year-to-date gain of 13.7%. In comparison, the Morgan Stanley Capital International (MSCI) Asia index, excluding Japan, has experienced a decline of roughly 12%, with close to 23% of its portfolio allocated to Indian markets.

The Reserve Bank of India, which is expected to announce new interest rate decisions soon, is also anticipated to maintain stability in rates, further influenced by the fluctuating economic landscape.

The outlook for the remainder of this fiscal year has become increasingly complicatedAlicia Garcia-Herrero of Natixis anticipates that the Indian economic landscape will likely enter a period fraught with slower growth by 2025. "When we speak of a slowdown, we do not mean an economic collapseWhat we are suggesting is a directional forecast toward 6% - 6.4%, likely leaning closer to 6%," she shared with CNBC hours before the GDP data was published.

Adding to the cautious sentiment, Krishna Bimawala, a regional economist at State Street Global Advisors, projected that the Indian economy may soon encounter several "downside risks." While he does not foresee substantial effects within the medium-term horizon around the year 2020, he highlighted the urgency of implementing policy measures to address existing economic disparities and circumvent further adverse developments.

Investors hoping that the narrative of robust Indian economic growth remains intact will be eager to avert a repeat of the bleak September data.

This week, India’s stock market has shown resilience, with the Nifty 50 index gaining 2.4% to reach 24,708.40 points, totaling a year-to-date increase of 13.7%. Additionally, in light of the GDP deceleration, the yield on the benchmark 10-year Indian government bonds has fallen by over 10 basis points to 6.67% since the past weekend.

On CNBC this week, Jae Lee from TCW Group remarked that India "should not become a direct target for possible future tariffs," suggesting that despite global tensions and trade war potentials, the economic outlook for India might still have an upward trajectory if managed correctly.

In conclusion, while the current situation presents concerning signs, the resilience of the Indian economy remains to be seen