India's Economic Slowdown: Urban Consumptions Plunge
By Praveen Paramasivam and Shivangi Acharya
CHENNAI/NEW DELHI – India's city dwellers are cutting spending on everything from cookies to fast food as persistently high inflation squeezes middle class budgets, threatening the country's brisk economic growth.
Slowing urban spending over the past three to four months has not only hurt the earnings of the largest consumer goods firms, it has raised questions about the structural nature of India's long-term economic success.
Since the end of the pandemic, India's economic growth has been driven largely by urban consumption; however, that now seems to be changing.
Nestle India Chairman Suresh Narayanan noted that while high-income consumers continue to spend, the middle-class segment is shrinking among fast-moving consumer goods (FMCG) firms.
Nestle India reported its first quarterly revenue drop since the COVID-hit June quarter in 2020. The middle class, though not officially defined, is estimated to encompass a third of India's 1.4 billion people and is considered vital both economically and politically.
India's economy is projected to expand by 7.2% in the financial year ending March 2025, the fastest growth among major economies. However, urban consumption recently hit a two-year low according to a Citibank index that tracks indicators such as airline bookings and fuel sales.
Citi's chief India economist, Samiran Chakraborty, attributes this slowdown to unfavorable macro drivers, including inflation-adjusted wage growth remaining below 2%, well below the 10-year average of 4.4%.
Food inflation has risen above 8% due to weather-related shocks to produce prices, leading to significant cuts in household spending. Retail inflation reached a 14-month high of 6.2% in October, with food prices rising by 10.9%.
Despite anecdotal evidence of a 15% rise in retail sales during the 2024 festive season, many like Rajwanti Dahiya report cutting expenditures dramatically due to low savings.
India's central bank still forecasts 7.2% GDP growth for the fiscal year ending in March 2025, bolstered by rural demand and strong services. However, there's pessimism in the market with various economists predicting slower growth in the upcoming quarters.
Consumer stocks have been impacted, with the Nifty FMCG index declining 13% since October 1. Consumers in metropolitan areas are increasingly favoring cheaper, unbranded items over high-cost branded products, and dining out has also seen a downturn.
Fast-food chains like McDonald's and Burger King reported same-store sales declines as consumers opt for budget-friendly alternatives to manage their expenses better.
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