Economic momentum intact, but low consumer confidence a worry: Economic Review

India’s economic momentum remains intact with the expansion of the country’s manufacturing and services sectors, rising tax collection and declining inflation, said the Economic Review for July. 

But it added that consumer confidence in the general economic situation, employment, price level, and income had declined, and would need to be monitored for future trends.

“Households’ optimism about economic conditions for the year ahead has declined from the previous survey round,” stated the Economic Review, carried out by the finance ministry’s Department of Economic Affairs and released on Thursday. 

“Further, lower optimism on the general economic situation, employment and prices led to a moderation in the future expectations index of the Consumer Confidence Survey in July 2024.”

According to the Reserve Bank of India, consumer confidence, as measured by the future expectations index, or FEI, declined 4.1 points to 120.7 in July from two months earlier due to decreased optimism about the general economic situation, employment, and rising prices. 

Sentiments about current employment and income also worsened, with the current situation index declining to 93.9 points in July from 97.1 two months earlier.

“The industrial outlook survey of the manufacturing sector, also conducted by the central bank, showed a decline in (both) the current assessment and the expectations indices of business sentiment in August. Production, order books, employment and export sentiments moderated,” said the Economic Review.

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Experts, however, say consumer confidence is likely to revive in the coming months, especially as retail inflation eases due to declining food prices. Retail inflation based on the consumer price index (CPI) rose by 3.54% in July, its lowest in 59 months.

The FEI gives a wide standard deviation based on household perspectives about inflation, with the June numbers likely taken by RBI as the basis of the index, said Bhanumurthy N.R., director, Madras School of Economics.

“The RBI looks at inflation expectations in the medium term, which could be below the mean. This is not serious,” he said. “Other indicators suggest strong positive sentiments for the Indian economy, compared to some of the advanced major global economies.”

Stronger economic activity

The latest monthly economic review, however, said the first four months of 2024-25 (April-July) witnessed a widening of the tax base and heightened economic activity.

During this period, key economic indicators presented a positive outlook underpinned by robust domestic activity, improving external trade, and growing capital flows, the July Economic Review said, adding that overall growth indicators suggested sustained momentum as the financial year progresses.

A double-digit growth in e-way bill generation reflected sustained economic activity, which is expected to result in higher goods and services tax (GST) collections in the coming months, the Economic Review added.

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Central and state governments collected ₹1.82 trillion in GST in July, marking a 10.3% year-on-year increase, according to finance ministry data. 

India’s manufacturing activity remained steady in July, driven by new orders leading to higher output.

The HSBC India manufacturing purchasing managers index (PMI), compiled by S&P Global, stood at 58.1 in July, after recording 58.3 in June, 57.5 in May, and 58.8 in April. A reading above 50 signals an expansion in economic activity.

India’s service sector also improved, surging to a 13-year high in July amid buoyant demand. The HSBC India services purchasing managers’ index (PMI) rose to 62.3 in July, from 58.5 in June and 61.2 in May. 

Optimistic on trade

The July Economic Review remained optimistic on merchandise trade, stating that a recovery in global demand may boost exports in the coming months. 

“Recovery in global demand across India’s major exporting partners has given a boost to exports, while a strong domestic demand has encouraged imports,” it said. “Services exports have been on a rising trajectory, resulting in a rise in net services receipts.”

That said, India’s goods trade deficit widened in July from the previous month due to increasing imports and damp global demand amid geopolitical challenges. India’s merchandise trade deficit, the difference between a country’s exports and imports, stood at $23.5 billion in July, higher than the $20.98 billion deficit reported for June.

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Merchandise exports fell to $33.98 billion in July from $35.20 billion in June and $38.13 billion in May. Merchandise imports increased to $57.48 billion in July from $56.18 billion in June, but were lower than May’s $61.91 billion.

India’s services exports improved to $28.43 billion in July from $26.22 billion recorded in the same month last year.

“On balance, India’s economic momentum remains intact. Despite a somewhat erratic monsoon, reservoirs have been replenished. As of now, the projection of real GDP growth of 6.5-7.0% for FY25, made in the Economic Survey for 2023-24, seems appropriate,” the July Economic Review said.

“Given the perception of recession in some of the advanced economies, India stands strong,” said Bhanumurthy of the Madras School of Economics.