Investments in infra sector and consumption demand driving India’s economic activity

The rural engine is running on a slightly different track. There are indications of a weaker rural demand due to the El Nino phenomenon, the estimated shortfall in the kharif crop and the risks to the current rabi crop

Even as India is expected to maintain its status as the fastest growing economy in the world, some economists expect its GDP growth rate to slow down in the second half of the current financial year.

The Indian economy is considered a global bright spot, which has delivered a strong performance in the first half of FY24 with the GDP growth print in Q1FY24 high at 7.8% year-on-year. This is set to be followed by another solid 6.8% growth in the second quarter, going by the data on high frequency indicators.

Both the consumption and the investment drivers were in action in HI FY24; while economic activity has continued to be spearheaded by public investments in the infrastructure sector, India has also seen a robust consumption demand.

“Although we don't expect any significant moderation in the intensity of public capital expenditure, persistent headwinds on the export front, higher interest rates along with a tighter funding environment for consumer loans and weaker agricultural output due to the El Nino phenomenon can pose risks to the overall growth trajectory in the second part of FY24,” said Suman Chowdhury, chief economist and head of research, Acuité Ratings & Research.

“We expect 5-5.5 per cent growth in H2FY24 and hold on to our base forecast of six per cent for FY24," he said.

The resilience in urban demand is clearly one of the primary drivers of the current momentum in the Indian economy. Urban demand has reportedly been strong as reflected by a step up in passenger vehicle sales, on-line food deliveries, airline traffic and hotel occupancies which has particularly translated into a stronger than anticipated momentum in the services sector. While India didn't win the ODI World Cup 2023, the event surely did its bit to also push up consumption demand in October and November, along with the regular festivities.

Nevertheless, the rural engine is running on a slightly different track. There are indications of a weaker rural demand due to the El Nino phenomenon, the estimated shortfall in the kharif crop and the risks to the current rabi crop.

Having been on a path of mend over the last three quarters, rural consumption recovery was however punctured in Q2 FY24 owing to a confluence of adverse macroeconomic and seasonal factors including high inflation in Q2 and the irregular monsoon. Some of the high-frequency data points have validated the Q2 FY24 slowdown in rural demand.

On a FYTD basis (Apr-Oct), domestic tractor sales have contracted by four per cent on an annualised basis.

Most FMCG companies recorded a slower volume growth in rural markets in Q2 FY24 versus Q1 FY24.

IIP data available till September indicates that consumer goods output has grown by only 3.7 per cent YoY in the first half of the year with the consumer durables production actually declining by 0.7 per cent YoY. This also reflects the fragility in rural demand.