Moderating urban demand could dampen growth outlook in FY25

Even as a good monsoon has ensured a pickup in rural demand, urban demand is seen to have moderated in recent months, leading to concerns about a possible slowdown in the economy.
 
The phenomenon has been raised by two reports on Monday, including the finance ministry’s monthly economic review that has highlighted that “underlying demand conditions bear watching”.
 
The finance ministry’s monthly economic review for September noted that rural demand continues to strengthen in the first half of the fiscal year 2024-25, supported by above-normal monsoon boosting kharif sowing, an increase in Minimum Support Price (MSP) for kharif crops , and government initiatives like increased allocation for Mahatma Gandhi National Rural Employment Guarantee Scheme.
 
“Contrary to rural demand, there has been evidence of a slowdown in urban demand as reflected in the performance of various indicators during H1 of FY25,” the report said, listing out various reasons including a moderation in the volume growth in urban FMCG sales in the first quarter of the fiscal, declining auto sales in the first half of the fiscal as well as a dip in both housing sales and launches in the second quarter of the fiscal.
 
“The above trends may be largely explained by softening consumer sentiments, limited footfall due to above-normal rainfall, and seasonal periods during which people tend to refrain from new purchases,” the report said.
 
While the latest RBI Consumer Confidence Survey for the September 2024 round highlights an improvement in consumer sentiments and the ongoing festive season and improvement in consumer sentiments may boost urban consumer demand, the report however said that early indications were not particularly promising.
 
Meanwhile, Nomura also warned that urban demand is likely to stay soft due to lower real salary increases, fading pent-up demand, high interest rates, and tight credit conditions.
 
“We believe India’s economy has entered a cyclical growth slowdown. Coincident and leading growth indicators point to a further moderation in GDP growth and the RBI’s forecast of 7.2% for FY25 is overly optimistic, in our view,” it said in a report, adding that it sees rising downside risks to its own GDP growth projections of 6.7% in FY25 and 6.8% in FY26.
 
The MER said that for now the performance of the Indian economy has been satisfactory during the first half of FY25, supported by strengthened rural demand, enhanced agricultural activity, an improving services sector, and a stable external sector. However, demand conditions need to be monitored and risks to growth arise from escalating geopolitical conflicts could impact India’s economy. “Their spillover effects on India could cause negative wealth effects, impacting household sentiments and altering spending intentions on durable goods,” it said.
 
The Economic Survey has pegged GDP growth at 6.5% to 7% this fiscal. Real GDP grew by 6.7% in the first quarter of the fiscal. Official quarterly GDP estimates for the quarter July-September of 2024-25 will be released on November 29 and will provide more clarity on economic activity this fiscal.