Can 2025 Be the Year of Consumption Revival?

What lessons does 2024 hold for our economy managers? How do they manifest as policy challenges as we step into 2025?

First, let’s recognise that there is a serious problem with consumer demand. Both headline government data and the balance sheets of consumer-facing companies are telling us that the Indian consumer, the centrepiece of the so-called “India story”, has slowed down her purchases. The average consumption growth captured in GDP [gross domestic product] data shows an average growth in consumption of 5.4% compared with a pre-Covid five-year average of 7%.

The reasons for the slowdown go beyond poor monsoons in a year that impacted rural demand or a temporary slowdown in hiring in cities in segments like IT. This is a structural problem that needs long-term solutions. In fact, a closer look at the data reveals that consumer demand had been gradually slowing since 2017.

Recently, there has been much hand-wringing about slow wage and salary growth in the organised sector and the data does support that. As the share of employee remunerations in GDP goes down and profits’ share climbs, consumer demand typically goes down. But how does one fix it?

No Quick Fixes

Companies are after all profit maximisers and cannot be blamed for keeping employee costs low. You can’t compel them, in a free-market economy, to hike wages and take a hit on bottomlines. One has to get to the root of the problem.  Why have employees in India seen an erosion in pricing power for their work?

Could it be due to growing industrial concentration, or the “Chaebolisation” (the Korean conglomerates associated with high market power) of the Indian economy that the former RBI deputy governor Viral Acharya described? Or has there been a slowdown in productivity growth that naturally impinges on remunerations? How much of a structural shift did Covid entail?

There are no pat answers. However, for India to achieve sustained growth of 8% plus that will take it to its much aspired “Viksit Bharat” status, consumer demand—particularly mass-market consumption—has to grow faster. Other things like private investments also need consumer demand as fuel. Thus, appropriate policy interventions are imperative. However, those are possible only when we understand the nature of the problem.

There are some short-term solutions as well that might prop things up before more permanent solutions come. We perhaps need to take a cue from politics in framing them. The success in term of election outcomes of income support schemes – Ladli Behana in Madhya Pradesh, Ladki Bahin in Maharashtra or the Maiyya Samman in Jharkhand – are sending policymakers an important message. Instead of viewing them as greedy voters making a grab for revadis (freebies), they might well reflect the fact that disposable incomes are under pressure and any fiscal help that comes along makes a tangible difference.

These are state schemes. The Union Budget due at the end of January 2025 would do well to supplement this with central income transfer schemes. Tax relief for the salaried class does the same. This might not necessarily blow up the fiscal deficit if the government changes its tack—jettisoning the notion that all capital expenditures are good and all revenue expenditures are inferior. Revenue spending to support incomes is essential when consumer spending is tepid.

Missed Opportunity?

Based on the experience of 2024, our monetary authority should also re-examine some of its decisions over the past couple of years. The decision to get inflation to 4%, growth be damned, has come under scrutiny. Others need the same kind of analytical audit.

Thus, we might well ask if the RBI’s obsession with “currency stability” ultimately left behind too shallow a market for the rupee, incapable of functioning without the central bank’s helping hand? Volatility and speculation are essential to the smooth functioning of any market. Did the central bank’s extreme measures in wringing out volatility in the name of stability weaken the currency market substantially? Is this weakness responsible for the seemingly out-of-control depreciation that we are seeing? Did this “stability” paradigm also leave us with a bloated, uncompetitive rupee, in the process effectively taxing exporters and coddling importers?

Again, did the RBI’s emphasis on financial stability lead to a paucity of credit that impinged on growth? Could issues such as growing default in retail lending have been handled better through penalties for specific errant banks rather than the sledgehammer of system-wide tightening of prudential norms.

This leads to a bigger question: can a low-middle-income economy with relatively low penetration of formal finance afford to aim for a pristine lily-white financial system? Instead, should we take chances with the risk of some slippage in loan quality for smaller borrowers, allow fintech firms and NBFCs [non-banking financial companies] (that service the bottom of the borrowers’ pyramid) a little more freedom to grow and develop these markets? As they say, nothing ventured, nothing gained.

The writer is an independent economist and former chief economist, HDFC Bank. Views are personal.