Economy Check: High Frequency Indicators Remain Mixed, Risks To Downside Persist

Amid the ongoing slowdown in the economy, high frequency indicators continue to show mixed signs, and downside risks to growth persist. Despite the government's measures to boost consumption in the union budget, fiscal impulse is limited with any impact expected to kick in only next fiscal.

India's GDP growth is estimated at 6.4% as per the first advance estimates for FY25, presented by the Ministry of Statistics ahead of the budget. GDP growth in the first and second quarter came in at 6.7% and 5.4%, with the second half of the year expected to see a modest uptick in activity. However, high frequency indicators continue to show mixed trends despite the festive season, amid slowing urban consumption, tighter credit and a lower than expected rise in government spending.

Following a moderation in growth during December, manufacturing PMI in January rose to a six-month high of 57.7, led by a rise in new orders. Companies were also more optimistic on future prospects, on the expectations of buoyant underlying demand, favourable economic conditions and marketing efforts, stated the release. However, services PMI saw a loss of growth momentum in January, dropping to the lowest in over two years at 56.5, led by a softer increase in sales and output.

Power consumption, and consumption of diesel and petrol, too, saw easing in growth on a sequential basis, while some high frequency indicators such as domestic air traffic and GST collections saw an uptick.

Retail auto sales grew by 6.6% in January on an annual basis, with two wheelers growing by 4.15%, three wheelers by 6.8%, passenger vehicles by 15.3% and commercial vehicles by 8.2%.

Rural indicators, such as agricultural sowing and production, saw a pick up, signaling resilience in the rural economy, aided by easing inflation. The total kharif foodgrain production for 2024-25, as per the first advance estimates, is projected at 1,647.05 lakh metric tonnes — a record high. While, area sown under rabi crops in 2024-25 grew by 9.6% to 661 lakh hectare, until Jan. 31, 2025, as per the department of agriculture.

Even with higher fiscal spending and ongoing strength in industrial indicators, the growth backdrop in India remains mixed, stated a research note by Barclays. This reflects the nature of slowdown in India, which is largely concentrated around slower consumption, discretionary spending, and credit tightening, said Rahul Bajoria, chief India economist at BofA. The budget has taken a step to address these issues, with a large tax cut, but its impact will show up from next fiscal, he added.

This growing distance between supply side indicators and demand side indicators should, over time, result in weaker import demand and inflationary pressures, despite a weaker exchange rate, going forward, according to Bajoria.

GDP growth in fiscal 2026, too, is expected to range between 6.3-6.8%, as per the economic survey, with the budget assuming a nominal GDP growth rate of 10.1%.

The lower fiscal deficit in fiscal 2026 is being achieved at the expense of moderation in capex growth and expectations of elevated dividends from RBI and other financial institutions pegged at Rs 2.56 lakh crore in FY26, stated a research note by Teresa John, economist at Nirmal Bang Institutional Equities.

This leaves little room for upside surprise in dividends in FY26, which may limit the room for a further fiscal stimulus, should the need arise later in the year, she said.

Fiscal impulse — a measure of the impact of government spending and taxation on the economy — also appears limited. "We see the budget as largely neutral for growth," stated a research note by Nomura. The tax cuts are aimed at low- to middle-income households, who have a higher propensity to consume, but for the growth impulse to materialise, it requires that any shortfall on tax revenue not be offset by expenditure compression, it explained.

Cyclical slowdown in growth, along with moderating inflation, should pave the way for rate cuts, INR depreciation notwithstanding, John said.

The Monetary Policy Committee cut rates by 25 basis points on Friday. While John expects further cuts of 50 basis points, further cut in GDP growth forecasts could mean the possibility of 100 basis points of rate cuts cumulatively, she said.