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Informist, Monday, Oct. 28, 2024

 

NEW DELHI – The state of urban demand in India continues to face questions from both the government and private observers, with the finance ministry noting Monday that "underlying demand conditions bear watching". Meanwhile, Nomura economists have said the weakness in urban demand "is likely to continue".

 

In its Monthly Economic Review report for September, the finance ministry said there is evidence of a slowdown in urban demand in the first half of 2024-25 (Apr-Mar), pointing to falling growth in sales of fast moving consumer goods, automobiles, and homes. These trends, the finance ministry's economists said, could be due to softening consumer sentiment and limited footfall due to above-normal rainfall, among other reasons.

 

"Going forward, the ongoing festive season and improvement in consumer sentiments may boost urban consumer demand. However, early indications were not particularly promising," the finance ministry's report warned.

 

Nomura economists Sonal Varma and Aurodeep Nandi also cited the same high-frequency data as well as a few others to say in a note Monday that India's economy has entered a "cyclical growth slowdown".

 

"Companies are scaling down their salary outlays. When deflated by urban CPI, real salary and wage expenditure growth of listed non-financial corporates--a proxy for real urban wages--has moderated to 0.8% year-on-year in Q2 FY25 (provisional for Jul-Sept) from 1.2% in Q1 FY25, and is down from 2.5% in FY24 and 10.8% in FY23. This likely reflects a mix of weaker nominal salary growth and a leaner workforce," Varma and Nandi said. Calling the RBI's GDP growth forecast of 7.2% for FY25 "overly optimistic", Varma and Nandi see downside risks to their projection of 6.7% for FY25 and 6.8% for FY26.

 

Interestingly, both the finance ministry and Nomura warned that monetary policy is now tight, with the former saying that subdued inflation, except for a few food items, suggests "real price of money may have gone up". Earlier this month, the RBI's Monetary Policy Committee had left the policy repo rate unchanged at 6.50% for the 10th meeting in a row, although it loosened its stance to neutral from withdrawal of accommodation. In a poll conducted by Informist before the Oct. 9 monetary policy decision, Nomura was the only one of 30 respondents to predict a 25-basis-point reduction in interest rates. However, only one member of the MPC--external member Nagesh Kumar--voted for such a move. In an interview to Informist last week, Kumar said that "cheaper credit" is needed to support growth.

 

The comments by the public and private sector economists come even as the Reserve Bank of India continues to defend its monetary policy as well as the growth conditions. In an interview to CNBC-TV18 in Washington, DC, Governor Shaktikanta Das said that while signals on growth are "mixed", the positives outweigh the negatives.

 

"There is some narrative that perhaps the sales figures and certain things have slowed down. But what I would like to emphasise is that there are mixed signals--there are some positives, there are some negatives. But I think the positives significantly outweigh the negatives. The so-called slowdown in certain areas--that is outweighed by the kind of positives that we are getting," Das said in an interview broadcast on Monday.

 

The comments by Das came after Nestle India Chairman and Managing Director Suresh Narayanan said last week that demand is muted and that households in the middle-income bracket, particularly in urban areas, are not purchasing enough packaged goods. Tata Consumer Products, too, said after the release of its quarterly earnings that "subdued demand environment" had impacted revenue.  End

 

Reported by Siddharth Upasani

Edited by Avishek Dutta

 

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