UNION BUDGET '24

Analysis | Can Sitharaman's Budget address India's consumption slump?

With the Modi 3.0 government set to present its first budget on July 23, all eyes are on Finance Minister Nirmala Sitharaman to see if the NDA government will reward voters for their support for the third straight term or punish them for the lower mandate.

In absolute terms, India is the fifth-largest economy in the world with a thriving growth rate. According to estimates from the Ministry of Statistics and Programme Implementation (MoSPI) and the National Statistical Office (NSO), India's real GDP (GDP at constant prices) reached Rs 173.82 lakh crore in 2023-24, compared to Rs 160.71 lakh crore in 2022-23. The growth rate in real GDP during 2023-24 is estimated at 8.2 per cent, up from 7 per cent in 2022-23. While this paints a positive picture of the Indian economy, a closer look at its components—private consumption, investment, government spending, and net exports—reveals a more concerning trend.

1. Private consumption
One of the key challenges facing the Finance Minister as she presents her seventh budget is the consumption slump dragging the economy down. The Private Final Consumption Expenditure's share in GDP dropped to 55.8 per cent from 58 per cent in the previous year. Although PFCE grew by 4 per cent in 2023-24, it shows a K-shaped recovery with premium products and services showing higher growth rates than the value segment. Besides the overall consumption growth in FY24 was mostly price-led and inflationary. Weak rural demand is one of the major reasons for the low consumption rate. Several underlying factors have been contributing to this dampened consumer sentiment:

Unemployment: The uptick in unemployment figures – particularly in rural areas and among female workers – is one of the prime factors that has been contributing to the low consumer sentiment. The recent-stampede-like situation in near Mumbai airport and the student agitations over NEET and the Railway Recruitment Exam are clear indicators that a huge percentage of youth is desperately seeking employment in the country. According to the latest data from the Centre for Monitoring Indian Economy (CMIE), the unemployment rate in India stood at 9.2 per cent in June 2024, a sharp increase from 7 per cent in May 2024. It was 7.3 per cent and 8 per cent in 2022 and 2023, respectively. Though the country's working population increased from 61 per cent in 2011 to 64 per cent in 2021, the proportion of youth involved in economic activities declined to 37 per cent in 2022 despite a strong demographic dividend.

Wages: Wages have largely remained stagnant or declined, with real wages for regular workers and self-employed individuals showing a negative trend after 2019. The average real monthly wage of a regular worker has dipped to Rs 10,925 in 2022 from Rs 12,100 in 2012. Wages in urban areas have decreased faster than in rural areas. While wages may have increased for government employees, private sector workers, who comprise a larger percentage of the workforce, are experiencing wage stagnation.

Inequality: The rising income inequality in the country poses yet another problem. According to an Oxfam report, the top 10 per cent of the Indian population holds 77 per cent of the total national wealth, while the poorest 50 per cent saw only a 1 per cent increase in their wealth. This disparity means that a majority of the population lacks the purchasing power needed to drive demand, which in turn affects capital spending by industries and hampers economic growth.

Inflation: Another key factor hampering growth is the rise in retail prices. After three consecutive months of moderation, consumer price inflation increased in June 2024 due to a significant rise in vegetable prices. Food inflation, which makes up about half of the overall Consumer Price Index (CPI) basket, climbed to 9.55 per cent in June, up from 8.69 per cent in May and 4.55 per cent in June 2023. Vegetable prices alone surged by 27.33 per cent in the preceding month. The Reserve Bank of India is currently struggling to control inflation within the 1-6 per cent target range.

2. Government Spending
The share of Government Final Consumption Expenditure (GFCE), which includes salaries of employees and expenses on infrastructure projects, dropped to 9.5 per cent from 10 per cent in 2022-23. The growth in GFCE moderated to 2.5 per cent.

3. Investment
Though a boost to consumption is required, the Centre should continue to focus on investment to compensate for the lower consumer demand. The high multiplier effect (around 2.5) for investment will help crowd in private investment. With a robust growth rate of 9 per cent, the share of Gross Fixed Capital Formation (GFCF) in GDP, which consists of spending on housing and equipment, increased marginally from 33.3 per cent to 33.5 per cent last year.

4. Net Exports
Exports of goods and services grew by 2.6 per cent, while imports grew at a much faster rate of 10.9 per cent. This disparity led to an expansion in the trade deficit, which widened to 2.3 per cent of GDP in 2023-24 from 0.4 per cent in 2022-23.

What the govt should do
The Centre should focus on putting money into the hands of lower-income groups through schemes like MGNREGA and support for MSMEs. Key demands from the MSME sector include doubling the loan limit to Rs 20 lakh under the MUDRA Yojana and expanding the credit guarantee cover for unsecured loans for MSMEs from Rs 2 crore to Rs 5 crore. The sector also seeks government incentives to help them sell products globally. It should also initiate steps to reap the benefits of the demographic dividend and generate jobs to deal with the supply-demand gap in the labour market.