TAG: GS-3: ECONOMY
THE CONTEXT:
The Finance Ministry’s September 2024 economic report has drawn attention as it marks the first official acknowledgement of a slowdown in urban demand in India, signalling a shift in economic momentum after a period of post-pandemic recovery.
EXPLANATION:
Key Highlights from the Finance Ministry Report
1. Signs of Urban Demand Slowdown
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- For the first time, the Finance Ministry has acknowledged a deceleration in urban demand, indicating a shift after the post-pandemic economic recovery phase.
- Urban demand indicators show moderation in growth, driven by softening consumer sentiments, unfavorable weather conditions, and seasonal purchase trends.
2. Key Indicators Highlighting Slowdown
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- Export Decline: Merchandise exports fell by 3.76% in Q1 FY25, highlighting challenges in external demand.
- Auto Sales Dip: Auto sales, particularly in urban areas, declined by 2.3% in H1 FY25, with lower Q2 sales compared to the previous year.
- Industrial Capacity Utilization: This indicator slightly decreased to 74% in Q1 FY25, from a peak of 76.8% in the previous quarter, suggesting lower industrial activity.
- FMCG Volume Growth: Urban FMCG sales volume growth declined sharply from 10.1% in Q1 FY24 to 2.8% in Q1 FY25, hinting at restrained consumer spending.
- Housing Market: Both sales and new launches in the housing sector experienced a decline in Q2 FY25.
3. Reasons for Urban Slowdown
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- The report attributes this slowdown to several factors, including softening consumer sentiment, above-normal rainfall impacting footfall, and seasonal behavior where consumers hold off on new purchases.
4. Rural Demand Shows Strength
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- In contrast to urban trends, rural demand has shown resilience, supported by favorable monsoon conditions, increased MSP for Kharif crops, and government welfare initiatives like MGNREGS.
- Rural FMCG sales reflected this strength, with 5.2% growth in Q1 FY25, up from 4% growth in the previous year.
5. Economic Outlook and Growth Projections
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- Despite urban challenges, the Ministry expects the Indian economy to grow at 6.5%-7% in FY25, buoyed by rural demand, government spending, and the festive season.
- The Ministry cautioned against global risks such as geopolitical tensions, trade uncertainties, and financial market volatility, which may impact growth projections.
6. Consumer Sentiments and Inflation
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- While the latest RBI Consumer Confidence Survey indicates improved consumer sentiments, early signs from the festive season reveal modest demand.
- After two months of low inflation, consumer price inflation rose in September due to erratic monsoon patterns impacting vegetable supplies, potentially increasing the real cost of borrowing.
Conclusion
- The Finance Ministry’s report highlights a nuanced economic landscape: while urban demand faces short-term challenges, rural resilience and strategic government spending could keep growth momentum intact at 6.5%-7%. Global economic uncertainties and inflationary pressures remain key areas to monitor.
Source:
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