India’s Consumption Conundrum: Spending Growth Without Strong Wage Momentum

Why in News ?

As the Union Budget 2026–27 approaches, policy focus is shifting away from short-term consumer relief measures towards other growth drivers. This makes it timely to assess whether household consumption—despite income tax cuts and GST rationalisation—has genuinely strengthened, or whether underlying wage and income weaknesses continue to constrain demand.

Significance of the Issue

• Sustaining Economic Growth: Private consumption accounts for nearly 60% of India’s GDP. Any weakness in household spending directly threatens overall growth momentum.
• Policy Effectiveness: Evaluating whether tax cuts and price relief translate into durable consumption growth is essential for evidence-based fiscal policymaking.
• Labour Market Health: Wage growth trends provide insight into job quality, income security, and the inclusiveness of economic recovery.
• Financial Stability: Rising household debt to sustain consumption raises concerns about long-term financial resilience and credit sustainability.

Key Components and Takeaways

1. Policy Push to Support Consumption

• Tax and Price Relief Measures: In 2025–26, the government cut income tax rates under the new regime and undertook long-awaited GST rate rationalisation in September to lower prices and stimulate demand.
• Short-Term Demand Boost: Post-GST cuts, demand for consumer durables—especially vehicles—rose. TransUnion CIBIL data showed consumer durable loan demand during the Dussehra–Diwali period increased about 1.5 times year-on-year, reflecting renewed consumer confidence.
• Inflation Decline: Lower taxes contributed to a sharp fall in headline retail inflation to a record 0.25% in October. However, not all tax cuts appear to have been fully passed on to consumers.
• Possibility of Pent-Up Demand: Some of the demand surge may be temporary, as households that postponed purchases earlier may have front-loaded spending once prices fell.

2. Consumer Confidence Tells a Mixed Story

• Overall Sentiment Improvement: The RBI’s Consumer Confidence Survey (November 1–10) showed an improvement in overall sentiment for both rural and urban households.
• Rural Stress Signals: Rural households reported worsening perceptions of current income and spending, indicating continued vulnerability.
• Urban Moderation: Urban households saw a slight improvement in income perceptions but reported weaker current spending.
• Underlying Concern: Despite supportive policy measures and favourable headline indicators, income and spending perceptions remain fragile—especially in rural areas—pointing to uneven and vulnerable consumption recovery.

3. Inflation-Led Wage Gains Mask Underlying Weakness

• Rural Wage Trends: Real rural wages rose to 4.1% in the first quarter of 2025–26 after stagnating for nearly three years. This rebound was largely driven by falling rural CPI inflation, which dropped sharply to 2.4%.
• Nominal Wage Growth: Nominal rural wage growth stood at 6.5%, the highest since mid-2023, indicating that sustained consumption will depend on continued wage growth rather than just low inflation.
• Risk of Reversal: If inflation rises without corresponding nominal wage increases, real wage gains could reverse, weakening future demand.

4. India’s Wage Growth: Inflation Is Doing the Heavy Lifting

• Urban Wage Indicators: Urban wage trends are often measured through staff costs of listed companies. RBI data on over 3,000 non-financial firms showed real urban wage growth rose to 5.7% in July–September 2025—the highest in over two years.
• Inflation-Driven Gains: This improvement was primarily due to low inflation (2.1%), not strong pay hikes.
• Flat Nominal Growth: Nominal urban wage growth remained at 7.8%, largely unchanged since mid-2023.
• Core Issue: Across both rural and urban sectors, recent real wage gains are inflation-driven rather than wage-driven. To sustain consumption as inflation rises, nominal wages must accelerate.

5. Borrow to Spend: Rising Household Debt Clouds Demand Outlook

• Credit Growth and RBI Intervention: Personal loan growth has picked up, following the RBI’s November 2023 measures to rein in retail lending, especially unsecured loans—highlighting concerns about credit-fuelled consumption sustainability.
• Household Balance Sheet Stress: Household financial health weakened post-pandemic as savings were used to absorb income shocks:
  • Financial liabilities rose from 3.9% of GDP (2019–20) to 6.2% (2023–24) before easing to 4.7% (2024–25).
  • Net financial assets fell to a multi-decade low of 4.9% of GDP (2022–23), recovering modestly to 6% (2024–25).

Debt Rising Faster Than Income: Between FY09 and FY23:

• Industrial wages grew 1.9 times,
• Real personal bank debt rose 2.9 times, reaching 3.6 times by FY25.

This indicates a growing household debt burden relative to income.

Impact on Investment: With households increasingly borrowing to sustain spending and long-term demand outlook uncertain, private investment remains subdued, as businesses hesitate to expand capacity.

6. Limited Budget Room to Boost Consumption

• Fiscal Constraints: Economists believe the Union Budget offers limited fiscal space for direct consumption-boosting measures.
• Monetary Policy Transmission: Support is expected to continue as the RBI’s 125 basis points of rate cuts in 2025 work their way through the economy.
• Policy Focus Shift: With inflation expected to remain benign, the Budget is likely to:
  • Prioritise capital expenditure,
  • Support labour-intensive export sectors affected by US tariffs,
  • Maintain fiscal discipline to preserve buffers for future economic shocks.

Challenges and Way Forward

• Boosting Nominal Wage Growth: Policies must focus on productivity, skill development, and job quality to ensure wages rise alongside inflation.
• Strengthening Rural Incomes: Targeted rural employment schemes, agricultural income diversification, and non-farm job creation are crucial.
• Managing Household Debt: Strengthen credit regulation, promote responsible lending, and enhance financial literacy to prevent over-leveraging.
• Encouraging Private Investment: Stable demand outlook, policy certainty, and infrastructure investment can crowd in private sector investment.
• Balancing Fiscal Prudence and Growth: Maintain fiscal discipline while preserving flexibility for counter-cyclical intervention if consumption weakens.