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Challenges for India’s Middle Class: Rising Inflation and Declining Urban Consumption
CHENNAI/NEW DELHI – The middle class in India’s urban areas is tightening its purse strings as ongoing high inflation impacts their spending capabilities, posing a challenge to the country’s previously robust economic growth trajectory.
In recent months, a noticeable decrease in urban spending has raised alarms about the sustainability of India’s long-term economic model. Traditionally, this segment has been a vital driver of consumption, making the current downturn a matter of concern not just for major consumer goods corporations but also for the broader economic climate.
Post-pandemic, urban consumption primarily fueled economic growth in India. However, a shift appears to be underway. Suresh Narayanan, Chairman of Nestle India, noted that while affluent consumers continue to spend extravagantly, the middle class—a demographic that has historically supported fast-moving consumer goods (FMCG) companies—seems to be shrinking.
Nestle India, which produces popular products like Kit Kats, recently reported its first quarterly revenue decline since the pandemic’s onset. This trend highlights the vulnerability of the middle class, which consists of approximately one-third of India’s 1.4 billion population, even though its income range is not precisely defined. The middle class plays a crucial role in both the economy and the political landscape, with their discontent being linked to Prime Minister Narendra Modi’s diminishing electoral appeal this year.
India’s economy, the third-largest in Asia, is projected to grow by 7.2% in the financial year ending March 2025, reportedly leading its major counterparts. However, beneath these optimistic forecasts are signs of a significant slowdown in household expenditures, with urban consumption dipping to a two-year low recently as indicated by an index from Citibank. This index tracks various factors, including airline bookings, fuel usage, and salary trends.
Samiran Chakraborty, Citibank’s chief economist for India, attributes part of this decline to unfavourable macroeconomic conditions. Growth in inflation-adjusted wages for publicly listed Indian companies has been stagnant, averaging below 2% for the first three quarters of 2024, compared to a 10-year average of 4.4%. This stagnation, combined with decreasing saving rates and stricter lending regulations, is stifling consumer spending.
Headline inflation has averaged around 5% over the last year, but food prices have escalated above 8%, driven by erratic weather affecting agricultural output. For instance, retail inflation reached a 14-month peak of 6.2% in October, with food inflation soaring to 10.9%. In light of these pressures, retail sales data indicates a mere 15% year-on-year growth during the ongoing festive season, a stark slowdown compared to previous years.
Some consumers have voiced their concerns directly. Rajwanti Dahiya, a 60-year-old pensioner, described her experience during the festive season, saying, “We have not spent at all. Savings are very low.” This sentiment reflects a broader trend of frugality among the middle class.
A Shrinking Middle Class
Despite the central bank’s optimistic forecast of 7.2% GDP growth supported by rising rural demand and a vibrant service sector, other analysts express caution. Economists from Citi and IDFC First Bank predict that the GDP growth for the July-September quarter may fall short of expectations, largely due to the decline in urban consumption.
This prevailing pessimism is mirrored in consumer markets, with the Nifty FMCG index losing 13% in value since October 1, notably exceeding the 7.4% drop of the Nifty 50 benchmark. Among the FMCG index’s 15 constituent companies, only one reported an increase in sales volume for the September quarter, underscoring substantial headwinds for the sector.
Urban consumers are increasingly opting for less expensive, unbranded options, affecting sales of established brands from hair oil to food products. This shift has resulted in a downturn in the foods and refreshment division at Hindustan Unilever, which recorded a sales volume decrease for the first time in 11 quarters. CEO Rohit Jawa highlighted that while consumption in larger cities is waning, smaller cities and rural areas continue to show growth.
Dining out trends also reflect this shift; popular fast-food chains like McDonald’s, Burger King, Pizza Hut, and KFC are witnessing declines in same-store sales. Rajeev Varman, CEO of Restaurant Brands Asia, noted consumers are still visiting, but they are opting for more economical meal choices. Avinash Crasto, a marketing executive from Mumbai, supports this view, stating that he prefers budget-friendly dining options to manage expenses for his family of four.
As India grapples with these economic challenges, the evolving landscape of consumer behavior among the once-vibrant middle class raises important questions about future growth and stability.
Source
finance.yahoo.com