India's consumption slowdown: A temporary dip or deeper concern?

Stagnating wages, derivative losses, and rising debt burdens-India's consumption story grapples with multiple challenges

In recent weeks, a slowdown in private consumption has dominated headlines. At a time when concrete signs of a revival in private capex cycle are yet to emerge, this is worrying. However, it is important to understand the factors underpinning the consumption slowdown for its proper diagnosis.

 

In Q2 of 2024-25, the sales growth of top 10 fast-moving consumer goods (FMCG) companies by market capitalisation slowed to 4.3 per cent from 6.1 per cent in the previous quarter, raising serious concerns about weakening urban consumption. This was later confirmed by a slowdown in private final consumption expenditure (PFCE), which grew by 6 per cent in Q2 of 2024-25, compared to 7.4 per cent in the previous quarter.

 

The slowdown in private consumption has been underway for some time now. It started eight quarters ago in Q3 of 2022-23 when year-on-year (y-o-y) growth in PFCE dropped to 1.8 per cent. The average PFCE growth moderated to 4.1 per cent over the eight quarters from Q3 of 2022-23 to Q2 of 2024-25, a sharp decline from the robust average growth of 10.5 per cent in the preceding eight quarters (Q3 of 2020-21 to Q2 of 2022-23), and the pre-pandemic average growth rate of 6.7 per cent (Q1 of 2012-13 to Q4 of 2019-20). A combination of factors contributed simultaneously to this slowdown in private consumption.

 

First, wages for casual and self-employed workers grew at a modest pace of 4.6 per cent and 4.5 per cent, respectively, during the seven quarters from Q3 of 2022-23 to Q1 of 2024-25. This contrasts with the much faster growth of 14.6 per cent and 10.5 per cent, respectively, in the preceding seven quarters (Q4 of 2020-21 to Q2 of 2022-23). A recent report by Ficci and Quess Corp suggested that wages grew at a compound annual rate of just 0.8 per cent in the engineering, manufacturing, process, and infrastructure (EMPI) sectors, and 5.4 per cent in FMCG between 2019 and 2023.

 

Second, food inflation averaged 7.1 per cent over the last eight quarters (Q3 of 2022-23 to Q2:2024-25), compared with an average of 5.3 per cent in the preceding eight quarters and 5.9 per cent in the pre-pandemic period (Q1 of 2012-13 to Q4 of 2019-20). Low-income households spend a significantly larger share of their monthly income on food compared to other income groups. In rural areas, the bottom 10 per cent households spend 52.3 per cent of their monthly per capita consumption expenditure (MPCE) on food, compared to 34.1 per cent by the top 10 per cent. Similarly, in urban areas, the bottom 10 per cent households allocate 43.3 per cent of their MPCE on food, compared to 27.3 per cent by the top 10 per cent. As such, persistently elevated food inflation has significantly impacted the ability of low-income households to spend on discretionary items, thereby dampening overall consumption.

 

Third, the goods and services tax (GST), being an indirect tax, is inherently regressive, disproportionately impacting low-income households compared to high-income ones. Over the last eight quarters (Q3 of 2022-23 to Q2 of 2024-25), GST revenue grew at an average rate of 11.5 per cent, outpacing nominal gross domestic product growth, which averaged 9.3 per cent during the same period. This increased burden of indirect taxes likely contributed to higher retail prices, thereby suppressing demand.

 

Fourth, household financial liabilities rose sharply to 5.7 per cent of GDP in 2022-23, compared to 3.7–3.9 per cent during the previous three years (2019-20 to 2021-22). Household debt as a percentage of personal disposable income rose to 48 per cent in 2022-23, up from 40 per cent in 2019-20. Available data suggests that financial liabilities of households and household debt as a percentage of personal disposable income likely rose further in 2023-24. Estimates by Motilal Oswal Financial Services also suggest that the household debt servicing burden rose sharply to 12.4 per cent in 2023-24 from 10.8 per cent in 2018-19. A part of the increased debt servicing burden was due to an increase in lending interest rates resulting from the Reserve Bank of India’s monetary tightening, which was necessary to tame inflation. While overall personal loans have continued to grow at a robust pace, personal loans for consumption (excluding housing and education) slowed significantly over the last five quarters, from 28.2 per cent in Q1 of 2023-24 to 14.1 per cent in Q2 of 2024-25. Thus, the dual pressures of a rising debt-servicing burden and a deceleration in personal loans for consumption have profoundly weighed on consumption.

 

Fifth, the Indian stock market significantly outperformed many other markets in recent years, with market capitalisation surging by 89 per cent between April 2020 and March 2024, creating a large wealth for domestic investors. This should have boosted consumption. However, retail investors suffered huge losses of Rs 1.81 trillion in the derivatives segment during 2021-22 and 2023-24 —equivalent to a staggering over 22 per cent of households’ gross disposable income. Notably, most of these losses (92-93 per cent) were suffered by investors with an annual income of less than Rs 5 lakh. Unlike gains in the cash (spot) segment, which are notional (until realised), losses in the derivative segment are real, which could have dampened consumption of the middle-income group.

 

All the above factors have been detrimental for the middle class, impacting their consumption. Since higher income groups have not been adversely affected by these challenges, their consumption remains reasonably strong, evident in the rapid growth of premium products across sectors.

 

The slowdown in private consumption, which has been the mainstay of India’s aggregate demand, does not bode well for the growth prospects of the economy. A key question is whether this slowdown is temporary or indicative of a deeper structural issue. While it is difficult to say at this stage, factors such as slowing/stagnating wages, persistently elevated food inflation, rising household debt-servicing burden, and exposure of retail investors in the derivatives segment warrant close monitoring. 

The authors are, respectively, senior fellow, research associate, and research analysts at the Centre for Social and Economic Studies