India economy expands slower than forecast on waning demand

India's economy expanded slower than forecast in the three months through December, as a gloomy global outlook and rising borrowing costs dampened activity.

Gross domestic product rose 4.4% from a year ago last quarter, according to data released by the Statistics Ministry Tuesday. That's slower than the 4.7% expansion seen by economists in a Bloomberg survey.

The ministry expects growth for the fiscal year that started April 1 to come in at 7%, same as the expansion it had forecast in January. That compares to a revised 9.1% growth in the year ended March 2022.

Waning consumption, which accounts for about 60% of GDP, risks hurting growth in Asia's third-largest economy, as borrowing costs rise. The Reserve Bank of India has increased interest rates by 250 basis points since May to tame inflation and signalled it isn't ready to pause just yet, amid growing dissent within the rate-setting panel.

"My fear is that all sources of demand in the economy are contracting at the same time," Jayanth Rama Varma, an external member of RBI's Monetary Policy Committee, said in a recent interview. 

With exports struggling on waning global demand and the government forges ahead with fiscal consolidation, Varma said rising borrowing costs will dent household budgets and, in turn, consumption. For Shashanka Bhide, another rate setter, demand in the economy is fuelling inflation.

There might be more pain in store as interest rates go up further and consumer activity in India's key export market — the US — loses steam. While India's growth will likely moderate to 6.1% next year, it will be the fastest among major economies in the world, according to the International Monetary Fund.

Improving rural and services demand is helping India pull off a relatively strong performance in a tough environment where even China indicators are pointing to an uneven recovery despite its reopening.