Why in news?

With the Union Budget 2026–27 approaching, attention is shifting from consumer-focused measures to other growth drivers. This makes it timely to assess whether household consumption—after tax and GST support—has truly strengthened.

What’s in Today’s Article?

• Policy Push to Support Consumption
• Inflation-Led Wage Gains Mask Underlying Weakness
• India’s Wage Growth: Inflation Is Doing the Heavy Lifting
• Borrow to Spend: Rising Household Debt Clouds Demand Outlook
• Limited Budget Room to Boost Consumption

Policy Push to Support Consumption

• In 2025–26, the government took multiple steps to boost household consumption.
• Income tax rates under the new regime were cut, followed by long-awaited GST rate rationalisation in September, aimed at lowering prices and stimulating demand.
• Following GST cuts, demand for consumer durables rose, especially vehicle sales.
  • Data from TransUnion CIBIL showed consumer durable loan demand during the Dussehra–Diwali period rose about 1.5 times year-on-year, suggesting renewed consumer confidence.
• Lower taxes contributed to a sharp fall in headline retail inflation to a record 0.25% in October. However, the full benefit of tax cuts may not have been passed on to consumers.
• Some of the rise in demand may only be temporary, as many households postponed their purchases earlier and then bought everything at once after-tax cuts reduced prices.
• Consumer Confidence Tells a Mixed Story
  • The RBI’s Consumer Confidence Survey (November 1–10) showed improvement in overall sentiment for both rural and urban households.
  • Yet, a closer look reveals stress:
    • Rural households reported worsening perceptions of current income and spending.
    • Urban households saw a slight improvement in income perceptions but reported weaker current spending.
• The Underlying Concern
  • Despite supportive policy measures and headline indicators, income and spending perceptions remain fragile, particularly in rural areas.
  • This suggests that India’s consumption recovery may be uneven and vulnerable, with wage and income growth emerging as key constraints.

Inflation-Led Wage Gains Mask Underlying Weakness

• While rural demand is widely seen as improving, recent data show that the rebound in real rural wage growth has been driven mainly by falling inflation rather than strong income gains.
• Real rural wages rose to 4.1% in the first quarter of 2025–26 after stagnating for three years, largely because rural CPI inflation dropped sharply to 2.4%.
• Nominal rural wage growth stood at 6.5%, the highest since mid-2023, highlighting that sustaining consumption will depend on continued wage growth, not just low inflation.

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

• According to experts, nominal wages must keep pace with inflation, which bottomed out in late 2025 and is now expected to rise.
• If wages do not increase—especially relative to core inflation—any prolonged fall in food prices could hurt rural incomes and weaken future demand.
• Urban Wages: Growth Limited by Flat Pay Increases
  • Urban wage trends are often gauged through staff costs of listed companies.
  • RBI data on over 3,000 non-financial firms shows real urban wage growth rose to 5.7% in July–September 2025, the highest in more than two years.
  • However, this improvement was mainly due to low inflation of 2.1%.
  • In nominal terms, urban wage growth stood at 7.8%, a level that has largely remained unchanged since mid-2023.
• The Core Issue
  • In both rural and urban areas, recent gains in real wages are driven more by low inflation than strong pay hikes.
  • To sustain consumption as inflation rises, nominal wages will need to increase, not just rely on price softness.

Borrow to Spend: Rising Household Debt Clouds Demand Outlook

• While personal loan growth has picked up, it follows the RBI’s November 2023 move to rein in retail lending, especially unsecured loans.
• This highlights concerns over the sustainability of credit-led consumption.
• Household Balance Sheets Under Stress
  • Indian households’ financial health weakened after the pandemic as savings were used to cope with income shocks.
  • As a result, household borrowing rose sharply:
    • Financial liabilities increased from 3.9% of GDP in 2019–20 to 6.2% in 2023–24, before easing to 4.7% in 2024–25.
    • Net financial assets fell to a multi-decade low of 4.9% of GDP in 2022–23, recovering only modestly to 6% in 2024–25.
• Debt Rising Faster Than Income
  • According to economists, between FY09 and FY23, industrial wages grew 1.9 times, while real personal bank debt rose 2.9 times, reaching 3.6 times by FY25.
  • This points to a rising household debt burden relative to income.
  • With households increasingly borrowing to sustain spending and future demand looking uncertain, private investment remains subdued.
  • Businesses are hesitant to expand capacity when the strength of long-term consumption growth is unclear.

Limited Budget Room to Boost Consumption

• Economists believe the Union Budget offers little fiscal space for direct measures to drive consumption.
• According to them, existing support will continue as the RBI’s 125 basis points of rate cuts in 2025 are still working through the economy.
• With inflation expected to remain benign, the Budget is likely to stay focused on capital expenditure and supporting labour-intensive export sectors affected by US tariffs, while maintaining fiscal discipline to preserve buffers for any future need to stimulate consumption.