Shrinking middle class in India?-Data show Growing Middle class!

 Key Findings from the SBI Eco wrap Report(25th Oct 2024)

• Income Inequality is Decreasing: The report uses the Gini coefficient to demonstrate a decline in income inequality in India. The shift is most noticeable in lower income brackets, with a substantial portion moving into higher income groups. This aligns with a rightward shift in the income distribution curve.

• ITR Filings are Increasing: The number of ITR filings has significantly increased, indicating a growing tax base. This growth is particularly evident in previously untapped states (Uttar Pradesh, Bihar, etc.), suggesting broader economic participation.Below is the chart which shows No. of tax payers in Different income Group in AY2014 and AY2024 which clearly shows that the bulk have moved up from Rs.1.5lac to Rs5 lac to Rs.2.5 lac to Rs.10 lac(highlighted in yellow colour)

• Growth in 'Crorepati' Taxpayers: The number of taxpayers earning over ₹1 crore has increased significantly, highlighting the expansion of India's high-income segment.

• Female Labor Force Participation is Rising: The report documents a notable increase in women's participation in the workforce, notably in agriculture, which is particularly striking.

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  courtesy :SBI Eco wrap Oct 24 report
  The report highlights significant income growth, particularly among lower and middle-income groups. While the increase in ITR filings and the shift in the income distribution curve strongly suggest rising incomes , it shows the potential for spending with good disposable incomes.Whether it is spent or saved in MFs or Stock market needs to be analysed before prematurely jumping to say that middle class is shrinking, and that too without any basis.

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  courtesy:SBI Eco wrap Oct 2024-self explanatory which shows that Income disparity coverage is the improvement in disparity in AY24 over AY15 clearly demonstrating that the income of the middle class has moved up.
  

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• SBI Eco wrap published in Oct 24 clearly establishes that Indian middle class is widening on the basis of income shown in personal ITR filings in Fy23-24 which is based on hard facts and not on conjectures. Moreover SIPs in Mutual Funds are also growing at a faster clip and all this read together show that middle class is only growing. Any skew in FMCG consumption may get straightened in a quarter or two if it is real.Many FMCG products are sourced thro e Commerce platforms and so a comprehensive report is required to understand the slow down in Private consumption.RBI restrictions on Credit card spending and unsecured personal loans might have also dampened the consumption a little bit. Some may be waiting on the wings for RBI to cut interest rates to take up Housing loans or contract any additional loans. Loan Growth rate of 11.5% in middle of Oct 24 may be low compared to 19% growth in May 24 but still high compared to 2021 period.

  
  "Mutual funds, particularly through SIPs (Systematic Investment Plans), have become increasingly popular in India. In August 2024, the number of folios increased by 3.16%, reaching 14.3 crore." writes India Today-11th Sep 2024.
  
  
  

It further goes on to say"The journey of the industry has been impressive—it took 50 years to build Rs 10 lakh crore in AUM from 1963 to 2013, but in just six more years, it reached Rs 23 lakh crore by 2019. As of August 2024, the AUM has tripled to Rs 66.70 lakh crore, demonstrating strong investor confidence.

Hitesh Thakkar, Acting CEO of ITI Mutual Fund, highlighted the growth,and said, "Mutual fund investment is a cost-effective, transparent option for retail investors to participate in India's growth."

According to data released by Groww, some interesting trends have emerged in August 2024.

There has been a 200 basis point (BPS) increase in inflows into large-cap funds compared to small and mid-cap funds. However, inflows into sectoral and thematic funds decreased by 15% compared to the previous month, indicating a shift in investor interest."

The lastest SIP nos in Sep 2024 show that the SIP inflows are above Rs24500 cr, thereby sustaining the momentum and growth.In a media statement, Venkat Chalasani, Chief Executive, AMFI said, "The steadily increasing SIP contribution of Rs 24,508.73 crore in September 2024 highlights the shifting investor sentiment towards disciplined and long-term wealth accumulation."

With respect to increase of SIP numbers, Groww said that it shows growing financial awareness among India's youth. "They are using disciplined investment methods to manage market fluctuations and build long-term wealth. SIPs provide a structured way to invest, helping individuals benefit from compounding over time," it said. According to the Groww, they added more than 1.58 million new SIPs (around 1/4th of the total) in September 2024.

Considering the above data points, there is no evidence for shrinking of middle class and on the contrary, there is enough proven data and information by research teams like that of SBI, which establish the widening of middle class.

