Rural uptick but urban areas new points of concern in GDP growth

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Last Updated30/10/2024

While rural demand is seeing an uptick, high food inflation and a moderation in credit growth are possible headwinds that could slow down growth in the second quarter of 2024-25.

Urban Consumption Decline: The latest high-frequency data and corporate earnings guidance indicate a slowdown in urban demand, with FMCG companies like Tata Consumer and Nestle India noting muted demand in cities due to high food inflation and the waning post-COVID consumption surge.
Automobile Sector Impact: The auto sector, a major demand driver, has also seen slowed sales, attributed to excessive rains and pre-election effects.
Corporate Revenue and Profits: Corporate sector profit growth has weakened, with Q2 revenues for non-financial companies projected to grow at only 5-7%—the slowest in the last 16 quarters.

Rural Demand Uptick: Strong monsoon conditions have fueled rural demand, visible in FMCG volume growth and increased tractor and three-wheeler sales.
Urban Demand Concerns: In contrast, urban demand softened, with FMCG volume growth dropping to 2.8% in Q1 FY25 from 10.1% in the prior year. Similarly, auto and housing sales slowed down, indicating a shift away from urban consumption.

High Food Inflation: Persisting food inflation remains a concern, potentially constraining demand further. RBI has cautioned against premature rate cuts to avoid stoking inflation.
Global Economic Challenges: Protectionist policies in the U.S. and sluggish demand in Europe continue to strain India’s export performance. Finance Minister Nirmala Sitharaman emphasized the need for data-driven adjustments amid worsening global output-inflation dynamics.

Real Wage Moderation: Real wage growth in urban areas has slowed significantly, reflecting in reduced consumer credit growth and caution around discretionary spending. Salary outlays by companies also saw limited growth, impacting urban spending power.
Credit Growth Concerns: Moderation in consumer credit growth adds to concerns that discretionary spending, especially in urban centers, could remain constrained, even with festive season promotions.

Growth Projections: Nomura and other experts project GDP growth in Q2 FY25 to slow to around 6.5%, down from 7% forecast by RBI, due to pressures on discretionary consumption and industrial momentum.
Government Spending: With planned increases in capital expenditure, government spending is expected to play a pivotal role in economic recovery during the second half of the fiscal year, especially if rural demand holds strong.

Festive Season Boost: The ongoing festive season could uplift demand if boosted by discounts and promotions.
Rural Resilience: Rural demand, aided by improved real wages and a favorable monsoon, remains a hopeful driver for consumption growth.
Capital Inflows and Policy Environment: Easing by the U.S. Fed could support capital inflows into India, while a supportive policy environment aims to sustain manufacturing and investment.