After India’s economy slumped to a seven-quarter low of 5.4% in the July-September quarter, much lower than consensus estimates and below the Reserve Bank of India’s 7% projection, annual growth forecasts are being scaled down. The slowdown is ringing alarm bells in different quarters. One of India’s biggest conglomerates, Tata Group, is readying to buck the economic slowdown. Tata Sons chairman N Chandrasekaran has urged group company CEOs to aggressively pursue growth despite mounting uncertainties in domestic and global markets, as per an ET report based on information from sources. In internal strategy sessions and business reviews, Chandrasekaran has emphasised boldness in ambition, stating that while margins can be adjusted over time, growth opportunities must be seized immediately, some executives have told ET.
More than 15 Tata Group companies, including Tata Consultancy Services, Tata Motors, Tata Steel and Tata Power have reported single-digit growth in revenue in the first half of FY25 while profit slowed at an equal number of companies.
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The softer expansion in GDP growth has prompted economists from Goldman Sachs Group to Barclays Plc to lower their full-year growth estimates. Goldman’s economists Santanu Sengupta and Arjun Varma have revised their projection to 6% for the year through March 2025, down from 6.4%. As per the State Bank of India (SBI), the GDP growth is expected to fall below 6.5 per cent for the current financial year 2025 due to the second quarter growth slowing down to 5.4 per cent. Citing risk to the economic outlook and the likelihood of a rate cut by the RBI in February, most analysts now predict (GDP) to grow 6-6.8% in the year ending March 31, lower than the central bank’s forecast of 7.2%.
Corporate stress
Top Indian companies registered their worst quarterly showing in more than four years for the July-September period, raising concerns that a lurking economic slowdown had begun to affect corporate earnings. Nifty earnings are projected to grow by a modest 5% in FY25, according to a report by Motilal Oswal. This marks the first instance of single-digit growth in the past five years.
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“Since August 2024, we have reduced our FY25 estimates for Nifty EPS by 5 per cent, and we now expect a modest 5 per cent growth for Nifty earnings in FY25, the first year of single-digit growth in five years,” the report stated. Between FY20 and FY24, corporate earnings had demonstrated a strong compound annual growth rate (CAGR) of 21%. However, the pace of growth has decelerated significantly in the first half of FY25. During the July-September quarter (2QFY25), earnings for the companies covered contracted by 1% year-on-year (YoY), while Nifty-50 earnings grew by only 4% YoY. This performance represented the weakest earnings growth in eight quarters for the companies covered and 17 quarters for the Nifty-50.
The economy is cooling faster than anticipated, and industry is bearing the brunt. This is likely to delay the revival in private investment as companies await a resumption in consumer spending, ET has written. Markets are likely to feel the chill as corporate performance weakens in a high-interest rate environment.
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Indian wages contracted last quarter for the first time since the pandemic, curbing the economy’s breakneck speed as consumers cut spending and corporate profits slump, Bloomberg reported. Inflation-adjusted employment costs for listed non-financial companies — a proxy for real urban wages — declined 0.5% in July to September from a year ago, according to data from Elara Securities Inc. Figures from others, like Motilal Oswal Financial Services Ltd., also show a steady slowdown in wage growth, alongside a spike in inflation — pointing to financial stress for India’s urban middle class despite optimistic data showing the economy grew more than 8% last fiscal year.
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Consumers are now cutting back on everything from soaps to cars. Some of the country’s biggest companies from Maruti Suzuki Ltd. to consumer bellwether Hindustan Unilever Ltd. have posted weaker earnings recently, saying urban middle class spending has been languishing. About half of companies in the NSE Nifty 50 Index missed consensus estimates in their second quarter earnings, according to data compiled by Bloomberg.
“Slow hiring in technology sector and muted profitability for manufacturers is likely impacting real income and wage growth amid elevated inflation,” said Elara’s economist Garima Kapoor. Growth in inflation-adjusted wage costs for listed Indian firms – a proxy for earnings of urban Indians – has remained below 2% for all the three quarters of 2024, well below the 10-year average of 4.4%, data from Citi showed. As per Citi’s chief India economist Samiran Chakraborty, this as a key factor impacting urban consumption, along with declining savings and tighter rules for personal loans.
The opposition Congress party has said that the GDP growth slowdown in July-Sept quarter is due to “stagnant wages” for crores of workers.
