Consumer demand revival may take one more year despite moderating inflation

RBI's MPC said going forward, the inflation trajectory would be guided by food dynamics

It seems consumption demand may take at least a year to revive.

For instance, while Fitch Ratings has upped India's growth forecast by 30 basis points for 2023-24, it projected consumer spending growth to decline to 2.3 per cent during the year from 7.5 per cent in the previous year and 5.2 per cent average during 2018-2022.

This was despite the consumer price index (CPI)-based inflation projected to fall to five per cent by the end of the current calendar year from 5.7 per cent at the end of the previous year and 5.2 per cent on average during 2018-22.

When asked the reasons behind this projection, Jeremy Zook, director Asia sovereign ratings, Fitch Ratings said, "This is largely due to base effects and the fading of pent-up demand after pandemic-related disruptions."

He said over the past two quarters private consumption growth slowed to 2.1 per cent and 2.8 per cent year-on-year (YoY).  

"We do expect consumption to remain a bit subdued over the next year, but to begin accelerating in FY25 until it returns to its pre-pandemic average growth in FY26", Zook said.

The RBI in its latest monthly bulletin also pointed out that recent national accounts data and corporate results when read in conjunction clearly showed that inflation is slowing down personal consumption expenditure.

"This, in turn, is moderating corporate sales and holding back private investment in capacity creation," the Bulletin said.

Bringing down inflation and stabilising inflation expectations will revive consumer spending, and boost corporate revenues and profitability, which is the best incentive for private capex, it said.

However, Fitch Ratings pegged fixed investment in India to grow 9.9 per cent in 2023-24, even though slower than 11.4 per cent in the previous year and 6.2 per cent on average during 2018-22. Fixed investment, the rating agency said, would grow at a slower rate of 9.5 per cent in 2024-25 and would further slow down to 7.4 per cent the next year.

Though the retail inflation has fallen to 4.70 per cent in April (the first month of 2023-24) from 5.66 per cent in March and then further to 4.25 per cent, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) in its latest policy review pegged the rate of price rise at 5.1 per cent in 2023-24. It would be though lower than 6.66 per cent in 2022-23, it would still be above the RBI's target of four per cent.

The MPC said going forward, the inflation trajectory would be guided by food dynamics. In this regard, there is still uncertainty over the monsoon in August and September. The India Meteorological Department (IMD) has projected normal rainfall for July (94 to 106 per cent of the Long Period Average) after June, the first month of the monsoon, delivered sub-normal rains in many parts of the country.  Parts of eastern Uttar Pradesh and south Bihar may turn out to be an exception in July, it said.

IMD's projection would augur well for the planting of crops by farmers. The kharif cultivation has been progressing slowly due to sub-normal rainfall in June in many parts. For instance, the area of rice cultivation was down 26 per cent to 2.65 million hectares as on June 30 this year compared to 3.6 million tonnes during the corresponding period in the previous year. Similarly, the area of pulses sowing fell by almost two per cent to 1.85 million tonnes against 1.81 million tonnes during this period.

However, the area of cultivation of coarse cereals and oilseeds, barring sunflower, was higher so far YoY.

Kharif sowing would not be crucial for food inflation only but also for demand in the rural side through the income side.

Work demanded by households was higher by almost 4.5 per cent to 89.5 million days in the first quarter of this financial year compared to 8.57 million days in the corresponding period of the previous year with each month reporting higher demand than in the year-ago period