Is the Indian economy slowing down? After a solid pace of recovery from the pandemic until last year, economic performance in the first quarter of this financial year was, it was observed, to be moderating as GDP growth slowed to 6.7% a year. The figure was substantially lower than the 7.1% predicted by the Reserve Bank of India for April-June and marginally below the consensus expectation. Probable reasons like the strong base support, election-related curbs on government expenditure and so on were known beforehand and had been built into all growth forecasts; so they don’t apply. Not much can be inferred from a quarter’s performance, however, and economic activity usually slows down in these months — this is a seasonal pattern following a six-month-long busy period. Officials are confident of stronger growth in the rest of the year in which GDP is variously projected to be growing between 6.7%-7.2%, the uppermost forecast being that of the central bank.

But what is the economic outlook?

The biggest surprising feature of the first quarter’s growth was that much of it was led by consumption. Consumer spending picked up forcefully, overturning a six-quarter weakening trend. Likewise, investment accelerated too — it’s believed this was private sector-led. The composite investment includes public capital spending, which is known to have slowed down because of the model-code-of-conduct restraints related to the general election.

What deserve attention here are the advancements in private consumer and business spending. The former has consistently disappointed in recovering from the pandemic with ample signs of asymmetry in the process. If and with what strength this portion of domestic demand endures and restores in the forthcoming months will matter the most, including for business investments for which this is the key metric to add capacity.

Since the second quarter to September is nearing completion and a range of higher-frequency data are now known, what are the discernible patterns so far?

In an ironic twist, the widely considered proxy for consumer spending — vehicle sales — presently shows a switch from the urban to the rural parts of the economy. Rural consumption, depressed for a long time, is now assessed as having turned around: this is supported by the robust sales of two-wheelers. A slowdown is being observed in the urban (and richer) component, according to signals received from the struggling sales of passenger cars and medium and heavy commercial vehicles.

Conflicting signals are being emitted elsewhere. There is, yet, no straightforward correspondence between the spring back in consumption and the production (supply) side of the real economy. The urban job-provider to the un- or low-skilled migrant workers — the labour-intensive segments of trade, hospitality, transport and so on — does not convince about a forceful restoration so far. In the first quarter, aggregate output of this portion of the economy was no more than 3% higher than that of five years ago — April-June 2019, which was also an election quarter. The segment had risen a feeble 10% over its pre-pandemic size (2019-20), indicating considerable shrinkage.

Industrial output volumes are another indication. Manufacturing growth is moderating. This is quite likely from slower export growth of goods with which it’s closely associated. Then, non-durable consumer goods’ output has been steadily losing momentum this year, pointing to lessening demand for items like food and beverages, clothing and footwear, personal care and cleaning products. At the same time, durable goods (white goods, electronics) continue to record brisk growth in succession, no doubt with strong support of loans extended by banks and non-banks for consumption purchases; the fast-paced growth of consumer credit supports this. On the investment side, business investments are yet to demonstrate strength. Despite the bumper profits in the past four years, companies are still lagging in fixed assets growth, suggesting an insufficient mass of demand to justify fresh capacity addition. Such assurance is still awaited.

There are enough reasons to be tentative at this point. It is probable, for example, that the uplift in rural consumption is due to the beneficial interplay of lowered costs of farm inputs like diesel, fodder, pesticides, fertilisers from mid-2024 and rising food prices, which increased producer margins and, therefore, farm incomes. However, non-farm incomes received no such boost while facing costlier food. If that, indeed, is the case, the impetus to rural consumption may be limited, subject to more evidence. The support from foreign demand is anticipated to wane ahead, affecting both incomes and investments. Further, tighter prudential constraints by the central bank upon lending, particularly unsecured credit cards and other personal loans, and caution to the banks to limit incremental credit, are also moderating consumer borrowings and, consequently, spending.

There’s a structural aspect that needs observing too. This is the return to normal spending patterns by the segment of households and individuals who splurged unusually in the last two years following the end of the pandemic. This is being commonly observed across countries wherein the unwinding of unspent incomes or accumulated savings from pandemic times — a gauge for changes in consumption demand — has been carefully watched for return to normal levels. The evolution of such a process may not be dissimilar in India, which is why the trend reversion assumes significance this year.

Overall, there is reasonable uncertainty about stronger private consumer and business demand on the domestic front with a visible slowdown abroad. The cautionary outlook does have a few positive offsets. For one, interest rates are inclined to soften soon as the RBI is likely to relax monetary policy in the coming months while inflation is trending down. There are helpful forces abroad as well, notwithstanding slower world growth: the US central bank cut interest rates last week and America’s economy remains sufficiently strong. The key challenge is to ensure that consumer demand continues to gain vigour through the year, upholding investments and growth.

Renu Kohli is an economist with the Centre for Social and Economic Progress, New Delhi