India's Economic Conundrum: Navigating Subdued Demand

India's economy faces a challenging outlook for FY26, as a Nuvama report identifies weakened key consumption drivers. Slowed income growth and reduced consumption loans highlight this trend. Fiscal transfers may alleviate middle- and lower-income household pressures, but demand remains a significant concern for sustaining economic momentum.

India's economy is currently navigating a challenging phase marked by subdued demand, as growth in crucial sectors experiences a slowdown, according to a report by Nuvama. The report identifies four key drivers of consumption cycles—wealth effect, incomes, leverage, and fiscal transfers—that have shaped consumption patterns over the last two decades.

In Fiscal Year 2025, these drivers are showing signs of weakness. Household income growth has stagnated, rural wages remain stagnant, and organized sector wage growth is decelerating. Previously relied upon consumption loans have also diminished, dropping from a 25% growth in FY24 to 15% in FY25.

The outlook for income across both rural and urban households appears bleak for FY26, with consumption loans projected to remain low. However, fiscal transfers might offer some reprieve to middle- and lower-income households. While potentially impacting capital expenditure, this fiscal focus could support consumption, particularly at the lower end.

The report suggests that, although rural consumption may see an uptick due to its previous weakness, urban consumption is likely to decelerate further. Upper-end consumption, after a period of robust growth, is expected to slow down, as indicated in the report. State governments have raised social sector spending, with the central government likely to follow, potentially boosting rural consumption.

India's economic slowdown is evident with real GDP growth reducing from 8.2% in FY24 to 6% in the first half of FY25. The report notes a convergence in real and nominal GDP growth trends, pointing to a weakening demand. While large corporations led the post-COVID recovery, their tax contributions have aligned with the weaker growth trends seen in smaller businesses.

The report emphasizes that while the Indian economy is ready in terms of supply, it remains deficient in demand. With real GDP growing at a modest CAGR of 5% between FY19 and FY25, factors like subdued exports, government deficit reduction strategies, and cautious corporate capital expenditure have restrained household incomes, exacerbating demand challenges.

Amidst pressing economic challenges, the report suggests that fiscal policies aimed at enhancing lower-end consumption and recalibrating growth strategies could prove crucial to sustaining economic momentum in the years ahead. (ANI)

(With inputs from agencies.)