Festive demand may hold, but consumer volume growth to moderate: ICRA
ICRA Chief Economist Aditi Nayar warns that rising food and fuel costs could moderate consumer volume growth despite resilient festive demand.
While the festive season may provide a temporary boost to demand, the overall trajectory for consumer spending is expected to slow down in the latter half of the current fiscal year. According to Aditi Nayar, Chief Economist at ICRA, the period of rapid growth in consumer volumes is likely to face moderation due to several emerging economic pressures.
The Impact of Inflation and Comparison Hurdles
Nayar highlighted that the previous period of strong consumption was bolstered by significant policy shifts, including income tax rationalisation and GST reforms. As these effects fade from year-on-year comparisons, the baseline for growth becomes much higher, making significant volume increases harder to achieve.
Despite the resilience shown by high-frequency indicators so far—even amidst geopolitical tensions in West Asia—consumer sentiment in both rural and urban areas has shown a downward trend throughout the calendar year, according to Reserve Bank of India data.
Key Risks: Food and Fuel Prices
Two major external factors could dictate the future of household spending: food inflation and crude oil prices. Nayar warned that the transmission of food price pressures to consumer demand is incredibly rapid. A weak monsoon could lead to higher food costs, directly squeezing disposable income and dampening consumer sentiment.
Furthermore, the volatility in the global oil market poses a significant risk. Should crude oil prices rise sustainedly, leading to hikes in petrol and diesel prices, the impact on consumer sentiment could be substantial. If producers are forced to pass on higher commodity costs to end-consumers, demand could face further downward pressure.
Economic Outlook and GDP Projections
ICRA's broader economic forecast remains positive but cautious. The agency expects India's GDP to grow by 7.1 per cent during the current fiscal year. However, in a scenario where crude oil prices fail to correct, growth could dip to approximately 6.8 per cent.
Regarding monetary policy, Nayar anticipates at least one more interest rate hike by the RBI's Monetary Policy Committee in December. This is driven by inflation risks, elevated global yields, and high crude oil prices, which are expected to keep bond yields elevated.
Private Investment and Sectoral Trends
While elevated yields are unlikely to halt existing capacity expansion, the broader recovery in private investment might take longer than expected. Currently, investment is heavily concentrated in specific high-growth sectors, including:
- Renewable Energy
- Data Centres
- Electric Vehicles (EVs)
- Cement and Steel
- Hotels and Aviation
- Hospitals
In contrast, investment remains limited in sectors facing intense competition from Chinese imports and those focused primarily on exports.
Currency and Global Factors
On the currency front, Nayar noted that recent RBI measures to support the rupee have been a step in the right direction. A decline in crude oil prices to the USD 90–95 per barrel range could provide much-needed relief to the currency, though market volatility and foreign institutional investor flows remain critical variables to monitor.