Urban demand stress under watch, festivals may boost consumption: FinMin

Days before Diwali, the monthly economic review by the finance ministry has highlighted moderation in urban demand, softening consumer sentiments and limited footfall as areas that need to be watched.

In its review, released on Monday, the ministry also noted the early signs of artificial intelligence displacing workers, as described in anecdotal reports.

The commentary from several large consumer goods companies, including Nestlé India, Hindustan Unilever, and ITC, in their recent quarterly earnings, has been around a sluggish urban demand. Rural consumption, however, has mostly seen a revival, the companies pointed out.

Elaborating on urban demand, the finance ministry’s monthly review said that going forward, the ongoing festive season and improvement in consumer sentiments may boost urban consumer demand.

But early indications were not particularly promising, it said.

The report said that increasing Fast Moving Consumer Goods (FMCG) volume sales and a rise in three-wheeler and tractor sales showed that rural demand had continued to improve.

Escalating geopolitical conflicts, deepening ge-economic fragmentation and elevated valuations in some financial markets could cause negative wealth effects, impacting household sentiments and altering spending intentions on durable goods in India, the review said.

The report for the month of September underscored optimism for a healthy kharif harvest and sufficient food grain buffer stock to be able to alleviate price pressures.

The review noted that barring a sharp rise in the prices of a few vegetables, inflation appears well contained.

It said that inflation expectations by households and businesses have been softening, as Reserve Bank of India and Indian Institute of Management, Ahmedabad surveys have indicated.

“The headline inflation rate, 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 review added.

The inflation rate stood at 4.6 per cent in the first half of FY25, down from 5.5 per cent during the same period last year.

A growth outlook between 6.5 and 7.0 per cent for FY25 for the Indian economy was underpinned by a stable external sector, positive agricultural outlook and expected improvements in demand supported by the festive season, according to the report.

Also, the likelihood of an increase in government spending would boost investment activity, the finance ministry added.

The report said that there has been some softening in the manufacturing momentum, even though RBI surveys on manufacturing indicate improved business expectations for the upcoming quarters.

The manufacturing Purchasing Managers’ Index (PMI) declined from 57.5 in August 2024 to 56.5 in September 2024.

Heavy monsoon rains too have had a calming effect on mining and construction activity, the monthly review noted while highlighting the moderation in the services sector activity in Q2 FY25, particularly in road transport-related services.

“Nevertheless, business sentiments remain sanguine,” the review added.