Whose truth, whose interpretation, who suffers? Is there a consumption slowdown in India?

India’s consumer economy is navigating turbulent times, facing both structural and immediate pressures. Despite optimistic GDP forecasts from the Reserve Bank of India (RBI), the broader reality signals an increasingly cautious consumer base — a shift that could reflect a deeper, lasting change in spending behaviour. Since the post-Covid-19 K-shaped recovery, high-income households have driven discretionary spending, widening disparities as inflation and stagnant income growth now weigh heavily on lower-income groups.

Private consumption, historically the backbone of India’s GDP, shows troubling signs of deceleration, dropping from 58.1% of GDP in FY22 to 55.8% in FY24. While it previously underpinned an 8.2% GDP growth last fiscal year, the current trend seems unsustainable without broader consumer confidence.

India’s consumption economy seems to be at a crossroads, marked by shifting long-term spending habits and a significant decline in private expenditure this year. Over the past decade, rising incomes have led consumers to allocate a greater portion of their budgets to other items like electronics and gadgets, often at the expense of essential goods like food.

As we are in the Diwali season — a time traditionally characterised by increased consumer spending — there are signs of a lull. Air travel, another gauge of discretionary spending, has also seen a downturn, while the FMCG sector, generally resilient even in slowdowns, reports a shift toward essential items as inflation dampens demand. High-margin items like packaged foods and personal care products have seen declining sales. Even coffee, which surged post-Covid-19, is now facing waning demand. Retailers may anticipate a short-term boost in sales, yet the prevailing trend indicates that this seasonal uplift may only mask deeper issues within the economy. Average FMCG inventory levels, measured in days to sell, have more than doubled to over 35 days, indicating a significant slowdown in consumer demand for essentials. The situation is even more acute in the auto industry, where small cars are struggling to sell and inventory levels have reached a historic high of 80-85 days, leaving dealers with 790,000 vehicles worth Rs 800 billion, according to the Federation of Automobile Dealers Associations.

Consumption patterns are increasingly driven by aspiration. However, in small-town India, purchases tend to focus on lower-ticket items, often leaning towards regional brands or even unbranded products. Rural areas, though resilient, lack the purchasing power of urban centres, highlighting the uneven nature of India’s growth. Sectors reliant on lower-income consumers, such as FMCG and microfinance, are feeling the pinch. Cooling demand for FMCG products suggests consumers are focusing on essential spending as costs rise.

More concerning is a rise in delinquencies in microfinance — key for low-income households — pointing to increased financial distress among vulnerable populations. Paired with a surge in unsecured lending, which recently climbed over 20%, lower- and middle-income households in India are walking a financial tightrope.

Incremental credit growth is also significantly weaker than in previous years, raising questions about whether the slowdown is cyclical or symptomatic of deeper issues. Government spending, while now beginning to show signs of revival, was notably sluggish during the first quarter of the fiscal year. Monetary conditions have also been constrained, with banks reducing lending since March-April to meet regulatory loan-deposit ratio targets. This tightening has triggered a cycle where slowing credit leads to lower deposit growth, further constricting economic momentum.

Though the RBI remains optimistic, pointing to accommodative monetary policy and infrastructure investment as stabilisers, rising inflation and declining manufacturing activity have sparked scepticism about its 7.2% growth projection. Earlier this year, RBI Deputy Governor Michael Patra noted a sharp decline in corporate sector borrowing — from nearly 9% of GDP in 2007-2008 to under 1% today — citing rising internal accruals and subdued capacity expansion. This trend could highlight cautious corporate sentiment on new investments, suggesting they foresee weaker growth prospects than official figures may suggest. If GDP growth is indeed lower than expected, the government’s declining expenditure-to-GDP ratio could further strain demand conditions.

Economic stress is evident in both industrial output and consumer behaviour. The Index of Industrial Production (IIP) recorded just 3% year-on-year growth in August, down from 5.5% last year, with a 0.1% contraction that month. Inflation, lingering above the RBI’s comfort range at 6.4% in September, continues to erode purchasing power.

Government capital expenditure (capex) budgets have risen, yet the impact is dulled by decreased capex from public sector enterprises, with Union and enterprise spending falling from 4.7% to 3.9% of GDP. Meanwhile, manufacturing employment has taken a hit as low-skilled workers migrate back to agriculture, taking on lower-wage jobs. This shift has impacted urban income levels, straining consumer confidence in cities.

The policy environment is complex. The recent inclusion of Indian sovereign bonds in JP Morgan’s Government Bond Index-Emerging Markets might reduce borrowing costs, but fiscal expansion could face resistance from foreign bondholders who often prefer fiscal restraint. Political factors could add further uncertainty, with Assembly elections ahead.

Broad economic indicators offer little reassurance. The IT and IT-enabled services sector, a driver of urban employment and stock market stability, now emphasises efficiency over expansion. Facing global pressures and the shift to technologies like AI, growth in this sector may stagnate, potentially dampening urban consumption and market sentiment. Weak IT growth, in this and next quarters, could undermine consumption in cities, where IT earnings typically support spending in housing, retail, and services.

While high food inflation is commonly attributed to supply-side issues, demand-side factors also play a role. In the past four years, 14 states have implemented income transfer schemes for low-income households, benefiting nearly 20% of adult women. These transfers, amounting to approximately Rs 2 lakh-crore annually, support lower-income purchasing power, which can inadvertently drive up demand and pressure food prices.

As India stands at this economic crossroads, the upcoming second-quarter GDP estimates and the RBI’s December policy meeting will be crucial. Policymakers must now balance growth stimulus with inflation control, and reconcile fiscal prudence with the need for economic support. If structural issues go unaddressed, India’s consumption-driven growth model may need a strategic overhaul to remain viable in the long run.

(Srinath Sridharan is a policy researcher and corporate adviser. X: @ssmumbai.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.