Moneycontrol Pro Panorama | The Budget must address the three Cs that flag slowing growth

The three Cs need to be addressed by the Union Budget 2025 for a meaningful recovery in India’s slowing growth.

Dear Reader,

 When India’s gross domestic product (GDP) growth dropped to a jaw-dropping 5.4 percent in the September quarter (Q2 FY2025) -- a sharp comedown from the 8 percent plus levels seen just a couple quarters earlier -- policymakers termed it as “transient” and industry was “cautiously optimistic”.  Yet, slowly but surely, confidence that growth will soon bounce back, is waning. Red flags warning of a widening slowdown are increasing. For now, the three Cs -- Consumption, Credit Growth and Capex (capital expenditure) -- are playing spoilsport.

Apart from the divergence between rural and urban consumption and the K-shaped recovery that perhaps pushed the government to boost social spends in the election year, stuttering urban consumption is the new problem. My colleague Ravi Ananthanarayanan’s take on Hindustan Unilever’s December quarter results gives insights into slowdown in urban demand. Even in the previous quarter, the narratives from large FMCG firms signalled a demand slowdown.

Analysts are poring over data to get a fix on why urban demand that initially helped the Indian economy come out strong from the Covid woes, is now faltering. Apart from the spillovers from global slowdown that are often pointed out by policymakers, domestic factors such as sticky inflation (mainly food), high real estate cost, deceleration in real urban wage growth are weighing on the salaried class’ ability to spend. Slowing demand is bound to take a toll on corporate revenue and profit expansion.

One obvious question here is: Did the Reserve Bank of India act in haste by tightening liquidity through stricter lending norms particularly targeted at unsecured lending? As of November, bank credit growth slowed for the fifth straight month. Even the Purchasing Managers’ Index underscored weak demand as factory activity was weak in the last two months of 2024. Lower credit to non-banking finance companies also dragged down credit growth to the services sector.

A report by Nuvama Research highlights that although banks and corporate balance sheets remain strong, households have been leveraging amid weakness in incomes. “If the USD continues to strengthen and the RBI takes aggressive measures to support the INR, the downturn could worsen, potentially straining retail loans", it said.

The biggest risk to economic growth is sluggish capex -- both government and private. The reasons for slowing private capex are evident from the other two Cs -- weak consumption and credit growth. The absence of domestic consumption (a huge support for India’s economic growth) against the backdrop of geopolitical tensions, uncertainty on trade tariffs in the near to medium term and gloomy exports are bound to affect production and capex plans in India Inc.

Furthermore, government capex growth that did all the heavy lifting in the last three to four years has been sluggish in FY2025 (data until November). Analysts’ estimates indicate a shortfall of Rs 1.1 trillion in FY2025’s actual capex when compared to the Budgeted Estimate. Today’s Budget Snapshot highlights the central government’s expenditure over the last five years.

In short, the three Cs need to be addressed by the Union Budget 2025 for a meaningful recovery in India’s slowing growth. With liquidity in deficit and anaemic growth, the policymakers have a tight balancing act to ensure the pace of slowing growth does not worsen.

What’s in it for equity investors in Indian markets? Manas Chakravarty decodes the Bank of America survey of Global Fund Managers which finds that India remains off investors’ radar.

Investing insights from our research team

Persistent Systems Q3 FY25 – superlative show, strong long-term growth outlook

HUL Q3 FY25: Weak show amid muted urban demand

Will the Street take note of HDFC Bank’s healthy show amid an uncertain environment?

Dalmia Bharat: Muted earnings growth outlook

What else are we reading?

Can HDFC Bank lift loan growth from the dumps without harming its book?

Will Trump’s 'drill, baby, drill' send a chill down climate course?

Agriculture sector needs imaginative policies in Budget 2025

Startup Street: In God we trust – Startups riding the faith wave

Fed to keep rates on hold for ‘foreseeable future’, Pimco says (republished from the FT)

Budget should build on bioethanol success story

Trump’s economics are anybody’s guess. Here’s mine

Foreign Investment and India’s Economy: Role of tax policies in Budget 2025

Driving India’s circular economy through tax rebates and sustainability initiatives in Budget 2025

For BJP’s growth in Tamil Nadu, Annamalai should graduate out of the lone ranger role

UK millionaire exodus is more drip than flood

Tech and Startups

Industry sees opportunities for India in US' $500 billion Stargate Project for AI infra

Technical Picks: Chambal Fertilisers, Persistent Systems, Wipro.

Vatsala Kamat Moneycontrol Pro