Economy
Mint Primer: Why the urban middle class has cut spending
Summary
- Growth in urban income has been declining and this has hurt the sentiments, forcing people to hold back on their spending.
The second quarter FY25 results of bellwether consumer companies such as Nestle India, HUL and Maruti Suzuki have revealed an urban consumption slowdown. Mint looks at the extent, reasons and likely impact of the slowdown on India’s economic growth.
How bad is this slowdown?
It is significant. According to the finance ministry’s Monthly Economic Report, volume growth in the fast-moving consumer goods sector has dropped from 10.1% in Q1 to 2.8% in Q2. This is reflected in the performance of leading consumer companies. Both Nestle India and HUL struggled to post a flat revenue growth in the second quarter and saw their profits decline. India’s leading car maker, Maruti Suzuki, saw domestic volumes dropping by 4%. Its profit fell by 17%. They blamed this underwhelming performance on muted demand, especially from their urban middle class consumers.
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What is causing the fall in demand?
While a heavy southwest monsoon caused some impact, experts blame more serious factors for the slowdown in consumption. Growth in urban income has been declining and this has hurt the sentiments, forcing people to hold back on their spending. According to Nomura, wage expense growth among listed non-financial companies was just 0.8% in Q2FY25 as against 10.8% growth in FY23. The information technology sector, for instance, has cut back on recruitment, gone easy on wage hikes and retrenched people. Add to this the high food inflation which has hurt the disposable income of the lower middle class.
Does other data support this view?
October’s goods and services tax revenue were the second highest on record. An analysis of 479 listed companies (excluding banks) shows average revenue growth is over 5% in Q2. Apple’s India sales in July-September are the highest ever. Experts argue urban India is seeing a K-shaped demand with premium goods selling more than mass consumption items.
How will this affect economic growth?
Private consumption is the largest contributor to economic growth. If it slows down sharply, growth will take a beating. Policymakers are hoping this is temporary, and that a strong festive demand will bring about its revival. If that does not happen, then the chances of growth being revised down from 7.2% that the central bank has estimated for 2024-25 are high. As things stand, private investment and exports, key engines of growth, remain sluggish. That leaves public spending as the only driver of the Indian economy.
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What can the government do here?
Not much. One way is to put money in the hands of people and hope they spend it. The Centre did just that in the recent Union Budget where it cut income tax rates for the middle class in a bid to boost demand. Many state governments are offering cash transfers to people and some economists put this number at as high as ₹2 trillion on an annualized basis. But consumption will return only if sentiments improve. And that will happen when India Inc hires more and offers good hikes to existing staff.
