Insights from an Urban Market Observer
As I walk through the bustling streets of India’s metropolises, I am surrounded by the vibrant sounds, colours and aromas of a nation in transition. The question on everyone’s mind, including CNBC’s Inside India newsletter: Can a consumption boom save India’s slowing economy? As an Urban Market Observer, I would like to offer my perspective on this important issue..
The Consumption Conundrum
India’s economic growth is slowing, with GDP growth slowing from 8% in 2018 to 5% in 2020. The main factors behind this slowdown have been falling investment and sluggish consumption growth. However, with the government’s efforts to boost consumer demand, there are glimmers of hope that a consumption boom could be the catalyst for an economic revival.
Rural revival
The rural economy, which accounts for about 50% of India’s consumption, is showing signs of revival. Government initiatives, such as the PM-KISAN scheme, which provides direct income support to farmers, and increased allocation for rural development in the Union Budget, are expected to boost rural demand. This, in turn, could lead to increased consumption of consumer durables, agri-inputs and other essential goods.
Rising urban consumption
The urban economy, driven by a growing middle class, is also poised to increase consumption. Easing credit conditions, falling interest rates and increased government spending on infrastructure projects are likely to boost consumer confidence and spending. The growth of e-commerce, digital payments and increasing penetration of mobile phones and internet services will further boost urban consumption.
Key areas to watch
Some of the key areas that could lead to a consumption boom are:
Automobiles: With the government’s focus on electric vehicles and an expected revival in rural demand, the auto sector is likely to gain momentum.
Consumer durables: Increased consumer spending on electronics, appliances and other durables is expected to fuel growth in this sector.
Fast-moving consumer goods (FMCG): Modern retail, e-commerce and rising demand for packaged food and beverages will drive the FMCG sector.
Real estate: Government initiatives to promote affordable housing and the expected reduction in interest rates could lead to a revival in the real estate sector.
Challenges and Conclusion
While the prospects for a consumption boom are promising, there are challenges that need to be addressed. These include:
Cash generation: The economy needs to generate more jobs to sustain consumption growth.
Cash revival: The government needs to attract more investment, both domestic and foreign, to boost economic growth.
Monetary policy: The Reserve Bank of India (RBI) needs to maintain an accommodative monetary policy stance to support growth.
In conclusion, a consumption boom, driven by both rural and urban demand, can certainly provide a much-needed boost to India’s sluggish economy. However, it is important to address the underlying challenges and ensure that growth is sustainable and inclusive. As an urban market observer, I am cautiously optimistic about the prospects for a consumption-led economic revival in India.
This report is excerpted from this week’s CNBC “Inside India” newsletter, which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its rise. Like what you see? You can subscribe here.
The Big Story
India’s first budget under Prime Minister Narendra Modi’s current government was highly anticipated as the country grapples with a slowing economy, a falling rupee and global macroeconomic headwinds.
The government’s message was subtle, yet clear: the middle class will have to spend more to boost corporate earnings and boost the economy.
In a one-two punch, India’s Finance Minister Nirmala Sitharaman abolished taxes for those earning up to 1.2 million Indian rupees ($13,694) a year, up from the previous threshold of 700,000 Indian rupees.
The move is expected to benefit 10 million more taxpayers whose savings can be used to buy goods and services or invest. This means a reduction of 1 trillion Indian rupees in annual treasury revenue.
Consumption levels in India have nearly tripled to 200 trillion Indian rupees in the last decade, with the country’s population increasing to 294.3 million households. The sector now accounts for about 60% of India’s economy – making it a top growth driver.
Upasana Chachra, chief India economist at Morgan Stanley, describes consumption as “one of the key pillars of the Indian economy.”
“There is no doubt that it plays a significant role in providing stability to final demand,” he told CNBC’s Inside India.
Consumption cracks
However, the government’s focus on boosting consumption – rather than infrastructure development, which it has historically focused on – comes in response to deep cracks in consumer spending.
Barring the luxury market and segments catering to the rural population, consumption levels have fallen across all sectors as India’s urban dwellers – who reached 522.9 million by 2023 – have cut back on spending.
These factors, highlighted in a recent report by market research consultancy Kantar, include rising inflation and stagnant wages.
Companies ranging from supermarket chains to automakers are struggling. Many of India’s biggest companies, such as Hindustan Unilever
, Maruti Suzuki
and Reliance Retail – the retail arm of Reliance Industries
– reported revenue declines and weak earnings last year due to a drop in urban demand.
Shortfalls in household spending also bode poorly for foreign companies competing for a share of India's much-debated future growth.
Cyclical slowdown
The slowdown in India's consumer spending is partly due to a "cyclical slowdown in consumption", as households have cut spending to save more or service loans during the post-Covid-19 spending boom, says Dhiraj Nim, foreign exchange strategist and economist at ANZ Bank.
"Naturally, consumption will be weak in this part of the cycle. "So, we don't need to worry too much because there are policy measures to address this, such as a rate cut by the RBI," Nim told CNBC's Inside India. India's central bank is expected to cut interest rates in its first policy meeting as governor on February 7, with Sanjay Malhotra as its new governor.
Against this backdrop, Nim says the government's tax cuts "will not significantly boost GDP growth."
