Cautious spending threatens to weaken India's growth

Mumbai

INDIA'S consumers are being tested after helping drive the fastest-growing major economy.

More cautious spending on everything from shampoo to cars and travel threaten to weaken what's been the backbone of the economy, contributing about three-fifths of gross domestic product. The pullback has acted as a drag on growth, which is predicted to have slowed for a fourth consecutive quarter to 6.5 per cent in the three months to March, the weakest pace since mid-2017 and almost on par with China.

While official GDP numbers for the March quarter are due May 31, high-frequency data for services and manufacturing point to activity slowing with industrial production contracting in March for the first time in nearly two years.

Economic sluggishness may persist for a year, according to Credit Suisse Group AG, given high interest rates and stress among India's state-run and shadow banks. A prolonged slowdown would pose a significant challenge to the next government, which is likely to be in place by late May.

"I am concerned about the slowdown in India currently as it pertains to consumption and seems deeper than one can be explained by global factors," author and global investor Ruchir Sharma told Bloomberg's TOPLIVE blog. "It is going to be hard for the Indian market to outperform other emerging markets over the next two to three years as I don't expect any new government to do much more than firefight the slowdown."

This month, Kotak Institutional Equities Ltd cut its forecast for economic growth for the 2020 fiscal year to 6.8 per cent from 7.1 per cent, citing a sharper-than-expected decline in consumer demand. The brokerage isn't alone. The latest average estimate for a 7.2 per cent expansion is down from the 7.5 per cent expected in a Bloomberg poll in September, when the credit crunch among shadow banks first emerged.

The slowing in demand comes at a time when companies too are holding back investments awaiting the outcome of a general election, posing a double-whammy.

The bellwether consumer goods sector has been hard hit, especially given distress in rural India where incomes have been subdued. That's translated into an abrupt slowdown for makers of corner-store staples from toothpaste to shampoo.

Depressed crop prices, a financing squeeze and prospects of weak rainfall have combined to make India's farmers warier of shelling out extra rupees.

Private forecaster Skymet Weather Services Pvt Tuesday said the south-west monsoon, which waters more than half of India's farmland, might be delayed this year, keeping alive the prospects of uncertain rainfall.

From almost 16 per cent in the last three months of 2018, growth in the market for fast moving consumer goods has slowed to 13.6 per cent in the first three months of this year, with sales of essential items in rural areas slowing the most, according to Nielsen. BLOOMBERG