Cracks in India’s consumption story run deep

Tata Consumer Products

15/01/2025 22:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
    By Shritama Bose
       MUMBAI, Jan 16 (Reuters Breakingviews) - If India wants
to prop up its stalling economic growth, it will have to
sacrifice some of the financial stability underpinning the
country’s moment on the global stage.
    Under Prime Minister Narendra Modi, consumption by India’s
294 million households has nearly trebled to $2.07 trillion over
the past decade. It is the top engine of the $4 trillion economy
and drives around 60% of GDP. Yet consumer spending is weak and
has decoupled dramatically from the path of national output
since the year ended March 2023, according to economists at
state-owned Punjab National Bank.
    Beyond the luxury market where well-heeled Indians are
spending big on the high life, cracks are appearing; car
sales crawled during the usually busy annual Diwali holiday in
October-November. Indians are eating out less often. Starbucks
 SBUX.O  and its partner Tata Consumer Products  TACN.NS ,
meanwhile, are pushing the brakes on expansion; their target to
hit 1,000 coffee stores by 2028 is unchanged but they are
slowing the pace of new openings. Starbucks has more than 6,500
stores in China.
    As it stands, India expects its GDP growth in the current
year to March will hit a four-year low of 6.4%, the lower end of
the pace policymakers envisioned the country sustaining for the
next decade. In short, consumption is fading before it has had a
real chance to flourish.
    A weak jobs environment lies at the heart of the
problem. The abundance of labour in the world’s most populous
country is making wages crawl. It puts a perverse spin on the
vaunted demographic dividend: casual and regular workers in 2023
earned an average real monthly wage roughly 1% lower than in the
previous year, an International Labour Organization report based
on official data shows. That’s prompted fears of a middle class
shrinking instead of growing.
    As a result of stagnant real incomes, middle-class Indians
don't have much left over for the kind of discretionary
purchases that would power a U.S.-style consumer economy.
    "There used to be a middle segment, which used to be the
segment that most of us fast moving consumer goods firms used to
operate in, which is the middle class of the country, that seems
to be shrinking," Suresh Narayanan, chair of Nestle’s India
 NEST.NS  unit, warned in October. His peers have sounded an
alarm about weak consumption in rural India for years.
    The problem is worryingly broad-based. IT companies,
typically the biggest private sector employers, are making fewer
hires and paying less. Demand for their services like those
provided by Tata Consultancy Services  TCS.NS  is growing
slower. Automation and advances in technology including
artificial intelligence are killing repetitive jobs in
outsourcing and financial services, so firms are not backfilling
roles when they fall vacant.
    Farmers’ incomes benefited in 2024 from a strong monsoon but
it’s a brief respite after two years of stagnating incomes for
the 46% of the workforce depending on agriculture. Climate
change is upsetting weather and food-inflation patterns: in
June, rating agency Moody's tipped water stress as a sovereign
credit risk to India.
    The long-term answer is to create more jobs outside of
agriculture. Modi’s administration is pushing manufacturing
investment in the hope that factories will absorb workers and
pay them better. However, the foreign direct investment required
to speed progress is declining.
    In the short term, New Delhi needs to act to avoid a return
to a trend of weak output and consumption growth following a
two-year phase of post-pandemic revenge spending. The reduced
private spending is hitting growth directly and shrinking tax
collections. Poor demand also means lower private investment,
and that burdens the government with an even bigger role in
turbocharging GDP.
    Authorities could cut taxes to stimulate consumption. They
are considering lower levies on personal income in the budget in
February, Reuters reported in December, citing two official
sources. Yet New Delhi will be hard-pressed to forego revenue
without imperiling its goal to consolidate the fiscal deficit to
4.5% of GDP by March 2026.
    A larger deficit could further beat down consumption if it
prompts a spike in the government’s borrowing costs, triggers a
lower sovereign credit rating and weakens demand for the rupee
in international currency markets. That would make India’s oil
import bill heftier and prompt a surge in inflation: Oil prices
are already spiking following U.S. curbs on oil tankers
supplying Russian crude.
    Those problems could quickly compound if, as expected,
Indian policymakers try to keep exports competitive by allowing
the rupee to track the weakening yuan. That currency is getting
battered by fears of a second trade war between China and the
United States under Donald Trump’s imminent presidency.
    Alternatively, the central bank could boost consumption by
making it easier for individuals to tap credit. New governor,
Sanjay Malhotra, will be wary of risks stemming from eye-popping
growth in consumer loan books as the banking system only
recently recovered from a corporate bad debt crisis. The Reserve
Bank of India raised risk weights for unsecured lending in
November 2023. These measures added to a chill in consumer
spending – personal loans are growing at nearly half their pace
a year ago. Nonetheless, the RBI expects banks’ asset quality to
weaken.
    The rosy narrative of strong growth and macroeconomic
stability is fragile. If policymakers do intervene, they would
be better off doing it sooner rather than later. 
    
    Follow @ShritamaBose on X

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Graphic: Consumer credit growth has fallen off a cliff    https://reut.rs/4jdxOGL
Graphic: Incomes are growing slower than prices    https://reut.rs/4jdO8az
Graphic: Starbucks' India store count is a fraction of its China
presence    https://reut.rs/4jcWJtX
Graphic: Consumer spending is decoupling from output growth    https://reut.rs/42e5j5O
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 (Editing by Una Galani and Aditya Srivastav)
 ((For previous columns by the author, Reuters customers can
click on  BOSE/ 
shritama.bose@thomsonreuters.com))