India’s steadily improving economy is showing early symptoms of slowing spending.
In February, India’s economic activity remained stable, despite early signs of declining consumption due to worries about future growth prospects and hawkish monetary policy.
The needle on a scale measuring so-called animal spirits remained steady from January, when it moved to the left after ramping up pace during the last month of 2022, indicating that decreasing domestic demand is becoming a concern. Bloomberg’s eight high-frequency indicators revealed slowing credit growth, lackluster tax receipts, and an increasing jobless rate.
In the three months to December, India’s GDP growth unexpectedly dropped to 4.4%. The “full-blown impact” of the Reserve Bank of India’s 250 basis point boost in borrowing costs since May may be passed to end-consumers, according to Crisil Ltd., the local subsidiary of S&P Global Ratings.
After retail inflation exceeded the central bank’s target for the second month in a row in February, the central bank is expected to boost rates further in its next policy review on April 6. The fallout from the failure of Silicon Valley Bank, as well as problems at Credit Suisse Group AG, and the impact of heat waves on India’s rural economy, might potentially cloud the picture.
According to purchasing managers’ polls, activity in India’s dominant services sector increased at the quickest rate in 12 years. Manufacturing activity increased at its weakest pace in four months, although it remained above the 50-point threshold. This contributed to the composite index rising to 59 from 57.5 in January.
However, a lack of confidence in the business climate slowed employment growth, according to Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence. “The level of optimism in February was the lowest in seven months and below the historical trend, as some businesses questioned whether demand would remain this resilient.”
Exports declined 8.82% year on year in February, while imports plummeted 8.21%, the largest reduction in more than two years.
“Slowing core exports and imports indicate softening global and domestic demand,” said Madhavi Arora, an economist with Emkay Global Financial Services Ltd. However, Arora lowered her current account deficit forecast for the fiscal year ending March to 2.5% of the gross domestic product, from 2.6% earlier on robust services exports in the last few months.
Liquidity in the banking system is tightening, and credit growth moderated to 15.52% in February, from 16.33% in January, central bank data showed.
Goods and services tax collections, which help measure consumption in the economy, fell to 1.49 trillion rupees ($18.1 billion) in February from 1.56 trillion rupees in January though it was 12% higher from a year ago.
New vehicle registrations rose 16% in the month, according to data from the Federation of Automobile Dealers Associations. But passenger vehicle sales growth slowed to 10.9% year-on-year, from the 22% rise seen a month ago.
Electricity consumption, a widely used proxy to measure demand in the industrial and manufacturing sectors, improved. Peak demand in February rose to 181 gigawatts from 173 gigawatts a month ago amid predictions of hotter weather over the coming months. India’s unemployment rate climbed to 7.45%, from 7.14% a month ago, according to data from the Centre for Monitoring Indian Economy Pvt.
