FinMin flags softer urban demand, factory output

• The Finance Ministry on Monday (October 28, 2024) acknowledged emerging concerns of softening consumer sentiments and faltering demand, particularly in urban India, as well as a moderation in industrial momentum in recent months, even as it maintained that the economy will grow between 6.5% and 7% through 2024-25.

Highlights:

• The Finance Ministry acknowledged emerging challenges in the economy, notably in urban consumer demand and industrial momentum.
• Despite these concerns, it projected economic growth between 6.5% and 7% for 2024-25.

Contrasting Urban and Rural Demand Trends:

• Rural Demand: Strengthened by a favorable monsoon, rural demand remains strong and is expected to grow further.
• Urban Demand: Indicators show a slowdown in urban areas, with declines observed in fast-moving consumer goods (FMCG) volume growth, automobile sales (down by 2.3% in H1), and housing sales and new launches, particularly in Q2.
• Reasons for Slowdown: Factors cited include softening consumer sentiments, reduced foot traffic due to excessive rainfall, and seasonality that deters new purchases.

Consumption Trends and Festive Season Outlook:

• The Ministry remains cautiously optimistic about the festive season’s potential to uplift urban demand but noted that early indicators of consumption were “not particularly promising.”
• Overall Demand Conditions: Described as “bear watching,” with an emphasis on monitoring underlying trends in consumer sentiment and spending.

Industrial Performance and Manufacturing Sector Slowdown:

• Manufacturing Growth: Slowed to 1% in August, with further moderation observed in September.
  • Factors Influencing Output: Lower international oil prices affected refinery output, and a drop in automobile growth influenced steel production.
• Corporate Q2 Performance: The slowdown coincides with weak Q2 results across corporate sectors and declines in indicators such as GST collections, bank credit growth, and merchandise exports, as noted in the recent Reserve Bank of India (RBI) bulletin.

Risks and External Influences:

• The review highlighted geopolitical conflicts, geo-economic fragmentation, and high valuations in financial markets in advanced economies as key risks.
• Potential Impacts on India: Spillover effects could negatively impact household wealth, dampen consumer sentiment, and reduce spending on durable goods.

Optimism in Consumer Confidence and Manufacturing Sector:

• Despite challenges, RBI surveys reveal a slight improvement in consumer confidence, with cautious optimism among manufacturers regarding growth prospects.

Prelims Takeaways

• Goods and Services Tax (GST)