CRISIL and Ministry of Finance outline some factors negatively impacting India's GDP growth

Some factors negatively impacting India's GDP growth

 Forecasting private consumption in India until March 2025 requires careful consideration of several factors.:

Positive Factors:

• Rural Demand Strength: Rural consumption shows signs of revival, boosted by a healthy kharif harvest and increased FMCG sales, along with three-wheeler and tractor sales. This suggests strong rural income and spending.
• Festive Season: The upcoming festive season is expected to positively impact urban consumer demand.
• Government Spending: Increased government spending is anticipated to boost investment activity.
• Stable External Sector: A stable external sector provides further support to economic growth.

Negative Factors:

• Moderation in Urban Demand: Urban demand shows signs of moderation as per Finance Ministry, with softening consumer sentiment and limited footfall. This is a significant concern, as urban consumption constitutes a larger portion of the overall economy.
• Inflation: While inflation appears well-contained, barring a few vegetable prices, any unexpected price spikes could negatively affect consumer spending.
• Geopolitical and Geoeconomic Uncertainty: Global uncertainties could negatively impact household sentiments and spending.
• AI-Driven Job Displacement: Early signs of AI displacing workers could negatively impact employment and consumer confidence.
• Softening Manufacturing Momentum: The manufacturing PMI decline suggests slowing momentum in this key sector.

Forecast Considerations:

A precise forecast is impossible without more detailed data (like specific consumption figures, income data, detailed inflation forecasts, etc.). However, considering the above, a reasonable forecast would likely show:

• Moderate Growth: Given the conflicting signals, private consumption growth until March 2025 will probably be moderate, likely lower than previous years. The strength of rural demand will partially offset the weakness in urban areas.
• Potential for Disappointment: The reliance on the festive season to boost urban consumption carries some risk. If this fails to materialize significantly, overall private consumption could underperform expectations.
• Inflation as a Key Variable: Inflation's behavior will be crucial. If inflation remains controlled, the forecast is more likely to be positive. However, significant price increases could dampen consumer spending.

• The CRISIL data highlights paint a picture of slowing industrial growth in India during August 2024, which would necessitate a downward revision of any existing economic forecast. Several key points need to be incorporated:

  • Contracting IIP: The Index of Industrial Production (IIP) contracted, signaling overall industrial slowdown. This directly impacts GDP growth projections.

  • Weakness Across Sectors: The contraction wasn't limited to one sector; it was broad-based, affecting primary goods (mining and electricity heavily impacted), capital goods (investment-related), infrastructure and construction, and intermediate goods. Consumer non-durables also showed very weak growth. This widespread weakness suggests a more significant economic slowdown than a sectoral issue.

  • Export Slowdown: The decline in merchandise exports further dampens the growth outlook. Reduced export demand often indicates weakening global economic conditions, potentially affecting India's economy further.

  • Consumption Weakness: The continued contraction in consumer non-durables for the third consecutive month is alarming. This suggests weakening consumer confidence and spending power, factors that would normally be expected to be more robust. This is a serious concern given this is the third consecutive month of declines.

  To update the forecast:

  To incorporate this information effectively, an updated economic forecast needs to:

  1. Lower GDP Growth Projections: The broad-based industrial slowdown necessitates a reduction in projected GDP growth for the relevant quarter and the remainder of the fiscal year. The magnitude of the reduction will depend on the weight of the affected sectors in the overall economy and how much of that weakness persists.

  2. Adjust Sectoral Forecasts: Specific growth rates for various sectors (mining, manufacturing, construction, etc.) should be revised downward to reflect the CRISIL data.

  3. Consider Consumer Spending: Given the persistent weakness in consumer non-durable goods, the forecast should adjust for dampened consumer spending.

  4. Assess External Factors: The export slowdown should be considered within a broader global economic context to determine the extent of its impact on India's economy.

  5. Factor in Uncertainty: The data points to uncertainty in the Indian economy. The forecast should include a wider range of possible outcomes to reflect this uncertainty.

  In short: The CRISIL data indicates a more pessimistic outlook than previously anticipated. A revised forecast must reflect this slowdown across multiple sectors and the weakness in both investment and consumption. The degree of the negative adjustment will require further economic data and analysis, but a reduction in growth projections is certain based on this information.

• Based on the September 2024 Monthly Economic Review, India's economic forecast and private consumption outlook until March 2025 (FY25) present a mixed picture:

  Economic Forecast:

  • Optimistic Aspects: The review underscores a healthy kharif harvest, robust services sector performance, and continued strength in rural demand fueled by good monsoons and government initiatives. The external sector also remains stable, with rising capital inflows and comfortable forex reserves. Manufacturing shows some softening but remains in expansionary territory according to several indicators.

  • Concerns: Urban demand displays moderation due to softening consumer sentiments, limited footfall (potentially due to weather), and seasonal purchasing patterns. While inflation is currently well-contained, the erratic monsoon impacted agricultural supplies, leading to a temporary rise in food inflation in September. Geopolitical uncertainties and potential global economic slowdowns pose risks.

