India’s resounding 8.2% GDP growth in 2023-24 came with two worrying portents. The farm sector lost momentum due to an unhelpful monsoon, and private consumption spends rose at less than half the economy’s pace. In fact, the 4% growth in private final consumption expenditure (PFCE) was the weakest since 2002-03, if one excludes 2020-21, when COVID-19 first hit the world. Of course, some of this stemmed from the farm sector’s rain woes that weighed down rural demand, while economists flagged a K-shaped consumption pattern of higher-end goods and services seeing greater offtake than the rest. A normal monsoon this year, it was hoped, would help the farm sector and rural demand rebound, and shore up overall consumption to levels that spur growth as well as hasten an uptick in industrial capacity utilisation rates to thresholds that compel private investors to ramp up. This much-awaited outcome is vital for the virtuous cycle of more investments leading to more jobs and higher consumption to kick in.
Growth numbers for the first quarter suggested this story was playing out, with the PFCE rising at a seven-quarter high of 7.4%, outpacing the 6.8% GDP uptick. Rural demand signals such as two-wheeler sales also perked up. India Ratings reckons that real rural wage growth turned positive in July and is expected to stay positive, aided by cooling inflation. This bodes well for consumption. However, a twist in this tale may be imminent, with urban demand beginning to show some fatigue. Last Tuesday, S&P Global Ratings, which expects India to grow 6.8% this year (lower than the 7.2% rise penned in by the Reserve Bank of India), said high interest rates are tempering urban demand. The RBI’s consumer confidence survey for July shows a turn in the tide, with current and future confidence levels of urban buyers dropping. The Finance Ministry has taken note too, pointing to a dip in passenger vehicle sales through April to August as a barometer of stuttering urban demand. The trend warrants monitoring, it said, while expressing hope that festive fervour could trigger a course reversal. With wallets crimped by persistently high food inflation (that also clouds rate cut hopes), the ability of urban Indians to create room for discretionary spends through the festive season and beyond would be critical for growth as well as the virtuous private investment cycle. With global oil prices turning benign, the Centre must consider passing through the reduced costs to consumers, and cut levies embedded into retail fuel prices. A substantive fuel price cut, as opposed to the token two rupees of relief per litre unveiled this March, can support demand in the economy.
Published - September 30, 2024 12:20 am IST
