Consumption growth rebound is promising

The growth in consumption demand is corroborated by the results of consumer goods companies, which show a revival in rural demand

Beyond the headline of five-quarter-low Gross Domestic Product (GDP) growth of 6.7% in the first quarter of 2024-25 are numbers that reflect both the resilience and prospects of the Indian economy. First, the bad news. That the number came in below street estimates as well as projections of the Reserve Bank of India is worrying.

Despite a contraction in government spending, investment demand, reflected in Gross Fixed Capital Formation, actually grew faster compared to the previous quarter, to 7.5%. (AFP)

Now for the not-so-bad news. The big gap that had opened up between the GDP and Gross Value Added (GVA) growth numbers in recent quarters is no longer evident in the latest release — and that’s just the way it should be. In the long term GDP and GVA growth numbers should converge.

Finally, the good news. Despite a contraction in government spending, investment demand, reflected in Gross Fixed Capital Formation, actually grew faster compared to the previous quarter, to 7.5%. Given the dip in government spending, this means, households and corporates stepped up. Consumption demand, as measured by Private Final Consumption Expenditure (PFCE) grew even faster compared to the previous quarter, to 7.4%. This is a seven-quarter high.

Interestingly, both were widely considered the missing piece in India’s growth story, which, since the recovery from the pandemic’s lows, has been driven by government spending. PFCE growth has remained tepid — until now. The growth in consumption demand is corroborated by the results of consumer goods companies, which show a revival in rural demand. If these trends continue, and government spending increases (as it will, because part of the dip was caused by the national elections), it is very likely that GDP growth will ease into the 7-percent-plus region, which will be an impressive achievement for an economy India’s size.

There’s also the possibility that the slowing of growth accelerates a change in the position of the Reserve Bank of India’s Monetary Policy Committee, which has continued to keep the policy rate high, and its stance, tight. Both industry and households would cheer that.