The November 29th press release on Gross Domestic Product (GDP) estimates show significantly lower numbers at 5.4% for the second quarter of 2024-25. While many have been talking about a slowdown for a few years now – at least in the aftermath of demonetisation, the impact of GST and later the pandemic – there was no official recognition of this.
Going by the GDP figures, there seemed to be a revival which was also due to the low base during the pandemic years. The government too was pushing the narrative of tremendous recovery along with efforts towards keeping investment buoyant by increasing its capital expenditure.
Throughout this, the sluggishness in consumption demand and the underlying low incomes of a large section of the population was ignored. But there finally seems to be an acknowledgment of this problem, with many corporate leaders talking about a fall in sales from fast moving consumer goods (FMCG) products to motor vehicles.
Current position of Indian economy
A crucial issue therefore is to also understand what these macro trends mean for the day to day lives of common people. Data on household budgets and expenditures is not available on a real time basis, but there are other indicators which help us envisage what is going on.
The lacklustre demand along with the anecdotal information indicate that not only the poor but also middle-class households are facing difficulty in meeting basic expenditures. This is not entirely surprising considering that wages in rural and urban areas have either remained stagnant or even fallen over the last decade.
For instance, estimates by Himanshu, an economist at Jawaharlal Nehru University, show that real wages for regular workers – who are among the better paid workers – has declined by 0.9% per year in rural areas and 0.7% in urban areas between 2017-18 and 22-23, according to the Periodic Labour Force Survey (PLFS). When compared to 2011-12, these have declined by 0.6% per year in rural areas and 1.2% per year for urban areas. Therefore, the earnings of these workers who form the core of the middle class, has declined in real terms over the last decade
Also read: ‘Growth in Real Wages Virtually Zero Under Modi Government’: Data
Food inflation
This is now being aggravated by rising prices. The All-India inflation rate for Consumer Price Index, CPI (General) reached a peak of 6.21 in October 2024 and declined slightly to 5.48 for November.
More importantly, the All-India Consumer Food Price Index (CFPI) has been very high. (10.87 in October and 9.04 in November 2024). Higher prices in general and food prices especially affect household budgets quite immediately, especially among the bottom 50% of the population, given that total expenditures (also a reflection of incomes) are not very high to begin with.
The average monthly per capita expenditure (MPCE) is quite low at Rs 3,773 in rural areas and Rs 6,459 in urban areas. Of this spending, a large component is on essentials. The Household Consumption Expenditure Survey (HCES) of 2022-23 shows that on average the proportion of total MPCE on food is 46.4% in rural areas and 39.2% in urban areas. While this is overall average, one can expect that this proportion of spending on food is much higher for those in the lower deciles of consumption expenditure.
Therefore, food inflation significantly hurts the poor’s ability to spend on other items. To this, if we add other essential spending, there is hardly anything left for discretionary spending (less than 30%). The spending on fuel, education, health, conveyance and rent put together is 25.4% of MPCE in rural areas and 33.1% in urban areas. As mentioned, these are all India averages, and if we look at the budgets of only the bottom two or three quintiles, they would look even more tight. Using the HCES data, Ishan Anand estimates that about one-third of India’s population survives on less than Rs 100 a day and more than 80% on less than Rs 200 a day.
Also read: How Much More Are Indians Going to Pay for Tomatoes This Diwali?
This poor economic situation is partly reflected in the Consumer Confidence Survey (CCS) conducted by the RBI, the latest round of which was in November 2024. The survey collects current perceptions vis-à-vis a year ago and expectations for the year ahead.
On the whole, current perceptions compared to a year ago on most parameters including economic situation, employment, price-level and income show ‘negative sentiments with signs of deterioration compared to last round’ (held in September 2024). However, = people are hopeful about the year ahead on all aspects except price level. For example, 43% of the respondents felt that the general economic situation had worsened compared to last year and another 21% felt that it was the same. Only a little over a third felt that the situation had improved.
Government’s misguided approach
Despite various recent as we all as long standing signals of the demand problem, the government continues to focus on supply-side measures to address the situation. The Union finance minister and the commerce minister urged the RBI to lower interest rates to boost growth.
The chief economic advisor to the government chastised the Indian corporate sector for not doing enough to raise investment in the economy. Corporate India on the other hand has been unsure of the demand in the economy. Concerns have been raised by some senior industrialists regarding the weakening of consumption demand, especially in urban areas in the country. They have stated that sales of FMCG products, two-wheelers and lower end four-wheelers have been decelerating in urban areas in the last few quarters and the pent-up demand following the pandemic seems to have been exhausted.
The Confederation of Indian Industry (CII), one of India’s largest industry associations and a longtime advocate of pro-market and anti-interventionist reforms, made some interesting and uncharacteristic recommendations to the government for the upcoming budget in 2025.
In its proposals to stimulate the slowing Indian economy, CII has suggested that the government should give ‘consumption vouchers’ to low-income citizens, increase the daily wages given under the public works programs like the MGNREGA and also enhance the cash support given to farmers under the PM-KISAN scheme.
Many of these have been recommendations of some economists as well as civil society groups for a long time. Hopefully, these will be taken seriously in the upcoming budget as it is becoming increasingly clear that this model of trickle-down growth is once again failing to deliver and what is required is a reorientation of the policy framework where employment creation, equitable growth and human development are the priorities
Dipa Sinha is a development economist.