Leading FMCG companies reported a decline in margins in the September quarter on account of higher input costs and food inflation, which ultimately slowed down the pace of urban consumption. Rising prices of commodity inputs such as palm oil, coffee and cocoa were also accentuated and some FMCG firms have hinted at a price hike.
Slowing urban spending over the past three to four months has not only hurt the earnings of largest consumer goods firms, it has raised questions about the structural nature of India’s long-term economic success.
Since the end of the pandemic, India’s economic growth has been driven in large part by urban consumption, however, that now seems to be changing.
However, several economists have said that urban demand in India is stabilising rather than slowing, explaining the recent growth moderation in car and packaged-goods sales as expected adjustments after ‘revenge-shopping’ through the months immediately following Covid-induced shutdowns had caused a consumption boom.
Interest rates
High interest rates are seen to be jeopardising economic growth as the RBI maintains rates to tackle inflation which is largely driven by volatile vegetable prices. India’s inflation rate rose to 6.21% in October, a 14-month high and breaching the Reserve Bank of India’s target range of 2-6%. Economists pushed their forecasts of a rate cut by the central bank in December to early next year, a Reuters poll showed. Inflationary pressures rose with both input and output prices edging up. While cost price inflation rose at its fastest since July, the increase in output prices was the most pronounced in over 11 years. Inflation has weighed on corporates, bringing down margins and driving up prices, as well as consumers who tightened the purse strings.
The RBI is likely to keep the benchmark interest rate unchanged for one more time in its bilateral monetary policy review later in the week as inflation has breached its upper tolerance limit and may also moderate the growth forecast given the disappointing second quarter GDP numbers, experts say. The Reserve Bank Governor-headed six-member Monetary Policy Committee (MPC) is scheduled to meet on December 4 to 6. The decision of the rate-setting panel will be announced on December 6 by Governor Shaktikanta Das.
Dhruv Agarwala, CEO, Housing.com and PropTiger.com, told PTI, “Initially, the sharp rise in inflation seemed to rule out the possibility of a rate cut. However, with growth deceleration becoming a pressing concern, the RBI may still consider a rate cut in the upcoming policy meeting, despite mounting inflationary pressures and a persistently challenging global environment,” he said.
The silver linings
After a challenging first half of financial year (FY) 2025, the corporate earnings outlook is likely to improve in the second half as the government spending, robust Kharif crop and improving rural demand is set to revive, Motilal Oswal said in a report.
The corporate earnings in the second quarter witnessed a subdued picture, particularly weighed down by the commodities sector. Excluding this segment, however, earnings were broadly in line with expectations. The consumption sector witnessed a challenge and emerged as a major weak spot. The BFSI (Banking, Financial Services, and Insurance) space in the second quarter witnessed asset-quality stress. The report points out that the level of government spending has been a critical factor that impacted corporate earnings of the companies.
Flat spending in 1HFY25, along with excess rainfall disrupting demand in rural and semi-urban markets, has led to earnings moderation. However, a reversal of these trends in the latter half of FY25 is expected to fuel recovery, the report added.
A major portion of the Indian economy, 55 per cent, is witnessing an upward trend despite fluctuations, as per a recent report by HSBC Global Research. The report noted that the economy was falling into a moderate track following a period of rapid stock market gains and robust GDP growth. Analyzing 100 growth indicators, it was observed that even though most of them remain positive, the amount of positive indicators has fallen from 65 per cent in the previous quarter, indicating an economic slowdown.
However, indicating the slowdown, it adds, “While a lower proportion of the economy seems to be growing positively compared to a quarter ago (55 per cent vs 65 per cent), the majority of indicators are still positive. And while investment activity (especially construction and public sector led) is holding up, consumption related ones are slowing.”
Staples and essentials are largely bucking the consumption slowdown at mostly double digit volume sales growth which, industry executives say, indicates consumers are not cutting spending on daily household items unlike earlier periods giving hope to the industry that the demand recovery is not too far away. As per Adani Wilmar, Tata Consumer Products, Colgate, LT Foods, Spencer’s Retail and market researchers NielsenIQ and Kantar, volume sales of packaged products in categories such as edible oil, spices, atta, toothpaste, rice, pulses grew in July-September quarter which most of them said will continue in the current October-December quarter, ET has reported recently. In contrast, typically during a slowdown, consumers either downgrade to smaller packs of essentials, or buy more of local brands for lower price or shifts to loose products which impacts the pace of growth which has not happened this time around.
(With inputs from agencies)