  Private Consumption Forecast:

  • Rural Consumption: Remains strong due to healthy agricultural output, government support, and increased FMCG sales. This sector is expected to continue its positive trajectory.

  • Urban Consumption: The outlook for urban consumption is more uncertain. While festive season spending is expected to provide a boost, the underlying trend shows moderation due to softening consumer sentiment and limited footfall. This sector's performance will be crucial in determining overall consumption growth.

  • Overall Consumption: A moderate growth in overall private consumption is likely until March 2025, with rural demand offsetting the weakness in urban areas. However, the extent of urban weakness and the success of the expected festive season boost will significantly impact the final figures. The uncertainty surrounding the external environment adds to this uncertainty.

  Overall Economic Forecast:

  The report anticipates an economic growth rate between 6.5% and 7.0% for FY25. This forecast reflects a balance between the positive aspects mentioned earlier (rural demand, stable external sector) and the concerns about urban weakness and global uncertainty. The actual outcome will hinge significantly on the strength of the urban economy and Capital expenditure fillip as budgeted and the broader global economic environment.

  Important Caveats:

  • The review acknowledges inherent uncertainties in the forecast, citing geopolitical factors, global economic slowdowns, and potential inflation pressures.
  • The forecast is based on data available as of September 2024 especially some of the good macro-economic indicators like first half sales of Vehicle sales, GST collections, excellent direct tax collections, manageable  Current account deficit to GDP ratio etc Unexpected changes in global commodity prices or unforeseen domestic events, could significantly alter the projections and if they remain within a band of normal volatility, the resilience of the economy will be able to take care of it.
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  • In summary, a cautiously optimistic outlook prevails. While positive factors suggest continued economic growth, several downside risks exist, potentially leading to lower-than-expected growth for FY25. The actual outcome will depend on numerous economic and geopolitical variables that aren't fully predictable but India's momentum is slightly tilted in favour of growth between 6.7% to 7% for the year

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Is India Growth slowing? vehicle sales dip in Sep24

 Is India Growth slowing? vehicle sales dip in  Sep24

H1 FY25 vs. September'24 Performance

H1 FY25 (YoY Growth)

• Overall: +6.55%
• 2W: +9.08% - This growth reflects a strong demand for two-wheelers, likely driven by factors like rising fuel prices and increasing urban mobility needs.
• 3W: +7.58% - The continued growth in the three-wheeler segment indicates a positive trend in the commercial vehicle market.
• PV: +1.07% - Passenger vehicles (PV) saw a modest growth, suggesting that consumer sentiment towards larger purchases might be cautiously optimistic.

September'24 (YoY Decline)

• Overall: -9.26% - This decline is mainly attributed to the heavy monsoon rains, impacting the overall market sentiment.
• 2W: -8.51% - The decline in two-wheeler sales indicates a temporary slowdown in demand.
• PV: -18.81% - The significant drop in passenger vehicle sales is concerning, suggesting a cautious approach by consumers towards larger purchases.
• CV: -10.45% - Commercial vehicles faced a decline, likely due to the slowdown in economic activities.

Exceptions (YoY Growth)

• CV: -0.65% - While the overall CV market experienced a decline, specific segments like utility vehicles showed a slight positive trend, indicating that particular segments might be performing better than others.
• Trac: -8.82% - The decline in tractors is likely influenced by factors such as seasonal variations in agricultural activities and the availability of credit.
• 3W (Sept): +0.66% - Despite the overall decline, three-wheelers performed well in September, potentially due to increased demand in specific regions or for certain applications.
• Trac (Sept): +14.69% - The significant growth in tractor sales in September is encouraging, suggesting a potential uptick in agricultural activities.
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  Two-Wheeler Segment Deep Dive

  Declining Sales

  2W sales declined 10% MoM and 8.5% YoY in Sep 24 due to low consumer sentiment and reduced walk-ins. This decline is particularly concerning given the strong growth observed in previous quarters.

  Contributing Factors

  Seasonal factors (Shraddh, Pitrapaksha), heavy rains, and a subdued market environment further impacted demand. The industry is closely watching the impact of global economic uncertainties on consumer confidence and purchasing power.

  Impact

  Delayed purchases and a challenging market for two-wheeler dealers. The decline in sales is putting pressure on dealer margins and inventory management. The industry expects a cautious approach to inventory replenishment in the coming months.

  Near-Term and Overall Outlook

  Positive Factors

  Festive season (Navratri and Diwali) and favorable agricultural conditions are expected to boost demand.

  Negative Factors

  High PV inventory and potential dealer profitability impact due to discounts.

  Overall Outlook

  Cautiously optimistic, with the festive season offering a chance for recovery if inventory is managed strategically.

