Slower Growth of Economy: A trade-off between Demand and Rate of Interest

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Despite the expectation of a 7% growth rate by the government, the Indian Economy has been plunging toward severe downfall. The economy weighs down by base normalization which is evident from its 4.4% expansion in the October-December period. It shows that the GDP is slowing down sequentially. In the preceding three-month period, the GDP grew at a rate of 6.3% which is much higher than the current growth rate. According to Chief Economic Adviser V Anantha Nageswaran, “Growth momentum carries on but an unfavorable base has led to lower numbers for Q3”.

In an economy there lie several numbers of factors that hamper the rate of growth. In this case, the main concern of the economists lies in the fact of persistence of higher interest rates. The interest rate has been increased RBI by 250 basis points since the month of May to control inflation. The monetary tightening policy is compressing the demand making growth more fragile. The rise in the pressure on household budgets affected their spending leading to a fall in demand.

When the interest rate goes up, consumers find it more useful to save their money for earning higher interest rates. This lowers consumer spending and thus the overall health of the economy. The rate of interest has been hiked by RBI to 6.5% during the meeting in February 2023. The economics has cautioned that a continuous rise in the interest rate could weigh on the total demand with the already slowed rate of consumption growth.