The slowdown in urban consumption demand being witnessed now may largely be cyclical, but could also be reflective to an extent of deeper structural issues, economists feel. They suggested urgent steps to enhance labour productivity and address the sagging wage growth.

Corporate India, they said, would have to prepare to live with lower profitability in the near term to boost demand. It would also have to adapt to the new realities of changing consumption pattern, particularly the shift away from traditional to tangible and intangible digital products. Else, most companies would find themselves out of price points, they warned.

Many of the economists FE spoke to, however, believed that the “baseline growth is still strong” and has the potential to revive consumption going forward.

“As of now, the urban demand slowdown is cyclical. If this continues for a couple of quarters, and deepens, then it will become structural,” said DK Pant, chief economist at India Ratings and Research. “As long as real wage growth stays positive, and inflation continues to fall (on an annual basis), the (urban) slowdown will not become structural,” he said.

MK Saggar, professor-IIM Kozhikode and former member of the monetary policy committee, said even though the baseline growth looked strong, downside risks were building up. “From a monetary policy viewpoint, it is important to gauge the turning point early and allow lags in policy transmission to work in time if aggregate demand is turning weak,” he said. “The cyclical slowdown can deepen if other parts of the global economy slow down. Spillovers can then shape up through trade, financial channels and, more importantly, confidence channels,” he said.

“If business and consumer confidence start falling elsewhere, they will also impact our shores,” Saggar noted.

According to data compiled by Ind-Ra, real urban wage growth in January-July 2024 has averaged 1.4%. The real rural wage growth (agriculture), on the other hand, has averaged (-)0.4%; and non-agriculture 0.1%.

Saggar said, “Corporate staff costs as well as rural wages have decelerated but not declined. The deceleration is particularly sharp in services sector with the year-on-year growth coming off from about 27% in the last quarter of FY22 to about 8% during Q3FY24 to Q1FY25.”

Former chief statistician of India Pronab Sen, however, said that one of the aspects that has been holding growth in recent years is consumption. “If consumption growth stagnates at 4% (as seen in FY24), then GDP growth cannot remain above 5.5% for a long period,” he said.

In a recent report, Nomura said that real salary and wage expenditure growth of listed non-financial corporates — a proxy for real urban wages — has moderated to 0.8% y-o-y in Q2 FY25 from 1.2% in Q1 FY25, and is down from 2.5% in FY24 and 10.8% in FY23.

Nomura had highlighted that passenger vehicle sales have slumped, airline passenger traffic growth has moderated and fast-moving consumer goods (FMCG) companies have flagged weak urban demand during their recent corporate results. “We believe this weakness in urban demand is likely to continue.”

Gaura Sengupta, chief economist, IDFC FIRST Bank, also believes that urban wage growth is expected to remain low in FY25, as input costs have risen, which has impacted corporate profits. “The slowdown in urban wage growth reflects moderation in listed company profit growth with rise in input cost pressure. A key support to profit growth in FY24 was sharp reduction in input cost pressures which had balanced slowdown in sales growth,” she said.

On the rural front, however, economists are optimistic on demand, as monsoon has been better this year as compared to the last. “Two-wheeler sales have held up relatively better than passenger vehicle sales growth. Rural demand is expected to show clear signs of pick-up in H2FY25 post the harvest season,” said Sengupta.

Former chief statistician Sen said that urban incomes have not grown substantially since the pandemic. A prolonged slowdown in consumption has affected production. “Additionally, during Covid-19, among many labourers who went back to rural areas, some have returned to urban centres which created surplus labour in the urban market. This also led to muted wage growth,” he said.

Moreover, in the absence of strong growth in domestic consumption, investment-led growth would be feasible if there is strong growth in exports, but outward shipments also remain stagnant, Sen highlighted.

Analysts feel that there is some space for monetary and fiscal policies to address the softening of demand if the signs of weakness persist in the second half of this fiscal year. However, a medium-term strategy to re-skill workforce and for better matching of jobs with skills is needed at this stage to enable a sustained increase in labour productivity, wages and ultimately consumption demand.

The finance ministry, in its latest monthly economic review, had noted that on the demand side, rural demand continues to improve, as reflected in increasing FMCG volume sales and a rise in three-wheeler and tractor sales. “However, urban demand appears to moderate due to softening consumer sentiments, limited footfall due to above-normal rainfall, and seasonal periods during which people tend to refrain from new purchases,” it had said.

According to SIAM data, the Indian passenger vehicle (PV) market saw slower-than-expected growth of 0.5% in H1 FY25, way below the initial expectations of 3-4%. Whereas, two-wheeler sales during the first half jumped 16% on year.

Meanwhile, analysts say, the GDP growth in FY25 is likely to be lower than the RBI’s projection of 7.2% in the backdrop of slowdown in urban consumption. “Coincident and leading growth indicators point to a further moderation in GDP growth and the RBI’s forecast of 7.2% for FY25 is overly optimistic, in our view,” Nomura said. It expects growth to be 6.7% in FY25, with downside risks.

“The government has done its bit, but big and small businesses have lost confidence in the market, and thus are not making investments.” In FY24, real GDP growth was 8.2%, but private final consumption expenditure (PFCE) had grown only 4% and gross fixed capital formation (GFCF) had grown by 9%.

The Reserve Bank of India (RBI) has projected Consumer Price Index inflation to decline to 4.5% in FY25 from 5.4% in FY24. In H1 of the current financial year, inflation has averaged 4.6%.