Urban Economy Struggles: Income Drop & Inflation Tighten the Grip in Q2FY25

Urban demand in the second quarter of FY25 contracted due to reduced corporate and government incomes and heightened tax burdens. A report by Systematix Institutional Equities highlights ongoing income challenges, slow employment growth, and inflation, pressing urban households to prioritize essential spending. Measures to boost income and employment are needed.

The second quarter of FY25 saw a contraction in urban demand as declining incomes within corporate and government sectors, alongside mounting tax pressures on households, took their toll, according to Systematix Institutional Equities. The report underscores how reduced corporate income and governmental spending have critically affected urban households.

Employee compensation growth in the non-financial sector continued its downward trajectory for the sixth consecutive quarter, dwindling to 6.3 per cent from June 2022's peak of 16.4 per cent. The slowdown is linked to tepid sales growth, recorded at 3.8 per cent for the quarter, reflecting a broad contraction across the economy.

Key sectors such as non-financial services, financial services, and manufacturing witnessed moderate real compensation growth, and a stark 10.5 per cent year-on-year contraction in the government's real revenue expenditure highlights the challenge. With significant portions allocated to interest payments, less capital is available for other government expenditures.

Employment trends remain weak, pushing urban incomes further down. In September 2024, the net proportion of people reporting a rise in employment levels fell to -7.3 per cent, reflecting the ongoing trend of poor-quality jobs and sluggish income growth.

Inflation compounds these challenges, squeezing household incomes and redirecting spending toward essentials. The report stresses that revitalizing urban demand hinges on stimulating income growth and expanding employment prospects in forthcoming quarters.

(With inputs from agencies.)