Can increased consumption promote India’s economy?

The report comes from this week’s CNBC’s “Inside India” newsletter, and brings timely, insightful news and market commentary on the emerging powers and the large companies behind their meteor rise. Like what you see? You can subscribe here.

India’s first budget under Prime Minister Narendra Modi‘The current government was highly anticipated as the country is fighting the decline in the economy, depreciating the rupee and global macroeconomic headwinds.

The government’s message was sloppy, but clear. Middle-income classes must spend more to boost corporate profits and drive the economy.

India’s Finance Minister Nirmala Sitharaman in one-two punch People’s taxes have been removed It has annual revenues of up to 1.2 million Indian rupees ($13,694) increased from the previous threshold of Indian rupee of 700,000.

This measure is expected to be beneficial 10 million more taxpayers There is savings, which are directed towards investing and purchasing goods and services. This will be converted to a 1 – India’s rupee shortage Annual financial income.

India has almost the level of consumption 3 trillion in 200 trillion Indian rupee over the past decade has been growing with the country’s population growth 294.3 million households. The segment is currently occupying the surrounding area 60% of the Indian economy – Make it the best growth driver.

Upasana Chakra, Morgan Stanley’s chief Indian economist, describes consumption as “one of the mainstays of the Indian economy.”

“We will not deny that it plays a key role in providing stability against end demand,” she said within CNBC’s India.

Crack of consumption

However, government lasers focus on increasing consumption on the development of infrastructure that has been historically concentrated, but address deep cracks in consumer spending.

Excluding the segment that serves the luxury market and the rural population, consumption levels across the sector have declined as Indian urban residents. 522.9 million As of 2023 – Reduce spending.

Among the factors that encourage this are increased levels of inflation and stagnant wages. Recent Reports Highlights from the market research consulting company Kantar.

From supermarket chains to car manufacturers, businesses are in a pinch. Some of India’s largest companies, such as Hindustan Unilever, Martis Zuru and Reliance Retail – Retail division Reliance Industries – Reported slower revenues and lower revenues last year as it stricken urban demand.

The fault line of household spending also portends inadequate for foreign companies competing for a share of India’s much exaggerated future growth.

Cyclic deceleration

The lull in India’s consumer spending is partly “cyclical slowdown in consumption” as households either cut costs to save more or reduce service loans that have arisen after Covid. I ow the The pandemic spending boom says Dhiraj Nim, Forex Strategist and Economist at ANZ Bank.

“Of course, consumption is weaker in this part of the cycle. So there’s no need to worry too much as there’s a policy lever to deal with this, such as the RBI’s fee reduction,” Nim said in CNBC’s India. He spoke. . That’s the Indian central bank There is widespread expectation to reduce interest rates February 7th at Sanjay Malhotra and his first policy meeting as governor.

Against this backdrop, Nim says that the government’s move to cut taxes “will not translate into a major boost to GDP growth.”

Limit trends of households consuming (MPC) NIM estimates mean that despite the Rs 1 trillion in India’s tax concessions, their spending will only increase by Rs 600 million to Rs 700 million. MPC captures individuals’ spending motivation with each additional income. A read of 0.6 or 0.7 means that only 60%-70% of the dollars earned will be spent.

While reducing the ratio of fiscal deficits, the tax relief said it would ease the government’s daily spending by 0.4 percentage points of GDP, thereby “completely offsetting the increase from tax easing.”

For him, a more effective approach would be to provide “a wide-ranging economies” by, for example, taking measures that lower fuel prices or reduce inflation and simultaneously increase revenues. Such measures add that they support the higher costs that consumers are working on. Overcome levels.

Has consumption increased enough?

The enormous size of India’s consumption contribution to GDP is a good reason to attract the government’s attention. However, due to India’s true GDP growth It is expected to reach its lowest level in four years 6.4% For the current fiscal year in March, experts are calling for other measures to hamper the slowdown.

Based on references to economic policies in other countries like China, Morgan Stanley’s chakra could drive growth through the younger generation, along with increasing government capital expenditure (CAPEX) and consumption. I pointed out. This includes investing in aspects such as job creation and urban development.

“The growth in GDP from investment in CAPEX is more than consumption. Once CAPEX is featured and jobs are created, income levels also rise. This will also help maintain consumption growth. ” explained Chachra.

That’s all 3% of GDP It was assigned to CAPEX for the Indian fiscal year beginning in April. The proposed initiatives include boosting foreign direct investment flows targeting urban infrastructure and redevelopment initiatives, including recent budgets, as well as funds.

The hope now is that these initiatives work together to create jobs, ultimately increasing productivity and wages. If carried out well, this long process can stimulate urban consumption and promote much-needed economic growth.

Reserve Bank of India will likely cut interest rates. Economists are hoping India’s central bank announces 25 Veges Point Cut To report during the policy meeting on Friday. If the bank has low rates, it will be the first trim in nearly five years. Investors will also scrutinise the statement of RBI Governor Sanjay Malhotra. I took on the role in Decemberassesses the direction of banks’ monetary policy.

The Bharatiya Janata party is expected to win the Delhi parliamentary elections, the exit vote shows. In the case of the Indian Prime Minister Narendra Modi The BJP forms the government This is the first time the party has held the event in the country’s capital for the first time in 27 years. Incumbent Aam Aadmi Party has rejected the exit poll and questioned their accuracy.

India’s budget prioritizes reducing the fiscal deficit. The Indian government is aiming for Finance deficit of 4.4% of gross domestic product For the fiscal year 2025-2026, Finance Minister Nirmala Sitharaman announced on Saturday. The target has fallen from the 4.8% deficit set this year and the peak of over 9% between 2020 and 2021. In the next fiscal year, the government said it plans to reduce its debt level to 50% of GDP by March 31, 2031, with the switch from deficit to GDP as an indicator.

US President Donald Trump has invited Indian Prime Minister Narendra Modi for an official visit. The White House announced the invitation on Monday. On a visit scheduled for the week of February 10thafter the US returned illegal Indian immigrants abroad on the same day. Modi called out Trump on January 27th, during which the leaders discussed bilateral and trade relations. India also wants to avoid the US tariffs Trump has previously imposed on Mexico, Canada and China.

Volkswagen sued the Indian government over $1.4 billion in tax demand. September, India issued a $1.4 billion tax notice to VolkswagenGerman automakers use the import of auto parts as “individual parts” rather than “completely knocked down units” that attract 30-35% collection. He said he paid a low mission of 5-15% by misclassifying it as “individual parts.” Volkswagen said in a filing reviewed by Reuters that the tax dispute could undermine a $1.5 billion investment in India.

Indian stocks have been mixed in the past week after showing signs of pickup the previous week. Nifty 50 The index closed at 23,508.40 points for the week ending January 31st, an increase of 1.8% compared to the previous week.

Benchmark 10 years of government of India bond yields were marked slightly at the 6.78% mark.

On CNBC TV this week, Anand Gupta, lead portfolio manager at Allianz Global, said global geopolitics is “playing with Indian interests.” Most exposed to the risks of a trade war Trump’s tariffs were on fire. Towards this, Gupta cited the growth of the electronic manufacturing sector and the transition from China during Trump’s first term.

Meanwhile, HSBC’s chief Indian economist Punjurbandari said the Indian government will be in the 2025 budget, namely “to overthrow the fiscal deficit, promote large consumption and retain the driving force of its capabilities.” “We’re trying to do a lot of things,” he said. . “However, “something has to be given” to these ambitious goals, Bhandari said that if the New Delhi regime wants to reach its deficit target, It cannot provide a great driving force for the economy.