INDIA'S CONSUMPTION RECOVERY

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Picture Courtesy: Indian Express

Context:

In recent years, private consumption i.e. the main driver of India’s GDP has shown signs of uneven recovery despite policy measures such as income tax cuts, GST rate rationalisation, and RBI interest rate reductions. While these steps temporarily boosted spending, especially during festival periods, survey and wage data indicate that household income growth remains weak, particularly in real terms.

Current status of consumption in India:

• India’s consumption recovery remains uneven and fragile, with short-term improvements masking structural weaknesses in income growth. 

• Urban demand shows gradual improvement in consumer durables, automobiles, and services. 

• Rural demand has recovered after a good monsoon, but remains income-sensitive. 

• Fall in retail inflation, especially food prices, temporarily boosted real purchasing power. However, nominal wage growth remains modest, raising doubts about durability if inflation rises again. 

• Growth in personal loans and retail credit supported discretionary purchases. But rising household debt burden suggests consumption is partly borrowed, not earned. 

Reasons behind low consumption growth in India:

• Weak and uneven wage growth: Despite policy support such as tax cuts and GST rationalisation boosting short-term demand, nominal wage growth has remained modest and not aligned with inflation, especially in urban areas, limiting sustained consumption — a key point highlighted in the article.
• Consumption shares high but growth slowing: Household consumption remains the dominant driver of India’s economy, with Private Final Consumption Expenditure (PFCE) at about 61.5% of GDP in FY26, the highest since 2012, showing its continued importance; however, the pace of growth has moderated, indicating structural demand weakness rather than strong income-driven consumption. 

• Rural income gains inflated by low inflation: Real wage improvements in rural areas have been largely due to falling inflation rather than robust income gains, meaning that recent increases in rural consumption may be unstable if prices firm up. 

• Rising household debt instead of income-led growth: The article notes that many households are turning to credit to sustain spending, and India’s household debt rose to over 41% of GDP by March 2025, indicating greater reliance on borrowing rather than rising incomes for consumption. 

• Uneven consumption across segments: While overall consumption remains large, rural consumer demand growth outpaced urban growth in some quarters, showing a divergence where urban spending often more dependent on wages remains relatively sluggish.  

Key highlights of the RBI’s consumer confidence survey:

• Mixed overall sentiment: The RBI’s latest Consumer Confidence Survey (conducted November 1–10, 2025) showed that overall consumer sentiment improved for both rural and urban households, indicating a degree of optimism about economic conditions. 

• Divergence in income & spending perceptions: Despite the headline improvement, Rural households reported a deterioration in perceptions of current income and spending, signalling concern about actual disposable income. Urban households saw only a slight improvement in income perception but a setback in current spending sentiment, reflecting cautiousness in expenditure.
• Future outlook remains optimistic: The Future Expectations Index (FEI) — which measures expectations about the economy, income, spending, and employment over the next year — was recorded at about 125.6 in November 2025, showing sustained forward-looking optimism among consumers. 

• Confidence trends reflect inflation expectations: The surveys also suggest that inflation expectations have softened, contributing to improved confidence as households anticipate price stability, which can support future consumption decisions. 

Challenges related to India’s consumption slowdown:

• Modest growth of consumption relative to GDP: Although private consumption (PFCE) remains a dominant part of India’s economy — accounting for about 5% of nominal GDP by September 2025 — its pace has moderated and reflects structural weakness rather than strong income-led demand. 

• Wage growth not keeping up with consumption needs: One key challenge is that nominal wage growth remains modest, rural wages grew about 5% in Q1 of 2025-26 and urban wage proxies at 7.8% in mid-2025, but these increases are not strong enough to spur robust, broad-based demand. 

• Rural consumption gains are inflation-driven: Rural real wage growth was recently positive mainly because inflation fell sharply, not because incomes surged, making rural demand vulnerable if inflation pressures return. 

• Household borrowing masks weak income growth: Rising reliance on debt to support spending is another challenge: household debt levels have climbed to around 3% of GDP by March 2025, indicating that consumption may be sustained by credit rather than higher incomes. 

• Household savings and spending patterns show caution: While rural surveys reveal that 6% of households reported increased consumption and about 39.6% reported higher incomes, suggesting some uplift, these gains are uneven and households continue to adopt precautionary saving-cum-borrowing behaviour, which constrains discretionary spending. 

Government initiatives to boost consumption in India:

Tax relief measures to enhance disposable income: The Government of India reduced individual income tax rates in recent budgets under the new tax regime to put more money in the hands of middle-class taxpayers, a step aimed at boosting consumption, savings, and investment by increasing disposable income.  

GST rationalisation to lower prices and stimulate demand: By rationalising Goods and Services Tax (GST) rates on multiple items, the government helped lower retail prices of goods, which encouraged spending on consumer durables and helped revive household demand after earlier subdued price conditions.  

Rural employment guarantee through VB-G RAM G Act: The enactment of the Viksit Bharat–Guarantee for Rozgar and Ajeevika Mission (Gramin) Act, 2025 expanded rural employment guarantees from 100 to 125 days, increasing rural incomes and reducing income uncertainty for households dependent on rural labour markets.  

Boosting job creation through employment linked incentives: The Pradhan Mantri Viksit Bharat Rozgar Yojana, with an outlay of around ₹1 lakh crore and a target to create over 3.5 crore jobs, is designed to generate formal employment, thereby increasing wages, stabilising incomes and supporting consumption growth.  

Credit expansion and financial inclusion support: The government introduced new credit assessment models enabling public sector banks to extend over ₹52,300 crore in loans to nearly 4 lakh borrowers, facilitating easier access to credit for households and small businesses, which can help support consumption and entrepreneurial activity.  

Targeted rural livelihoods and entrepreneurship support: Programmes like the Start-up Village Entrepreneurship Programme (SVEP) have received renewed budget support (over ₹18 crore in UP alone) to promote rural self-employment, boost incomes of Self-Help Groups (SHGs), and expand non-farm economic activities.  

Increased allocations for rural and social welfare schemes: Ahead of Budget 2026–27, the government has signalled higher budget allocations for schemes such as MGNREGA, PM-KISAN, and PMAY, which support essential consumption by stabilising rural income and improving access to housing, though within fiscal constraints.  

Way Forward:

Promote income-led rather than debt-led growth: Policy focus should shift from temporary tax relief and credit expansion to sustained growth in household incomes, as long-term consumption can only be supported when wages rise steadily across sectors. 

Boost labour-intensive manufacturing: Encouraging sectors such as textiles, food processing, leather, toys, and electronics assembly can generate large-scale employment, helping raise wages and expand the base of income earners who drive mass consumption. 

Strengthen rural non-farm employment: Expanding rural industries, agro-processing clusters, and services can reduce dependence on agriculture and provide stable, year-round income, making rural demand less vulnerable to monsoon shocks. 

Enhance MSME productivity and formalisation: Improving access to affordable credit, technology, and market linkages for MSMEs can increase productivity and profitability, enabling firms to pay better and more stable wages. 

Increase female labour force participation: Improving childcare support, safe transport, skilling, and workplace flexibility can bring more women into the workforce, thereby raising household incomes and overall consumption capacity. 

Invest in skill development linked to industry: Aligning skilling programmes with industry demand ensures workers move into higher-productivity and better-paying jobs, which strengthens wage growth and long-term spending power.

Conclusion:

India’s consumption recovery remains fragile because it is being supported more by low inflation and credit expansion than by strong, broad-based wage growth. For demand to become durable and inclusive, policy must focus on raising employment quality, productivity, and real incomes rather than relying only on temporary stimulus measures.

 Source: Indian Express