 "Rural demand rises but urban areas 'slow down'; will it impact GDP growth?")
Signs of weakening consumer demand, particularly in urban regions, are becoming evident through various economic indicators and the latest earnings reports of consumer goods companies. These signs have raised concerns over the slowing momentum in India’s economic growth.
While rural demand has shown an uptick in the last few months, rising food inflation and a slowdown in credit growth pose challenges, potentially dampening the country’s growth in the second quarter of 2024-25.
Urban demand weakens amid inflation pressures
According to a report in The Indian Express, senior executives in Tata Consumer Products have noted a ‘softening’ in urban demand, while Nestlé India has identified major cities as pressure points, attributing some of the muted demand to high food prices.
Carmakers are also expressing concerns over demand within a sector that has generally resisted India’s consumption downturn, citing heavy rainfall and election-related factors as contributing to the slowdown. These signs may have implications for India's future growth trajectory.
Nomura India observes a sequential drop in growth momentum, stating that its recent coincident activity index — which encompasses consumption, investment, and external sector indicators — suggests a deceleration in GDP growth for the second quarter of 2024-25, following a moderation in growth from 7.8 per cent to approximately 6.7 per cent in the first quarter. Forecasts suggest further moderation to around 6.5 per cent in the July-September period, lower than the Reserve Bank of India’s projection of 7 per cent, with investment and industrial activity also slowing.
Rural real wage growth has provided some support, with demand in rural areas maintaining steady growth, Devendra Kumar Pant, chief economist at India Ratings and Research, told The Indian Express. However, urban demand appears to have plateaued, likely due to post-Covid consumption having exhausted previously pent-up demand.
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Rural demand offers some optimism
The Ministry of Finance’s economic review for September shows improved rural demand, evidenced by higher FMCG volume sales and increased three-wheeler and tractor sales. In contrast, urban demand has softened due to dampened consumer sentiment, high rainfall impacting footfall, and the tendency for fewer purchases during certain periods.
Recent data also indicates a slowdown in corporate growth, with initial figures for the quarter ending September 2024 showing net profit growth for 197 companies slowing to 6.1 per cent (Rs 83,007 crore) from 27.4 per cent (Rs 78,224 crore) a year earlier. Rising input costs and expenses have affected these figures, as shown by Bank of Baroda Research data, with the outlook weakening further when excluding banking companies. Rating agency Crisil has also indicated revenue growth in Q2 is expected to be the slowest in the last 16 quarters, between 5-7 per cent.
Wages and inflation pressures
Salary outlays by companies have also seen reductions, with growth in real wage expenditure of listed non-financial corporations — the proxy for real urban wages — decelerating to 0.8 per cent in Q2 FY25, down from 1.2 per cent in Q1 FY25 and significantly lower than in previous years, according to Nomura.
Persistent food inflation also remains a concern for the RBI, with Governor Shaktikanta Das noting that it would be premature to consider rate cuts at this stage. The external environment also presents challenges, as protectionist measures in the US and weak demand from Western Europe are affecting India’s exports. Finance Minister Nirmala Sitharaman, speaking at the IMF-World Bank meetings, remarked on the worsening global output-inflation tradeoff, which necessitates adaptable policy to manage any resulting spillovers.
At an event hosted by the Peterson Institute for International Economics, Das maintained an optimistic outlook, citing sustained domestic demand, lower input costs, and a supportive policy environment that drove growth in manufacturing and the services sector.
Govt spending, festive season to drive growth
Despite signs of slowing growth, the government expects a rebound in certain growth components, such as government expenditure, in the upcoming quarters. During April-August, central government spending amounted to Rs 16.52 trillion, a 1.2 per cent decrease compared to the previous year. Increased government spending, along with inflation control efforts, may contribute positively to growth in the latter half of the year.
Nonetheless, with credit growth continuing to moderate — especially in consumer credit — the impact on discretionary spending is likely to persist, as seen in urban demand trends. The outlook for a widespread uptick in private capital expenditure remains cautious, given the still-soft demand.
The festive season could provide a temporary boost, especially if discounts stimulate consumer activity. Government capital expenditure and sustained rural demand will also be key factors to monitor.