India’s economy signals lowering consumption

India’s economic activity remained steady in February despite early signs of slowing consumption and concerns over future growth prospects and hawkish monetary policy. Bloomberg’s animal spirits barometer, which measures high-frequency indicators, including credit growth, tax revenues, and unemployment rate, remained unchanged from January when it had slowed down after a pickup in the last month of 2022. Eight high-frequency indicators showed moderating credit growth, weak tax revenues, and a rising unemployment rate, signaling weakening domestic demand as a concern.

While purchasing managers’ surveys showed activity in India’s dominant services sector climbed at the fastest pace in 12 years, manufacturing activity expanded at its slowest in four months but remained above the 50-mark, taking the composite index to 59 from 57.5 in January. However, jobs growth was dampened by a lack of confidence in the business environment. Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence, said that the degree of optimism recorded in February was the lowest for seven months, and some companies doubted demand would remain this resilient.

Exports fell 8.82% in February from a year ago, and imports dropped 8.21%, indicating softening global and domestic demand. Meanwhile, liquidity in the banking system is tightening, and credit growth moderated to 15.52% in February, from 16.33% in January, according to central bank data. The goods and services tax collections, which measure consumption in the economy, fell to 1.49 trillion rupees ($18.1 billion) in February from 1.56 trillion rupees in January, though it was 12% higher from a year ago.

The Reserve Bank of India’s 250 basis point hike in borrowing cost since May could impact economic expansion, and the central bank is expected to raise rates further in its next policy review due April 6, as retail inflation breached the central bank’s target for a second straight month in February. The after-effects of the collapse of Silicon Valley Bank and troubles at Credit Suisse Group AG, along with the risk of a heat wave on India’s rural economy, could also muddy the outlook ahead.