Budget | Can I-T relief spur squeezed urban consumers to spend more?

There's good news and there's bad news.

A resurgence in rural spending — with India's hinterlands showing higher demand for biscuits, shampoo, hair oil and even large cars — is good news for numerous consumer-facing businesses.

The bad news is that consumers in urban pockets are holding back purchases, reflecting a deep distress that has been building across income segments in our large cities. Many experts feel this is already hurting India’s overall economic growth.

The Maruti example

A look at the third-quarter results of some of the country’s biggest corporate names shows the extent of urban distress and the buoyancy in rural buying. Maruti Suzuki India, the country’s largest carmaker by sales, posted a 15 per cent growth in retail sales across rural markets in the October-December period (Q3 FY25) this fiscal. Growth in retail sales in urban pockets was just 2.5 per cent. So, the difference in the growth rates between the two pockets was a significant 12.5 percentage points.

Also read | Union Budget 2025: Karnataka expects fairness, seeks more packages, aid

Rahul Bharti, Executive Director (Corporate Affairs) at Maruti Suzuki, said during an investor call earlier this week: "Broadly, the past trend has been continuing, with rural doing better than urban…urban retail sales are positive but lower than rural."

Slowing urban consumption is the worry elsewhere, too. Rohit Jawa, MD and CEO at Hindustan Unilever Ltd, India’s biggest fast-moving consumer goods (FMCG) company, pointed towards slowing demand in general for FMCG products over the past six months to say that there has been “demand compression” in urban markets.

Why the decline?

So, what is the urban consumer doing? The urban buyer, Jawa said, is shifting to smaller packs of biscuits, soaps, hair oil and shampoo. While he declined to suggest ways for India to improve its macroeconomic growth, he did say that the downtrading — urban consumers buying smaller, less expensive packs — would likely continue for another quarter or two.

According to a Mumbai-based brokerage, one of the primary reasons for urban distress is muted personal income growth and employment issues. “Real wage growth in urban areas remained subdued at under 2 per cent throughout 2024, with IT hiring showing consistent contraction (-1 per cent in Q2FY25). This has severely constrained discretionary spending in metro regions,” the brokerage said in a note.

The wage growth has more than halved; the 10-year average wage growth is 4.4 per cent. Then, persistently high food inflation (over 8 per cent in FY24 and 10.9 per cent in October 2024) coupled with elevated interest rates have eroded urban households’ purchasing power.

Watch | Not expecting much from this budget: Veteran trade unionist Amarjeet Kaur

Household savings fall

Given income stress and high inflation, especially after the COVID years, household net financial savings as a percentage of GDP fell drastically to just 4 per cent in Q3 FY23 versus 15.5 per cent during the pre-COVID period of Q1 FY21. They have since improved to 7 per cent in Q4 FY23.

Thus, while the urban affluent are borrowing and spending a large part of the borrowings on asset creation, the urban lower middle class is forced to spend nearly half its household savings on consumption.

Slowing GDP growth

Per the first advance estimates of the National Statistical Office (NSO), India’s real GDP growth this fiscal year is expected to be just 6.4 per cent against 8.2 per cent last fiscal. While economists expect overall consumption to pick up in the second half of the current fiscal, this growth will be coming on a small base of FY24, when consumption had grown at half the rate of growth of GDP.

Watch | Will Budget 2025-26 ease middle-class burden? | Talking Sense with Srini

And the stress in urban consumer spending will likely continue unless the Union Budget announces some measures to ease the woes of the middle class. There have been some reports about the government considering a tweak in income tax rates this Budget to allow more money in the hands of consumers.

Also, experts have opined that the RBI may finally begin reducing interest rates from the first quarter of the next fiscal year. This, along with new income tax slabs, may encourage consumption even in stressed urban markets.

Urban demand compression

The brokerage quoted above said that urban demand, which has traditionally fuelled India's economic momentum, is facing headwinds due to multiple reasons: high food inflation, elevated interest rates and stress in the lower and middle-class incomes.

Simultaneously, normal monsoons and benefits from various government welfare schemes have improved the growth outlook in rural demand.

“We believe that Q1 and Q2 FY25 trends had many one-offs in terms of intense heatwave, excessive and prolonged rains, double-digit food inflation from October and a very weak marriage and festival season. The Q3 trends are suggesting a seasonal uptick, suggesting that we might be close to a trough and witness some green shoots in urban demand by March,” it said.

Also read | Union Budget | Right moment to offer welfare, social security to gig workers

Poor automobile sales

The brokerage has highlighted “robust” growth in the sales of tractors and passenger vehicle segments in Q3 (driven by a surge in utility vehicles), exports and improved rural sentiment. But sales of two wheelers were pulled down in the domestic market last quarter due to a high base and increasing competitive intensity.