Recently, macro indicators have been signalling that the Indian economy has gone from racing like a Vande Bharat Express to crawling like a goods train.
What has triggered this slowdown? There are umpteen theories, but here are six possible reasons suggested by the macro data.
Euphoric spending ends
When the World War II ended, it is believed, the US saw a surge in baby boomers who propelled the economy with an orgy of spending. Indian citizens, freed from the restrictions of Covid, indulged in a mini orgy of spending. This seems to be ending now.
During the Covid lockdown, consumers were deprived of experiences such as shopping, eating out, travelling and entertainment. Post-unlock therefore, it made sense that they splurged first on these contact services. The trade, hotels, travel, media leg of GDP expanded by 14 per cent and 12 per cent in real terms over FY22 and FY23. This was also reflected in the boom in air passenger traffic, hotel occupancies, food delivery orders etc. (See table)
The unlock also released pent-up demand for residential homes, vehicles and consumer appliances. National income data show household investments in fixed assets (read property) rising from ₹21.3 lakh crore to ₹34.8 lakh crore in just two years from FY21 to FY23. This propelled the construction leg of GDP too (See table). Passenger vehicle sales, after shrinking 2 per cent in FY21, expanded 14 per cent in FY22 and 23 per cent in FY23.
But with the euphoria waning and steep tariff increases beginning to bite, consumption growth now seems to be normalising. This could explain the services PMI moderating from a peak of 62 in April 2023 to 57.7 in September 2024 and the manufacturing PMI receding from 59.1 in March 2024 to 56.5. Both indices, however, still indicate healthy growth.
Retail credit curbs
While consumers were in the mood to splurge post-Covid, their incomes weren’t growing too fast. PLFS data show that though unemployment receded, self-employment remained the primary source of jobs in FY24 employing 58 per cent of the workers while 22 per cent of workers held regular salaried jobs. Incomes between FY21 and FY24 grew at just 5-6 per cent annually.
The spending binge was thus fuelled by borrowings. RBI data show that additions to household financial assets fell from 30.6 lakh crore in FY21 to 29.7 lakh crore in FY23, while additions to household liabilities zoomed from ₹7.4 lakh crore to ₹15.5 lakh crore. Between FY21 and FY24, credit card loans and unsecured retail loans grew at 20 per cent annually; home and auto loans grew at 14-15 per cent.
But by late 2023, Reserve Bank of India (RBI) began to notice retail borrowers juggling one too many unsecured loans. Its inspections revealed loose underwriting practices and evergreening by some lenders. In November 2023, it sharply raised risk weights on bank exposures to unsecured loans and NBFCs. It then cracked down on high-growth NBFCs and microfinance lenders.
All this, taken with slowing deposit flows into banks, has led to a sharp fall in retail credit availability lately. Banks’ retail loan growth has slipped from 30 per cent in September 2023 to 13.4 per cent in September 2024, while credit growth to NBFCs fell from 22 per cent to 9.5 per cent.
This was likely the primary factor behind the recent slowdown in urban demand for products ranging from cars to appliances. Curbs on microfinance and digital lenders may have prompted urban belt-tightening on low-ticket consumer items.
Fading wealth effect
The post-Covid spending binge also had help from the wealth effect. Rock-bottom rates during Covid prompted households to rapidly re-allocate their savings from bank deposits to mutual funds and stocks, with some folks leap-frogging to derivatives and IPO flipping. RBI data show household bank deposit flows falling between FY21 and FY23, while investments in shares shot up from ₹1.1 lakh crore to ₹2.06 lakh crore and mutual funds from ₹64,000 crore to ₹1.79 lakh crore.
With stock markets trebling from Covid lows, retail investors reaped massive rewards for this risk-taking. Calculations suggest that, thanks to the bull run, retail wealth parked in stocks and mutual funds zoomed from under ₹9 lakh crore in 2013 to over ₹60 lakh crore in 2023. The feel-good from this paper wealth likely egged retail folk on to borrow and splurge on big-ticket items.
But in the past six months SEBI’s attempts to dissipate market froth and a selling spree from foreign investors has stalled the bull run and triggered a material correction. This is likely to have dented consumer sentiment resulting from the wealth effect.
Moderating govt capex
Unlike other nations, India was quick to roll back its Covid stimulus. The Central government’s fiscal deficit, which topped 9.2 per cent in FY21 was slashed to 6.7 per cent in FY22 and was at 5.6 per cent by FY24. While pruning revenue spends, the government tried to keep animal spirits alive through capital spending.
Between FY21 and FY24, the Centre ratcheted up its capital spending from ₹4.3 lakh crore to ₹9.5 lakh crore. This led to strong order flows into sectors such as defence, railways, infrastructure and capital goods, helping the investment leg of the GDP grow at 11 per cent per annum in real terms.
But this silent stimulus is now ending, with the Centre hoping to slow growth in capex to ₹11.1 lakh crore, to curtail the fiscal deficit to 4.9 per cent this year. In H1 FY25, with general elections intruding, the Centre ended up spending only 37 per cent of its full year target. While the second half promises some catch-up, government capex can no longer be a big prop to growth in the coming years.
Private capex breather
If there was one segment of the economy which sailed breezily through Covid it was India Inc. A deep cut in corporate tax rates from 33 to 22 per cent in September 2019, helped India Inc hang on to profits during Covid and build on them post-unlock. Benign input costs and strong pricing power have expanded the profits of Nifty50 companies by 240 per cent between FY21 and now. But profit growth seems to be stalling this year.
The private sector wields much more muscle than the government in propping up the economy through capital spending. National Accounts data show that private corporations, which had cut their capex to ₹19.9 lakh crore in FY21 ramped it up to ₹32.1 lakh crore in FY23, with strong profit growth and low debt levels spurring them on.
But with the earnings juggernaut slowing and interest rates spiking, private capex now seems to be flatlining. Care Ratings data show that capex of 1,074 large listed companies after climbing from ₹5.4 lakh crore in FY21 to ₹9.5 lakh crore in FY23, dipped to ₹9.4 lakh crore in FY24.
It is likely that election-related uncertainty put capex decisions on hold in H1FY25. But with profit growth in H1 also slowing (4 per cent for Nifty companies), India Inc may go slow on capex awaiting a reversal in rates and a clearer demand picture.
Disruption
When their profits abruptly slow down, listed companies seldom like to admit that they have lost out to competition or have failed to foresee market disruption. The emergence of quick commerce platforms, spurred by digital adoption, is disrupting distribution chains and consumer preferences in sectors such as FMCGs.
In industries such as paints, new competition has dented market shares. Rather than attribute their poor numbers to such disruption or market shares losses, companies have come up with creative explanations about inflation forcing the urban middle-class into penury.
Given that the macro factors above provide enough explanation for the slowdown, one need not take an alarmist view based on such narratives.