Nim estimates that households have a marginal propensity to consume (MPC) of 0.6 to 0.7, meaning that despite a tax cut of Rs 1 trillion, their spending will only increase by Rs 600-700 billion. The MPC captures an individual's willingness to spend for every additional dollar of income. A reading of 0.6 or 0.7 suggests that only 60%-70% of every dollar earned will be spent.
Fiscal By reducing the deficit ratio, this tax break will also be offset by a 0.4 percentage point increase in the government's regular spending, which "can offset any increase from the tax break," Nim said.
In his view, a more effective approach would be to provide "broader relief to the economy", such as by reducing fuel prices or adopting measures to reduce inflation while simultaneously raising incomes. Nim added that such measures would reinforce the high costs that consumers are facing across income levels.
Is consumption growth enough?
The sheer size of consumption's contribution to India's GDP is reason enough to grab the government's attention. However, with India's real GDP growth rate expected to slow to a four-year low of 6.4% in the current fiscal year ending in March, experts are calling for other measures to avert a recession.
Referring to economic policies in other countries such as China, Morgan Stanley’s Chachra noted that government capital expenditure (CAPEX) – along with consumption – could boost growth through the younger generation. This would include investment in aspects such as job creation or urban development, which would benefit India’s increasingly educated and ambitious millennial population.
“Capex is more than just a driver of GDP growth. When capex increases and jobs are created, income levels will also rise. It will ensure that consumption growth is also sustainable,” Chachra explained.
More than 3% of GDP has been allocated for capex for India’s fiscal year starting in April. Proposed initiatives include funding to boost foreign direct investment flows and infrastructure and redevelopment initiatives in cities, which were included in the recent budget.
The hope is that these initiatives will now work together to create jobs, which will improve productivity and wages. If implemented well, this long-term process could stimulate urban consumption – and spur much-needed economic growth.
Need to know
The Reserve Bank of India is likely to cut interest rates. Economists expect India's central bank to announce a 25-basis-point cut in its repo rate during its policy meeting on Friday. If the bank cuts rates, it will be the first cut in nearly five years. Investors will also be watching statements from RBI Governor Sanjay Malhotra, who took over in December, to assess the bank's monetary policy direction.
Exit polls suggest that the Bharatiya Janata Party will win the Delhi assembly elections. If Indian Prime Minister Narendra Modi's BJP forms the government in the national capital, it will be the first time the party has done so in 27 years. The incumbent Aam Aadmi Party has dismissed exit polls, questioning their accuracy.
India's budget has prioritized reducing the budget deficit. Finance Minister Nirmala Sitharaman announced on Saturday that the Indian government is targeting a fiscal deficit of 4.4% of gross domestic product for the financial year 2025-2026. This target is down from the 4.8% deficit set in the current year and a peak of over 9% during the 2020-2021 financial year. By switching from deficit to debt-to-GDP in the next financial year, the government also said it plans to reduce its debt level to 50% of GDP by March 31, 2031.
US President Donald Trump has invited Indian Prime Minister Narendra Modi for an official visit. The White House announced the invitation on Monday, with the visit scheduled for the week of February 10, the same day the US deported illegal Indian migrants to the country. Modi spoke to Trump on the phone on January 27, during which the leaders discussed bilateral relations and trade ties. India is also trying to avoid the US tariffs imposed by Trump on Mexico, Canada and China so far.
Volkswagen has sued the Indian government over its $1.4 billion tax demand. In September, India issued a $1.4 billion tax notice to Volkswagen, saying the German automaker paid an underpayment of duty of 5-15% by incorrectly classifying imports of car components as “individual parts” from separate shipments rather than “fully assembled units”, which would have led to a levy of 30-35%. In its filing reviewed by Reuters, Volkswagen said the tax dispute could jeopardize its $1.5 billion investment in India.
What happened in the markets?
Indian stock markets traded mixed last week, after showing signs of a bullish trend last week. Nifty 50
The index closed at 23,508.40 points for the week ended January 31, up 1.8% from the previous week.
The benchmark 10-year Indian government bond yield touched 6.78%.
This week on CNBC TV, Anand Gupta, chief portfolio manager at Allianz Global, said global geopolitics is “playing to India’s advantage”, which is least affected by the risks of a trade war triggered by Trump’s tariffs. In this context, Gupta mentioned the growth in electronics manufacturing and the shift away from China during Trump’s first term.
Meanwhile, HSBC’s chief India economist Pranjul Bhandari said the Indian government is “trying to do a lot of things” with its 2025 budget, namely “reducing the fiscal deficit, giving a big boost to consumption and keeping its capital spending in check”. However, Bhandari said that “something has to give” in those ambitious targets, adding that if the New Delhi administration wants to meet its deficit target, it will not be able to give a big boost to the economy.
What’s coming up next week?
Consumer confidence index reports for India, the US and China will be in focus next week. Investors will be watching to see if inflation is coming under control in India and the US, while China will be on the lookout for signs of deflation.
February 7: India interest rate decision, US non-farm payrolls for January, Michigan consumer sentiment preliminary reading for February
February 9: China consumer price index for January
February 12: India consumer price index for January, US consumer price index for January
February 13: US producer price index for January, UK gross domestic product for the fourth quarter
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