The Ministry of Finance, in its latest monthly economic review bulletin, has said contrary to rural demand, there's been evidence of a slowdown in urban demand through the performance of various indicators during H1 FY25.
"Volume growth in urban FMCG sales has moderated from 10.1% in Q1 of FY24 to 2.8% in Q1 FY25. As per FADA, auto sales declined by 2.3% in H1 FY25, due to the lower sales in Q2 of FY25 compared to Q2 FY24 in urban areas. Housing sales and launches also dipped in Q2 of FY25. The above trends may be largely explained by softening consumer sentiments," the ministry says.
The rural demand, on the other hand, continues to strengthen in H1 of FY25, supported by above-normal monsoon boosting Kharif sowing, an increase in minimum support price (MSP) for Kharif crops, and initiatives like increased allocation for Mahatma Gandhi National Rural Employment Guarantee Scheme. "The growth in rural demand is also reflected in rising auto sales, a segment seen as an indicator of consumer confidence and economic health," the ministry says.
The ministry, in its review of the performance of various sectors of the Indian economy during the first half of FY25, says it has been "satisfactory" so far, supported by rural demand, agricultural activity, and improving services and external sectors.
"But, underlying demand conditions bear watching," it says.
Highlighting risks, the ministry says challenges to growth arise from geopolitical conflicts, geoeconomic fragmentation and elevated valuations in financial markets in advanced economies. "Their spillover effects on India could cause negative wealth effects, impacting household sentiments and altering spending intentions on durable goods."
On inflation, the ministry says barring a sharp rise in the prices of a "few vegetables", it appears "well contained". The ministry says in the medium term, factors like rejuvenated reservoir levels, healthy Kharif crop sowing brightening the agriculture output prospects and ample food grain stocks could help contain price pressures.
The RBI says inflation expectations by households and businesses have been softening. "The headline inflation, influenced as it is by a few food items, may not be the most accurate gauge of the underlying demand conditions in the economy."
The ministry says that sentiment towards India among international direct and portfolio investors is positive. "Sustaining India’s growth momentum is essential to turn these positive sentiments into actual direct and portfolio investments in the country."
Momentum in the manufacturing sector seems softened in September 2024 from a strong growth in summer. "The manufacturing PMI declined from 57.5 in August 2024 to 56.5 in September 2024. However, this still indicates continuing expansion in manufacturing activity."
As per the Index of Industrial Production (IIP), the manufacturing sector grew only by 1% in August 2024. However, the IIP growth of 4.2% in the first five months of FY25 still remains robust. "Lower international oil prices and increased oil imports may have influenced the domestic refinery output.” The services sector, says the ministry, seems to have maintained its role as a key growth driver in Q2 of FY25 despite a slight moderation in pace.
