After the gross domestic product (GDP) growth of 8.15 per cent year-on-year (YoY) in FY24, beating all estimates, Deloitte India expects strong economic fundamentals to drive growth between 7.0 per cent and 7.2 per cent in FY25. This forecast is higher than the Economic Survey’s prediction (between 6.5 per cent and 7 per cent) but aligns with the outlook of the Reserve Bank of India (RBI).
As per Deloitte’s India Economic Outlook for August 2024, strong growth is progressively narrowing the difference between actual GDP and no–Covid-19 levels GDP in the coming years.
“Following a period of uncertainty in the first six months of the year, we believe India will witness robust growth in the second half. Key contributing factors include the continuity in domestic policy reforms, reduced uncertainties in the US post-elections, and more synchronous global growth within a low inflation regime," said Rumki Majumdar, Economist, Deloitte India.
Additionally, improved global liquidity conditions, as central banks in the West ease their monetary policy stance, will enhance capital flows and drive higher investments, particularly in the private sector,” she added.
Despite strong growth, private consumption spending has remained modest over the past five years. The pandemic, high global and domestic inflation, consequent tightening of financial conditions, and the effects of poor agriculture output on rural demand seem to have capped private consumption growth in India. But amidst all this, there is a silver lining. According to Deloitte research, India is witnessing distinct and broad-based shifts in consumption patterns. There is a broad-based shift in the composition of consumption toward more non-food and discretionary items, reflecting changing lifestyles and preferences that are here to stay.
The household consumption expenditure survey stated that the spending on discretionary goods and services (including conveyance) has gone up both in rural and urban India, with the former quickly catching up in spending on discretionary durable goods (including automobiles, electric and electronic goods) with the latter in just one decade.
Emerging Opportunities
Rural spending preferences have immense potential to create demand for discretionary goods and services, especially for durable goods and conveyance. Narrowing the urban and rural spending gap offers penetration-led volume growth opportunities for businesses to focus on volume, achieve economies of scale, and create opportunities through innovative products and services.
According to Deloitte research, if increasing income in states results in a relatively equitable distribution and higher rural spending, businesses can tap into a larger proportion of the state’s population that resides in rural areas. This gives businesses access to a large consumer base and a sustainable consumer spending demand, as compared to states with a widening gap.
The good news is that several Indian states have improved the urban-rural spending gap along with the rising income. These states hold the promise of a large consumer base in rural areas, where preferences and consumption behaviours are shifting towards non-food spending categories.
Demand for processed food has been among the highest in most states, suggesting a shift towards ready-to-eat options. Rapid urbanisation, increasing women’s participation in the workforce and enhanced marketing and availability are driving these changing dietary habits. When it comes to social spending, household spending on education and health is the least among most states in India.
Some states have relatively higher spending on health such as Kerala and Punjab, weighing on consumers’ ability to spend on discretionary goods and services.
Government’s Intervention
The government’s prudent initiatives can guide these emerging spending patterns strategically to boost business opportunities. This time, the finance minister did announce several initiatives in the Union Budget 2024-25 toward improving agriculture productivity and income, creating jobs for the youth, and in manufacturing, and addressing the longstanding challenge of access to finance for micro, small, and medium enterprises (MSMEs), among others.
All these are likely to have a direct effect on improving the supply side, curbing inflation, and propping up consumer spending, especially in rural areas and among the middle class.
Effectively addressing the urban-rural consumer spending gaps, inflation, and employment concerns can significantly enhance the affordability of aspirational rural consumers. The much-desirable policy pivot was evident in the Union Budget presented last month. Reducing the urban and rural spending gap in the coming years will ensure sustained consumer demand from a larger consumer base.
