Consumption slowdown in India might be for long.

 

As the world approaches four years since the onset of COVID-19, significant progress has been made in addressing its macroeconomic impacts in India and globally. However, it’s no longer necessary to frame every economic comparison with that singular event.

India’s Finance Minister recently highlighted concerning trends in urban consumption, pointing to stagnant wages and declining spending. Over the past three to four months, this slowdown in urban expenditure has adversely affected the earnings of major consumer goods companies and raised questions about the structural resilience of India’s long-term economic growth. Given that the urban salaried class represents a key tax base, any decline in their spending power is bound to have a cascading economic impact. It is not salary growth which is causing India's slowdown but the taxes which is causing the slowdown for the common people, particularly for the salaried class.

Consumer Spending Trends

• Second Quarter 2024
• Decreased to ₹24,567.77 billion from ₹24,971.79 billion in the first quarter of 2024.
• Historical Averages (2004-2024)
• Averaged ₹14,025.53 billion over the 20-year period.
• All-Time High
• Reached ₹25,729.57 billion in the fourth quarter of 2023.
• Record Low
• Dropped to ₹4,469.88 billion in the third quarter of 2004.

 This raises a fundamental question: Should India focus on being a consumption-driven economy or shift towards manufacturing-led growth?  Both models require a robust level of disposable income and consumption surplus.  

Middle Class and Tax Burden

• The middle class, holding the largest spending power, faces reduced disposable income due to:
• Dividend distribution taxes and higher long-term/short-term capital gains taxes.
• High inflation and interest rates, limiting savings and increasing reliance on credit cards.
• Salaried individuals effectively work ~3 months annually just to pay various taxes.
• This financial strain limits consumption growth, with many relying on credit cards to bridge spending gaps. Simultaneously, persistent inflation and high interest rates are curtailing savings.

     For instance, the salaried class spends nearly three months’ worth of earnings each year just to meet various tax obligations. India’s net direct tax collection, as of November 10, reached ₹12.11 lakh crore, reflecting a 15.41% year-on-year growth. Of this, non-corporate taxes, including personal income taxes, HUFs, and firms, accounted for ₹6.62 lakh crore. While these figures indicate strong tax revenue, they also highlight the financial burden on individuals. Moreover, the Securities Transaction Tax (STT) collection nearly doubled during the same period, rising to ₹35,923 crore. This increase in tax inflows, coupled with regulatory measures affecting F&O trades, has added pressure on consumption and investment capacity.

Relying heavily on public sector expenditure for economic growth is not a sustainable model. Excessive taxation to fund such expenditure risks suppressing affluent-class consumption, a key driver of economic momentum. With this trajectory, 2025 appears precarious for job markets and export-dependent sectors.

Private consumption expenditure, which constitutes nearly 60% of India’s GDP, grew by only 6% in the second quarter, a decline from 7.4% in the previous quarter. Slowing wage growth is a significant factor contributing to the urban consumption decline, with consumers scaling back spending on everything from essential items to big-ticket purchases like automobiles.

The manufacturing sector also reflects signs of deceleration. Growth plummeted to 2.2% in the second quarter of FY25 from 14.3% in the same period last year. Mining and quarrying registered a contraction of -0.1% compared to a modest 1.1% growth last year, while electricity, gas, and utility services saw their growth slow from 10.5% to 3.3%. Sluggish export demand has been a major contributor to this slowdown.

India’s path forward requires a careful balancing act between stimulating private consumption, fostering a competitive manufacturing sector, and maintaining sustainable public sector expenditures. The current trajectory demands strategic interventions to ensure long-term economic resilience and inclusive growth.

Cautious Approach by Banks

• The pace of credit card additions fell nearly 50% year-on-year in October.
• Total credit card base reached approximately 107 million by the end of October.
• Lenders added 786,000 new cards in October, a significant slowdown compared to previous trends.
• Data indicates that urban consumption is heavily reliant on debt instruments like credit cards.
• The slowdown in credit card additions highlights potential vulnerabilities in debt-driven consumption patterns.
• A cautious lending environment may further dampen urban spending, already under pressure from stagnant wages and high inflation.
• This trend underscores the need for sustainable consumption growth supported by real income gains rather than reliance on credit.

Conclusion:

This speaks loudly that taxes need to come down and we cannot have an economy where the public alone will spend based on revenues earned from taxes from the salaried class and other indirect taxes.  Even if every year the Infrastructure budget of India needs to be funded at par with the one announced in 2024-25 budget ₹11,11,111 crore for infrastructure, which is 3.4% of the GDP then taxes will need to grow significantly increasing more burden on the common man keeping inflation accounting in mind. It is high time for the government to think about whether we need export-driven GDP growth, consumption-driven GDP or manufacturing-based GDP growth. For example, the automobile sales drop is a perfect example of how the purses are stretched and budget constraints play its game.