India entering cyclical slowdown: Nomura

On October 17, the stocks of one of India’s leading two- and three- wheeler makers, Bajaj Auto took a double digit-hit after the company management said they are anticipating a weak festival season sales ahead.

Unlike car sales trends, the sales of two- wheelers and tractors are generally considered an indication of the health of the country’s rural economy, as the bulk of sales happen in non-metros and small towns. Is the Bajaj forecast signalling a bigger problem? Is India entering an economic slowdown?

A report from the Japanese equity research firm Nomura, which coincidentally got published the same day, indicates that its proprietary high-frequency economic growth indices suggest that India could be entering into a cyclical growth slowdown. Nomura’s indices show that India’s GDP growth momentum slowed sharply in the July-September 2024 quarter, led primarily by investment, although consumption and external sector indicators are also moderating.

“We see rising downside risks to our GDP growth forecasts, both for FY25 (6.7% YoY) and FY26 (6.8%),” Nomura analysts Sonal Varma and Aurodeep Nandi note in the ‘Asia Insights’ report.

According to Nomura India Coincident Activity Index (NICAI), a composite index covering consumption, investment and the external sector, aggregate NICAI growth slowed to 4.1% YoY (3-month moving average) in August 2024, from 6.5% in June and 7.0% in March, with the preliminary reading for September further lower at 3.0%. The second one, Nomura India Growth Thermometer (NIGHT) indicator which uses NICAI to estimate the sequential growth pulse suggests that sequential momentum in GDP growth is likely to slow sharply during the July-September, with YoY GDP growth likely to be lower than the 6.7% reading in the previous quarter in 2024, below Nomura’s earlier GDP forecast (6.9%) and also RBI estimates (7.0%). The third indicator - Nomura India Composite Leading Index (NICLI) – suggests growth momentum moderating sequentially, thus pointing to a rising risk of a cyclical growth slowdown in the coming quarters.

The NICAI is an aggregation of the weighted average of the three sub-indices – consumption, investment, and external – based on their respective weightings in the GDP basket. While consumption trends look at combined passenger vehicle sales, two-wheeler sales, tractor sales, diesel sales, consumer goods’ industrial production, aviation passenger traffic, cargo traffic, and consumer goods imports, for the investment index, Nomura considers data for capital goods production, medium and heavy commercial vehicle (MHCV) sales, coal, steel, cement, electricity generation, and industrial imports. For the external sector, it combines merchandise exports, services exports, and visitor arrivals.