India’s economy stable in H1 FY25, supported by rural demand: Fin Min

New Delhi: India's economy remained stable in the first half of FY25, bolstered by rural demand, but urban consumer demand moderated, according to the September Economic Review released on Monday.

The divergent trend in rural and urban demand is the opposite of last year, when rural demand fell. These trends – both last year's and this year's – highlight the wide importance of rainfall in the Indian economy. In FY24, monsoon rains were below normal, whereas they were plentiful in the first half of FY25.  

‘Potential risks’

Going forward, the report also warned of potential risks from geopolitical tensions and high valuations in global markets that could further impact household spending.

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The latest economic review cautioned about a moderation in urban demand in the first half of FY25. Urban consumer goods volume growth dropped from 10.1% in Q1 FY24 to 2.8% in Q1 FY25, and auto sales declined by 2.3% in H1 FY25, primarily due to weaker sales in the second quarter. 

Housing sales and new launches too fell during the second quarter.

"On the demand side, rural demand continues to improve, as reflected in increasing Fast Moving Consumer Goods (FMCG) volume sales and a rise in three-wheeler and tractor sales," the latest Economic Review said.

"However, urban demand appears to moderate due to softening consumer sentiments, limited footfall due to above-normal rainfall, and seasonal periods during which people tend to refrain from new purchases," it added.

The latest monthly review said that on the one hand above-normal monsoon, adequate reservoir levels, and sufficient input availability have bolstered kharif sowing, surpassing both last year’s level and the five-year average.

On the other, heavy monsoon rains had a “calming effect” on mining and construction, leading to a moderation in activity in the services sector in Q2 FY25, particularly in road transport-related services.

Also Read | India’s real GDP to grow at 7.2% in FY25 on investment, consumption boost: FM Sitharaman

The report prepared by the finance ministry’s department of economic affairs said inflation remains under control despite a "temporary rise” in vegetable prices, supported by robust agricultural output and easing inflation expectations.

"Barring a sharp rise in the prices of a few vegetables, inflation appears well contained. In the medium term, favourable factors, such as rejuvenated reservoir levels, healthy kharif crop sowing brightening the agriculture output prospects and ample food grain stocks, would help contain price pressures," the report said.

“Also, inflation expectations by households and businesses have been softening... In this context, 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.”

Also Read: India’s economic growth on track; job creation, tepid household spending remain a concern, say economists

"Investor sentiment toward India remains positive, and sustaining growth is key to converting this optimism into direct and portfolio investments," it said.

The report added that low oil prices are a positive for the Indian economy, whose latest high-frequency indicators fit well with the real gross domestic product (GDP) growth projection of 6.5-7% for fiscal year 2025 (FY25) provided by the Economic Survey 2023-24.

Oil prices have fallen in the last year or so due to lower demand from major developed economies and China. Brent Crude was trading at $71.80 a barrel on Monday, down 18% annually.

India's retail inflation rose to a nine-month high in September due to higher food prices.

Retail inflation rose to 5.49% in September, higher than 3.65% in August -- the highest since December 2023, when it was 5.69%. However, inflation is within the Reserve Bank of India's (RBI) medium-term target of 2-6%.

Food inflation, a persistent challenge, rose 9.24% annually compared to a 5.66% rise in August.

The RBI has kept interest rates unchanged at 6.5% since February 2023, which economists said may be another factor in moderating urban demand. 

India’s economic growth slowed to 6.7% in the first quarter of FY25 due to subdued government capex ahead of the general election.

However, it is slated to pick up in the subsequent quarters.

The RBI continues to forecast a 7.2% growth rate for the Indian economy in FY25, although the GDP growth target for Q2 FY25 has been slightly reduced to 7% from 7.2%, while Q3, FY25 has been increased to 7.4%.

The Economic Review said India's external sectors continue to perform well, as reflected in rising capital inflows, a stable rupee and comfortable foreign exchange reserves.

"Forex reserves surpassed the USD 700 billion mark at the end of September 2024, making India one of the top four countries with more than 700 billion reserves," it said.

"Expansion in merchandise trade deficit led to an increase in the current account deficit to 1.1% of the GDP in Q1 of FY25 from a surplus in the previous quarter. However, rising services exports and growing remittances cushioned the rising current account deficit," it added.