Indian Economy: Bag of mixed signs!

 

August IIP Records Negative Growth of 0.1%

The latest data shows that India's Index of Industrial Production (IIP) contracted by 0.1% in August, indicating a slowdown in industrial activity. This underscores the need for policymakers to closely monitor and address the factors contributing to this decline. The contraction in the IIP can be attributed to a confluence of factors, including subdued demand, supply chain disruptions, and rising input costs. While the government has taken steps to stimulate growth, such as tax cuts and infrastructure investments, the effectiveness of these measures will be closely watched in the coming months. The slowdown in industrial activity is a cause for concern, as it could impact overall economic growth and employment. The government is expected to continue monitoring the situation closely and take further steps to support industrial growth as needed.

September PMI Stands at Robust 56.5

In contrast to the IIP data, India's Manufacturing Purchasing Managers' Index (PMI) remained in expansionary territory, reaching 56.5 in September. But this is less than 57.5 registered in Aug 2024.This suggests that the manufacturing sector continues to show resilience and a positive outlook. The PMI reading above 50 indicates growth, and the strong reading of 56.5 points to robust expansion in the manufacturing sector. This growth can be attributed to several factors, including increasing demand, a revival in global trade, and government initiatives to support manufacturing activities. Despite the challenges posed by global economic uncertainties and supply chain disruptions, the manufacturing sector in India continues to demonstrate strong momentum. This positive trend is likely to have a positive impact on overall economic growth and employment in the country.

GST Collections Up Modestly by 6.5% in September

The Goods and Services Tax (GST) collections in September saw a modest increase of 6.5% compared to the previous year. While this growth is positive, the relatively low figure highlights the need for further measures to boost economic activity and tax revenue.

This increase in GST collections can be attributed to a combination of factors, including a gradual recovery in consumer spending, improved compliance, and government initiatives to encourage tax payments. However, the moderate growth indicates that economic recovery is still underway and that the full impact of the government's stimulus measures is yet to be realized.

The government is expected to closely monitor the GST collections in the coming months to assess the effectiveness of its policies and to identify any potential challenges or opportunities. The government may consider further measures to stimulate economic activity, such as tax cuts, subsidies, or infrastructure investments, to encourage businesses and consumers to spend more and contribute to higher tax revenue.

The increase in GST collections is a positive sign for the Indian economy, but it is crucial to maintain this momentum and to take further steps to address the underlying challenges hindering economic growth. The government's focus on improving compliance and streamlining the GST system is expected to play a significant role in boosting tax revenue and supporting economic recovery.

Indian Exports Remain Flat Year-Over-Year

India's exports have remained stagnant, with no significant year-over-year growth. This underscores the challenges faced by Indian businesses in maintaining their competitive edge in global markets, and the need for targeted policies to support export-oriented industries. While factors such as global economic uncertainty and trade tensions have contributed to the slowdown, domestic issues like logistical bottlenecks, high input costs, and a lack of access to financing have also played a role. This stagnation in exports raises concerns about the country's ability to generate foreign exchange and create jobs. The government is actively working on addressing these challenges by implementing measures to improve infrastructure, streamline customs processes, and provide financial incentives to exporters. However, significant efforts are required to create a more conducive environment for export-oriented industries, including fostering innovation, upgrading skills, and facilitating access to global markets. The government's focus on developing new export markets, particularly in emerging economies, could provide a much-needed boost to India's export performance. Additionally, promoting the adoption of digital technologies and e-commerce can help Indian businesses reach new customers and enhance their competitiveness.

Imports Decline in September 2024

In September 2024, India's imports have shown a decline, potentially indicating a slowdown in domestic demand or a shift in trade patterns. This trend, coupled with the flat export performance, suggests a need for a comprehensive review of India's trade policies and strategies.

The decline in imports could be attributed to several factors, including a weakening rupee, which makes imported goods more expensive, and a decrease in consumer spending as economic uncertainties persist. Additionally, businesses may be adjusting their inventory levels in response to changing market conditions.

While a decline in imports might initially appear beneficial for the trade balance, it could also signal a slowdown in economic activity. If the decline is driven by weak domestic demand, it could lead to reduced investment and job creation.

To address these challenges, the government should consider strategies to boost domestic demand, such as tax cuts or infrastructure investments, and to support businesses facing difficulties in accessing financing. It is also crucial to explore new export markets and to promote the adoption of digital technologies to enhance competitiveness.

CPI Inflation rate has gone up to 5.49% YOY above the RBI comfort level of 4% even though it is within the band of  4-6%.Food prices have gone up mainly because of heavy monsoon rains.

The above set of factors have a negative tone and this may impact Q2 GDP growth.

But for this to come out we may have to wait till Nov30th 2024.