Despite India's status as the fastest-growing major economy in recent years, experts are urging Finance Minister Nirmala Sitharaman to address the nation's weak private consumption figures in the upcoming Union Budget 2024. The Indian economy grew by 8.2 percent in FY24, but private consumption, which encompasses household and business spending, increased by only 4 percent.
Currently, India’s economic growth is primarily driven by the government’s strong focus on capital expenditure, compensating for the significant lag in private consumption. Lower consumption levels indicate households' or businesses' limited savings and spending abilities, which can negatively impact the economy. In simple terms, if spending decreases, companies will reduce production, leading to lower wages and salaries and, subsequently, reduced tax revenues for the government.
Economists have highlighted the stark contrast between the robust GDP figures and weak consumer demand. Media reports suggest that the government may consider tax cuts for individuals in certain income brackets to address this gap.
National accounts estimates reveal that India's private consumption growth of 4 percent in FY24 was a 20-year low, excluding the pandemic years. Household consumption surveys show that both rural and urban consumption decelerated in FY23. Recent sectoral data has also indicated weakness in consumption, such as a drop in auto retail to a two-and-a-half-year low in June. Auto sales, a significant indicator of private consumption, contribute 7 percent to India's GDP.
Dipti Deshpande, Principal Economist at CRISIL, pointed out several factors behind the slowdown in household consumption: "Rising frequency of weather disruptions, including in 2023, leading to weaker agriculture incomes; persistent high food inflation, which eats into households’ discretionary spending; and an incomplete service sector recovery, leading to weaker employment opportunities in urban areas." These factors contribute to the observed deceleration in household consumption, highlighting the need for targeted measures in the upcoming budget.
