India's Consumption Story Confronts a Critical Wage Growth Challenge
India's much-touted consumption narrative is grappling with a fundamental issue: wage growth. While one-off tax reductions can provide a temporary boost to household spending, a sustained increase in consumer demand necessitates wages rising at a healthy pace. This analysis delves into the current state of consumption, examining the interplay between policy measures, inflation, and income trends.
The Impact of Recent Policy Measures on Consumption
The fiscal year 2025-26 has been marked by efforts to bolster household consumption. The Union Budget introduced last year lowered income tax rates under the new regime, followed by the long-awaited rationalisation of the Goods and Services Tax (GST) in September. These moves aimed to stimulate spending, and initial data shows some success. For instance, demand for consumer durables surged post-GST cuts, with vehicle sales seeing significant growth as households capitalized on lower prices.
According to credit bureau TransUnion CIBIL, demand for consumer durable loans increased by approximately one-and-a-half times during the festive period between Dussehra and Diwali compared to the previous year, signaling renewed consumer confidence. However, this uptick may be partially artificial, as consumers likely postponed purchases ahead of the tax cuts, leading to inflated demand from late September onward.
Mixed Signals from Consumer Confidence Surveys
The Reserve Bank of India's (RBI) latest Consumer Confidence Survey, conducted in early November, reveals nuanced insights. While overall confidence improved for both rural and urban households compared to September, qualitative responses indicate underlying concerns. Perceptions about current income and spending deteriorated for rural households, and although urban households reported a slight improvement in income, their assessment of current spending worsened. This suggests that while headline numbers appear positive, the ground reality may be more complex.
Inflation and Wage Growth: A Delicate Balance
The prevailing narrative suggests urban demand is subdued but recovering, while rural demand benefits from a good monsoon. Data supports this: real rural wage growth rose to 4.1% in the first quarter of 2025-26, after averaging zero over the previous three years. However, this rebound is largely due to a sharp fall in inflation, with rural CPI inflation averaging 2.4% in April-June 2025, down from 5.5% a year ago. Nominal rural wage growth was 6.5% in the same period, the highest since mid-2023, but sustainability is key.
Gaurav Kapur, Chief Economist at IndusInd Bank, emphasizes that nominal wage growth must align with inflation, which bottomed out in late 2025 and is expected to rise. He warns that prolonged deflation in food prices could adversely affect rural income and demand if wages do not keep pace, particularly relative to core inflation.
Urban Wage Trends and Household Debt Concerns
For urban areas, a proxy for wage growth is the increase in staff costs of listed companies. Real urban wage growth reached 5.7% in July-September 2025, the highest in over two years, again driven by low inflation of 2.1%. Nominal growth was 7.8%, a level stagnant since mid-2023. Meanwhile, household debt has risen significantly. Financial liabilities of households 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 hit a multi-decade low of 4.9% of GDP in 2022-23, recovering slightly to 6% in 2024-25.
ANZ economists Dhiraj Nim and Sanjay Mathur note that between FY09 and FY23, industrial wages rose 1.9 times, while real personal bank debt increased 2.9 times, reaching 3.6 times by FY25. This rising debt burden relative to income underscores stress in household balance sheets, potentially dampening private investment as future demand foundations remain unclear.
Budgetary Constraints and Future Outlook
With the Union Budget for 2026-27 approaching, economists suggest limited fiscal room for further consumption support. Finance Minister Nirmala Sitharaman may focus on capital expenditure and labor-intensive export sectors impacted by US tariffs, while maintaining fiscal discipline to build buffers. IndusInd Bank's Kapur believes the effects of RBI's 125 basis points interest rate cuts in 2025 are still permeating the system, and with benign inflation, the budget can prioritize long-term stability over immediate consumption boosts.
In summary, while tax cuts have provided a short-term lift, India's consumption story hinges on robust wage growth. Without sustained increases in income, household demand may falter, highlighting the need for balanced economic policies that address both inflation and wage dynamics.
