India's Economic Activity Eases, But Growth Projections Remain Stable

Economic activity is showing signs of easing in the July-September quarter after India's GDP growth fell to 6.7% in the April-June quarter, down from 7.8% in the previous quarter. While the ongoing festive season, expectations of increased government capital expenditure, and a recovery in rural demand may boost the economy in the second half of the fiscal year, the extent of this impact remains uncertain.

The manufacturing PMI has dropped to its lowest level in 2024, while the services PMI fell to a ten-month low in September, influenced by lower export orders. Despite this, both indices remain above the 50-mark, indicating growth.

The eight core industries contracted for the first time in 42 months in August, declining by 1.8% due to a high base and excessive rainfall in some regions. Gross Goods and Services Tax collection growth reached a 40-month low of 6.5% in September, with revenues of ₹1.73 lakh crore. Net collections, after accounting for refunds, grew only 3.9%, marking the slowest growth of the current fiscal year.

Tanvee Gupta Jain, an economist at UBS, noted that the UBS India composite economic indicator has shown signs of softening since August. The slowdown in the April-June quarter was anticipated due to elections and heatwaves, with expectations of normalisation thereafter. However, no significant recovery has occurred in the September quarter, with subdued growth and a trend of decreasing momentum.

Some of this weakness is attributed to temporary factors like rain and elections, but persistent issues also exist, including declining urban pent-up demand, high real interest rates, tighter credit policies affecting microfinance and unsecured consumer loans, and reduced global demand. A potential increase in government spending and favourable monsoon conditions are positive signs for the second half of the ongoing fiscal. However, the farming sector is experiencing sluggish terms of trade due to falling food prices, negative ‘real’ rural wage growth, and uneven recovery in private capital expenditure, according to a research note from Nomura.

Concerns remain about the muted level of government capital expenditure, with Jain observing signs of fatigue in affluent consumption. The South-West monsoon has influenced variables such as power demand and fuel consumption, and it remains to be seen if this is a temporary rain-induced effect or a sign of ongoing moderation in some sectors, as indicated in a note from SBI Caps.

Despite these challenges, Governor Shaktikanta Das stated that consumption and investment drivers remain stable. Agriculture is expected to enhance supply and consumption due to above-normal rainfall. With a revival in rural demand, urban demand is also steady, supported by the services sector. Together, these factors help project GDP growth at 7.2% for the current fiscal year.

The Reserve Bank of India has maintained its forecast for GDP growth at 7.2% for the fiscal 2024-25, with the second quarter projected at 7% and the third and fourth quarters at 7.4%.

Notably, both the Monetary Policy Committee statement and Governor Das’ comments did not address any downside risks or acknowledge the observed weakening in growth momentum indicated by several high-frequency indicators. Nomura projects India's GDP growth at 6.7%.