​Consumption conundrum: On the Indian economy’s predicament  

The government’s push this year to spur consumption in the economy is a much-needed policy re-prioritisation at a time when several other engines of growth are either flagging or plateauing. The economy is a composite of household consumption, private investment, government expenditure and net exports. Of these, only government expenditure has witnessed robust growth over the past few years, thanks to the Modi government’s infrastructure push. It has also made available interest-free loans to States to do the same. However, as Finance Minister Nirmala Sitharaman has indicated in the last two Union Budgets, even though the Centre will increase its capital expenditure, it will not be at the blistering rate of 30%-35% that the early post-COVID-19 pandemic years saw. The government has other developmental and defence priorities that need funds too. It is time for the private sector to step up its investments. Private investment has grown, but not nearly at the rate needed to move India from 6%-6.5% growth to the more than 8% needed to meet the targets. Given that industrial capacity utilisation has not crossed 80% since March 2011, the only way to induce more private investment is to increase demand substantially. Net exports, especially merchandise, are struggling due to the global uncertainty around trade, and the U.S.’s 50% tariffs imposed on Indian imports. That is, demand from abroad is petering out, which leaves household consumption to do the heavy lifting.

There are two ways to encourage people to spend — increasing their incomes and lowering prices. The GST rate reforms, with effect from September 22, are a significant step in executing the latter. According to a study published by FICCI, more than three-fourths of rural monthly expenditure will attract either nil or 5% GST rates. This was previously 56%. For urban Indians, this proportion has been increased from half to two-thirds. On the income side, the government tried to put more money in people’s pockets by reducing income-tax rates in Budget 2025. This was a welcome and necessary step, although it is not enough to encourage a change in spending behaviour. People are more likely to save than spend that extra amount. The other way disposable income will rise substantially is if companies decide to increase wages. However, apart from a few niche sectors, India has an oversupply of labour, and wages will simply not grow fast enough. There is also a skill deficit that needs to be urgently addressed. This is the unfortunate predicament that the Indian economy finds itself in: consumption is the only driver of growth that is largely immune to global factors. But it also has high inertia, needing relatively more fiscal investment before it can get a jump-start.