The finance ministry’s latest monthly review noted some of the emerging challenges such as the rural-urban consumption divergence, but blamed the slump in urban demand on softening consumer sentiment.
Over the past few days, leaders from corporate India have raised concerns about flattening consumer demand in the economy. For instance, top executives at Tata Consumer Products Ltd are talking about the “softness” in urban demand. Their counterparts at Nestle India have pointed out that mega cities and metros are showing signs of “muted demand”. Car-makers and vehicle dealers have also been stressed because of alarming inventory levels. The evident slump in demand is hurting both the top line (revenue) as well as the bottom line (profits) of corporate India. Rating agency Crisil analysed 435 companies that account for almost half of the listed market capitalisation, and found that at 5 per cent to 7 per cent, corporate revenue growth in the second quarter (Q2, or July-August-September) this year will be the lowest in the past 16 quarters. An analysis of 197 companies by Bank of Baroda found that the growth rate in net profit of these companies in the second quarter was just 6 per cent — a sharp dip from a growth of over 27 per cent in the same quarter last year.
It should not surprise anyone, then, that companies are scaling down their salary outlays. According to Nomura Research, real salary and wage expenditure growth of listed non-financial corporates — a proxy measure for real urban wages — has moderated to 0.8 per cent in Q2 FY25 from 1.2 per cent in Q1 FY25, and is down from 2.5 per cent in FY24 and 10.8 per cent in FY23. These worrying trends are not just about corporate India’s worsening prospects. They point to a deceleration of the broader economic momentum that deserves the attention of policymakers. For one, as noted by business heads, there is a distinct and growing divide between rural and urban India’s consumption growth rates. Analysts point out that urban demand is likely to stay soft thanks mainly to lower salary increments and high interest rates. More broadly, economists are now reevaluating their forecast for India’s annual gross domestic product. In a recent research note, for instance, Nomura India states that India’s growth glass “looks half empty” and expects a slower GDP growth in the second quarter of 2024-25 compared to the first quarter. The GDP growth rate in the first quarter itself was slower than the fourth quarter of the previous financial year.
The finance ministry’s latest monthly review noted some of the emerging challenges such as the rural-urban consumption divergence, but blamed the slump in urban demand on softening consumer sentiment, limited footfall due to above-normal rainfall, and seasonal periods during which people tend to refrain from new purchases. Overall, policymakers remain more sanguine about the outlook, expecting an uptick in demand during the ongoing festive season as well as the boost that GDP will get from a rise in government spending. But in a worsening geopolitical landscape, domestic policies will have to do the heavy lifting to ensure that India’s prized growth momentum does not suffer.
