Over the past six months, a divergent trend has emerged. Demand from tier-3 towns and villages was firming up, with high-frequency indicators showing an uptick, while demand in urban consumption was slowing down across categories.
Various domestic growth indicators have seen signs of easing over the past few months. Here's a look at ten key high frequency economic indicators that indicate slowing urban demand.
Falling Services, Manufacturing PMI
Over the past few months, manufacturing and services activities, which are closely linked to consumption, have seen a drop, as indicated by the trend in the PMIs. This shows that businesses are scaling back on production and services, which could mean reduced job growth and lower income stability. However, any level recorded over the 50-mark is seen as a positive sign, only a fall under the key level signals a contraction in activity.
Slow Retail Sales Growth
Retail sales, a key indicator of consumer demand, slowed further in the second quarter of FY25 when compared to the first quarter. Further, over both quarters, the growth has been lower than that seen in FY24, indicating that consumers have been tightening their belts so far this fiscal.
Non-essential spending falls
Consumers have pulled back on non-essential spending, instead spending more of their money on essential items or saving more as inflation bites. Dining out, fashion, entertainment are all markers of urban consumption and a shift in consumer trends could cause stress in these areas.
Slowdown in credit growth
Credit growth lagging indicates slowing of borrowing, which could also be a function of banks and NBFCs tightening their lending norms, especially in the unsecured segment. Households and individuals will be unable to borrow more, leading to a fall in expenditure. Consumers that are less inclined to borrow usually avoid purchasing high-ticket items, such as houses, cars, or electronics.
Microfinance loan growth
The slowdown in microfinance loan growth can be attributed to the Reserve Bank of India cracking down on unsecured lending, but it also indicates that consumers are less willing to cough up high interest charges. In the urban area, when microfinance institutions pull back on credit, lower-income workers might find it difficult to fund daily expenses. This can lead to dampening sentiments in local retail and services, where most earnings among this economic strata are spent.
Falling PV sales
Passenger vehicle sales, which are often seen as a good proxy to gauge urban demand, has been on a downward trend. On the other hand, sales of two-wheelers, a proxy to understand the rural sentiment, is on the up-and-up. Slowing passenger vehicle sales could mean that buyers are holding back due to economic uncertainty, lower purchasing power or less disposable income.
Fuel growth
Mobility indicators like railway freight earnings, fuel consumption and even sales of passenger vehicle have eased in the recent months - indicating that the demand environment is also taking a breather, noted JM Financial. Fuel consumption, a signal of weaker mobility and reduced commuting, is linked closely to economic activity, possibly also indicating that sectors, which are reliant on transport, are seeing a slowdown.
Toll growth
Consumers are pulling back on non-essential travel for the past few quarters. Even business that rely on transportation have held back, as seen in the falling toll growth.
Government capex
Government capex has seen a significant slowdown, with expectations that the Centre will not achieve the Rs 11.11 lakh crore target earmarked in the Union Budget 2024-25. Government capex has an impact on both, rural and urban areas. However, slowing capex means lesser infrastructure improvements, fewer job opportunities and overall reduced government spending. Less money is moving from the Centre’s coffers to the public, leading to a broad-based slowdown in the economy.
Easing state capex
Many state-level infrastructure projects are important for urban development, such as road expansions, sanitation projects or public transport. Slowing capex in the states means that these will be limited, and also that less money from the state is going into the pockets of the people.
Over the past decade, states’ actual capital spending was only 83 percent of the budget estimates. States’ capex to grow only 3.7 percent in FY25, assuming the same achieves 85 percent of budget estimates, according to Motilal Oswal.
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