India’s Economy ‘Satisfactory’ in H1 of FY25, but Challenges Loom: Finance Ministry Report
India’s economy has performed satisfactorily during the first half of the 2024-25 fiscal year, according to the Finance Ministry’s latest economic report. Released on Monday, the report assesses a 6.5% to 7% growth projection for the current fiscal year, expressing confidence in rural demand as a significant driver. However, the ministry also highlighted several risks to future growth, including geopolitical conflicts, geoeconomic fragmentation, and volatility in global financial markets.
Rural demand outpaces Urban consumption
One of the key observations of the report was a noticeable shift in demand patterns, with rural areas showing stronger consumption than urban centers. “There has been a positive shift in rural demand, which has outpaced urban consumption,” the ministry reported, noting that this trend has buoyed overall economic performance so far. Sectors benefiting from this rural demand include agriculture and allied industries, which have experienced stable growth compared to the fluctuations seen in urban markets.
However, in urban areas, demand appears to be weakening due to factors such as high-interest rates, declining real incomes, and softening consumer sentiment. This divergence between rural and urban demand patterns underscores a more complex economic landscape where rural areas have managed resilience, even as urban sectors face potential slowdowns.
Global and domestic Risks to economic growth
The Finance Ministry’s report also identified several external risks that could impact India’s economic trajectory in the second half of the fiscal year. Among these risks are “escalating” geopolitical tensions, deepening geoeconomic divides, and high valuations in the financial markets of advanced economies. These factors could lead to uncertainty and market disruptions, affecting both investor sentiment and domestic economic activity.
The ministry’s report noted particular concerns about trade policy uncertainties from major economies, which could have “knock-on effects” on India’s export sector. This environment of rising protectionism and shifting trade alliances may lead to higher volatility in global trade, affecting both demand and supply chains for India’s businesses.
Contrasting projections from RBI and Nomura
The Reserve Bank of India (RBI) has maintained an optimistic stance, forecasting real GDP growth at 7.2% for FY25. The central bank’s outlook considers the resilience of rural demand and ongoing structural reforms that could support growth. However, not all analysts share the RBI’s confidence.
In a recent report titled “India: Urban demand is likely to stay soft,” securities firm Nomura took a more conservative view, warning of a cyclical growth slowdown. “We believe India’s economy has entered a cyclical growth slowdown,” Nomura noted, arguing that the RBI’s forecast is overly optimistic. The firm revised its own GDP growth projection to 6.7% for FY25 and anticipates further moderation to 6.8% for FY26.
Nomura attributes this cautious outlook to several factors dampening urban demand, including high-interest rates, tight credit conditions, and waning pent-up demand following the post-pandemic recovery phase. It also highlighted lower real salary increases, which could curb household spending and reduce disposable income levels across urban areas.
Impact on FMCG sales and consumer sentiments
The Finance Ministry’s report noted declining growth in the fast-moving consumer goods (FMCG) sector as an indicator of softer urban demand. FMCG sales volume growth dropped from 10.1% in the first quarter of FY24 to just 2.8% in the same quarter of FY25. Contributing factors included unfavorable weather patterns, such as excessive rainfall, which affected consumer foot traffic and spending habits in urban centers. Seasonal periods, in which consumers traditionally avoid making large purchases, also contributed to this trend.
Analysts see this drop as a signal that urban households are prioritizing essential goods over discretionary spending, reflecting a cautious approach amid economic uncertainty. The ministry noted that urban demand continues to be a focal area, with any further declines potentially affecting overall economic growth.
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Inflation remains manageable despite seasonal pressures
Inflation remains a significant concern globally, yet India has managed to keep it within “manageable limits,” according to the Finance Ministry. A slight increase in September’s inflation rate was primarily attributed to erratic monsoon effects on vegetable supplies, resulting in temporary spikes in food prices. Despite this, the ministry expressed confidence in the government’s measures to contain inflation and said that overall price levels are more stable compared to other major economies grappling with prolonged inflationary pressures.
A ministry official, speaking anonymously, noted that while food inflation remains a short-term risk, India’s policy interventions have kept it within a manageable range. The official cited the government’s proactive steps, including stockpiling and price controls on essential items, as part of the broader strategy to stabilize inflation.
Outlook for H2 of FY25
While India’s economic performance in the first half of FY25 was satisfactory, as described in the Finance Ministry’s report, challenges lie ahead. Geopolitical conflicts, global trade uncertainties, and a potentially slowing urban demand could all influence growth rates. Analysts are closely watching how the government navigates these external pressures while maintaining support for rural consumption, which has so far proven to be a strong pillar of economic resilience.
Ultimately, the contrasting outlooks of the RBI and Nomura illustrate the complexity of India’s economic landscape as it balances short-term challenges with long-term growth aspirations. As the second half of FY25 unfolds, policymakers will likely need to focus on stabilizing both urban and rural demand, addressing inflationary pressures, and adapting to global economic shifts.
