Economic Slowdown Hits India: Declining Wages and Reduced Consumer Spending
India’s real wages declined for the first time since the pandemic during the July to September quarter, indicating weaker economic growth. Elara Securities Inc. noted that the real wages of listed non-financial companies have declined by 0.5 percent from the same period of the previous year.
The decline comes against increasing inflation and a gradual deceleration of wage increases, affecting India’s urban middle class. Consumer expenditure, an important component of demand, has slowed down, and consumers have decreased their spending even on basic goods and automobiles.
This situation manifests in weak earnings of some leading firms, such as Hindustan Unilever Limited and Maruti Suzuki Limited, where more than half of the NSE Nifty 50 companies still need to meet their earnings estimates. This all points towards financial pressures in households within urban areas.
The technology sector and manufacturing industries have disclosed small wage rises, making the outputs from such companies less affordable. Tata Consultancy Services, Infosys, Wipro, and HCL Technologies all had an employee cost increase of only 3.3% in Q3 of 2024 compared to 8% in the previous year. Motilal Oswal Financial Services analysts have attributed weak consumer finances, slowed income growth, and high inflation.
Household consumption, which contributes approximately 60% of the GDP, continuously threatens to pull down the Indian economy. Brokerage firm Elara Securities has downgraded its full-year GDP growth expectation to 6.8% for FY 2024-25 from 7.1% earlier. Among other institutions, Goldman Sachs has forecast GDP to grow slower than 6.4% due to stagnated wages and high inflation.
The government has taken a long time to finance its capital expenditures, which has hindered economic activity. As of the mid-fiscal year, the actual percentage for the budgeted spending was 37%, while for last year, it was 49%. Minister for Economic Affairs Ajay Seth admitted that the government may fall short of its target for expenditure at ₹11.1 trillion.
Nevertheless, even rural territories have the potential for recovery. A bumper harvest is expected to increase consumption in rural areas and offset problems in the urban economies. Analysts expect government spending to improve in the second half of the fiscal year to support growth recovery further. The Reserve Bank of India (RBI) argues that an enhancement in private investments and agricultural production would promote growth in the future.
Moreover, some government ministers have urged the RBI to lower its interest rates. However, the RBI has maintained a cautious stance, citing its focus on controlling inflation. The released spending has been forecast to power a cyclical economic upturn, with analysts expecting an easing monetary policy.
