November 18, 2024
NEW DELHI – Mr Omji Dubey now restricts himself to dining out only once or twice a month.
The resident of Gurugram, a satellite city of Delhi, used to eat at a restaurant every weekend, which can cost upwards of 2,500 rupees (S$39.80) for a meal for two.
Mr Dubey, who works in the information technology sector, has also reduced his consumption of packaged, ready-to-eat food items in exchange for home-cooked meals, which are cheaper.
“Even so, my salary is barely enough to make it to the end of the month,” the 22-year-old bachelor told The Straits Times. The average starting monthly pay in India’s IT sector is around 40,000 rupees.
A spike in retail inflation in India, which hit a 14-month high of 6.21 per cent in October, has put a squeeze on the middle class, forcing millions of people like Mr Dubey to tighten their belts.
The surge has been driven by food inflation, which hit 10.87 per cent in October, adding even more pressure on household budgets.
In particular, a spike in vegetable prices of 42.18 per cent in October compared with the same month in 2023 – after a 36 per cent rise in September – is causing acute distress to many households.
A large section of India’s urban middle class – which has been estimated to account for around 30 per cent of the country’s population of 1.4 billion people – is looking for ways to rein in their spending.
This is even more so in the country’s large metropolitan cities like Delhi, Mumbai and Bengaluru, where everything from eating out to renting a flat is more expensive than in smaller cities and rural India.
Policymakers and economists are now closely watching for any potential impact on consumption and by extension the country’s consumption-driven economy.
Rural and urban consumption accounts for 63 per cent of India’s gross domestic product (GDP), with urban pockets responsible for 60 per cent of overall consumption.
Signs of softening consumer sentiment have been visible for much of 2024 in metropolitan cities, including tepid sales of big brand biscuits and below-expected sales of entry-level cars and house paints.
Fast-moving consumer goods companies such as Nestle, Britannia and Dabur have linked lower sales to a slowdown in urban consumption.
Britannia Industries, which sells biscuits, bread and dairy products, posted a consolidated net profit of 5.31 billion rupees for the three months that ended Sept 30, down from 5.88 billion rupees for the same period a year ago.
Dabur saw a profit drop of 18 per cent in the April to June quarter, citing a squeeze in urban demand.
The peak wedding season in India, between November and December, could give a concrete signal on whether the consumption slowdown is temporary.
“Middle-class spending has been under a cloud in recent times, but one needs to wait and watch for how it evolves in the coming period. The situation is still evolving, and festive sales are a key monitorable for a growth revision in financial year 2025,” said Mr Paras Jasrai, a senior economic analyst at India Ratings & Research.
According to financial company Nomura, during the 2024 festival season – which peaks during Deepavali, when a majority of Indians make major purchases and exchange gifts – the consumption growth rate halved to 15 per cent from the previous year, painting “a mixed picture” of consumption.
“We believe India’s economy has entered a cyclical growth slowdown. We see rising downside risks to our GDP growth projections of 6.7 per cent year on year in financial year 2025 and 6.8 per cent in financial year 2026, both of which are already below RBI (Reserve Bank of India) projections,” said Nomura analysts.
Analysts mentioned that the upcoming wedding season could boost consumption.
India’s central bank has estimated robust 7.2 per cent GDP growth for the fiscal year ending March 2025 due to improved rural demand.
Rural consumption has been recovering on the back of good monsoon rainfall, which has boosted the outlook for the agriculture sector – the main source of employment in rural areas.
In addition, more money has been pushed into the hands of farmers and the rural poor through crop subsidies and the cash transfer of benefits. A third factor is the lower cost of living in rural areas compared with cities.
But the question is whether rural consumption can compensate for softening urban demand.
Between July and September, rural consumption grew by 6 per cent, twice as fast as the urban consumption growth of 2.8 per cent, according to NielsenIQ, a consumer intelligence company.
Mr Dharmakirti Joshi, chief economist at ratings agency Crisil, said that items suited for the rural market, “such as two-wheelers, have performed significantly better in rural regions compared with urban ones”.
“The government’s emphasis on asset-creating and employment-generating schemes, like affordable housing, will also support rural demand.
“On the other hand, urban consumer sentiment is weak. This is due to the impact of rate hikes and the slowing growth in services, which have a higher penetration in urban areas,” he said.
The services sector has continued to grow, but a key gauge measuring growth of the industry – HSBC India Services Purchasing Managers’ Index – fell to a 10-month low in September.
The government has sought to push consumption, and in the 2024 budget reduced taxes for lower-middle class Indians by cutting the tax burden by 17,500 rupees for those earning less than 700,000 rupees annually while increasing infrastructure expenditure.
Commerce Minister Piyush Goyal has suggested the Reserve Bank of India should reduce interest rates.
Pertinently, the negative economic data does not mean that middle-class Indians are not spending at all.
Sales of 10-rupee packet biscuits may be seeing a decline, but sales of 30,000-rupee smartphones are going up, fuelled by the young and the upper-middle class.
Brokerage firm CLSA has maintained that young Indians are moving away from spending on traditional goods to experiences such as concerts and cricket games.
Tickets for Coldplay concerts – the band will play four shows in India as part of their world tour – sold out within minutes, with resale prices going up to 340,000 rupees.
“High food inflation has been a major deterrent that doesn’t affect the spending decisions of top-end consumers as it does the other end of the income strata,” said Mr Jasrai.
While there is debate on what constitutes a middle-class household, middle-class Indians make up 31 per cent of the population.
“There is a top-end… and people with money are spending like it’s going out of style,” said Nestle chairman and managing director Suresh Narayanan.