A consumption-driven economy can’t do without rapid income growth

After the pandemic, we saw a sharp bounce-back in consumption, supported by pent-up demand. While that demand has fizzled out in recent years, worries have arisen that our consumption recovery is not broad-based.

In the last year, robust agricultural activity has supported rural demand, but there are concerns of weak urban demand.

An important factor for a sustainable pick-up in consumption is optimism among consumers about their present situation and future.

According to the Reserve Bank of India’s (RBI) routine survey of households, the Current Situation Index (CSI) of urban consumer confidence—which reflects perceptions of current economic conditions, employment, price levels and income—has recovered from its pandemic lows but remains in pessimistic territory.

Rural consumer confidence, the index reading of which was in the pessimistic zone, has turned neutral. The central bank’s survey also shows that income perceptions of rural and urban households are weak, although there has been an improvement lately.

Also Read: Indian consumer habits: Second guess them at your own risk

The household sector’s economic health should not be viewed in isolation. It must be seen in the context of India’s broad macroeconomic balance sheet, particularly of the government and corporate sectors.

Since the pandemic, both the general government and non-financial corporate sector have entered a phase of deleveraging.

Government debt, which peaked at around 88% of GDP during the covid pandemic, had moderated to 82% by December 2024, aided by fiscal consolidation and robust growth in nominal GDP.

Similarly, corporate debt has declined significantly from 66% of GDP in 2017 to just over 50% after the pandemic, thanks in part to the corporate tax rate cut in 2019.

It is important to recognize that the two sectors undergoing deleveraging—the general government and corporations—are key sources of employment and household income through wages, transfers and subsidies.

A simultaneous deleveraging cycle in both these sectors may have adverse implications for household income, particularly at a time when household balance sheets increasingly have loans to be paid back.

Muted household income growth is also reflected somewhat in corporate payrolls. Our analysis of a large sample of around 670 listed non-financial companies reveals that employee cost growth slowed to 7.2% in 2024-25, the weakest since 2018-19 (excluding the covid-impacted year of 2020-21).

Average annual employee cost growth was 10.7% over the period from 2018-19 to 2023-24. The recent moderation is largely driven by the infotech sector, which constitutes 44% of total employee costs in our sample.

The sector is an employment powerhouse in urban India, but has shown signs of recruitment stagnation in recent years. Our study shows that aggregate headcount at the top five domestic infotech firms plateaued in 2024-25 after a 4% contraction in 2023-24.

The growth in employee costs for these firms in our sample slumped to just 5% in 2024-25 from an average of 14% between 2018-19 and 2023-24.

While sectors such as infrastructure, pharmaceuticals and capital goods continue to report double-digit growth in staff expenses, they do not fully compensate, given the significance of the infotech sector in formal urban employment.

Also Read: Consumer dissonance: Focus policy on market rivalry instead of pricing strategy

India’s deceleration in corporate expenditure on remuneration directly hits household income, worsening the economy’s consumption weakness. Periodic Labour Force Survey data also shows that real wage growth for salaried as well as casual workers has been muted in the past few years.

Meanwhile, geopolitical risks and global trade uncertainties have heightened the risk of a moderation in export growth, with implications for household income and consumption.

Some near-term factors do support consumption demand. The monsoon’s progress has been good so far, resulting in better kharif sowing and reservoir levels. This should help strengthen rural demand. Benign retail inflation, specifically in food items, should also support consumption growth.

Policymakers have taken cognisance of headwinds to consumption. Recent RBI rate cuts and the government’s income tax relief are steps in the right direction. However, for sustainably stronger consumption, we must ensure ample job creation and household income growth.

Government initiatives like its employment- and production-linked incentive schemes should help in job generation. However, given the large number of people entering the job market every year, we may need to take a sector-focused approach.

Also Read: Dani Rodrik: Abundance for consumers could still mean misery for workers

We also need greater emphasis on the formalization of jobs as a way to ensure social security, higher wages and better work conditions.

Only when households are confident of their earning prospects over the foreseeable future will we see a pick-up in consumption spending that is both robust and durable.

The authors are, respectively, chief economist and senior economist at CareEdge Ratings.