CNBC’s Inside India Newsletter: Can a Consumption Boost Save India’s Slowing Economy?

This report is from this week’s cnbc’s “Inseide India” newsletter, which brings you timely, Insightful news and market commentary on the emerging powerhouse and the big businesses before Like what you see? You can subscribeHere.

India’s First Budget under Prime Minister Narendra Modi,S Current Government was highly anticipated as the country contends with a slowing economy, depreciating rupee and global macroeconomic headwinds.

The Government’s Message was Subtel, Yet Clear: The Middle-Income Class has to Spend More to Boost Corporate Earnings and Spur The Economy.

In a one-two punch, India’s finance minister Nirmala Sitharaman Removed taxes for people With Annual Earnings of Up to 1.2 Million Indian Rupees ($ 13,694), UP from a Previous Threshold of 700,000 Indian Rupees.

The measure is expected to benefit10 Million More Taxpayers With savings that can be channeled towards investing or buying goods and services. This translates to a 1-TRILLION-India-Rupee Shortfall In Annual Treasury Revenues.

Consumption Levels in India Have Nearly Trebled to 200 trillion Indian Rupees in the Last Decade, AlongSide a Growth in the Country’s Population to 294.3 Million HouseholdsThe segment now accounts for Around 60% of India’s Economy – Making it the top growth driver.

Upasana Chachra, Chief India Economist at Morgan Stanley DesCribes Consumption as “One of the mainstays of the Indian economy.”

“There’s no denying that it plays an important role in providing stability towards end demand,” She told cnbc’s inside India.

Cracks in Consumption

However, the government’s laser focus on boosting consumption – Over infrastructure development, on which it has history concentrated – COMES In Response to Deeep Cracks in CRACKSAMER

Excluding the luxury market and segments serving the rural population, consumption levels across sector has dwindled as India’s’Se city dwellers – who Hit 522.9 Millionas of 2023– Cut Back on Spending,

Among the factors prompting this are mounting inflation levels and stagnant wages, a Recent report From Market Research Consultancy Kantar Highlights.

From supermarket chains to automakers, companies have been feeling the pins. Several of India’s Larget Corporations, Such as Hindustan Unilever, Maruti Suzuki And reliance retail – the retail arm of Reliance Industries – Reported a Slowdown in Revenue and Weaker Earnings Last Year, on Account of Languishing Urban Demand.

The Fault Lines in Househld Spending also bode poorly for foreign companies vying for a share of India’s much-hayped future growth.

A Cyclical Slowdown

India’s Lull in Consumer Spending is in Part Owed to a “Cyclic Slowdown in Consumption,” As Households Cut Back on Expenses to Eiter Save more or service loans incurred During thesePandemic Spending Boom, Says Dhiraj Nim, A Foreign Exchange Strategist and Economist at Anz Bank.

“Naturally, consumption will be weaker in this part of the cycle. So, we don’t have to worry too much as there are policy leavers to address this, such as a cutting of rates by the RBI,” NIM TOLD CNBC ” India. India’s Central Bank is widely expected to cut interest rates on Feb. 7, in its first policy meeting with Sanjay Malhotra as Governor.

Against this Backdrop, Nim Says The Government’s Move to Cut Tax “Won’st Translate Into A Sizable Boost to GDP Growth.”

Households’ Marginal Propensity to Consume (MPC)is 0.6 to 0.7, which means their experture will only increase increase by 600-700 billion Indian Rupees, Despite the 1 Trillion Indian Rupee Tax Concepts, Nim Estimates. MPC Captures an individual’s willingness to spend, for Each additional dollar of income. A reading of 0.6 or 0.7 implies that only 60% -70% will be spent per dollar earned.

While reduction the fiscal deficit ratio, this tax relieve will also also result in a pullback of the government’s routine expert by 0.4 percentage points of the gdp, thereby “COMPLELY OFFSETING POINTS Increase from the tax relief, “Nim said.

To Him, a more Effective Approach would be to provide “broad-based reliable for the economy,” by, say, cutting fuel prices or adopting measures that reduce information and increase income. Such measures, nim adds, will buttress the higher costs that consumers are grappling withAcross income levels.

Is a consumption boost enough?

The Sheer size of the consumption contribution to India’s GDP is Reason enough for it to draw the government’s attention. However, with India’s Real GDP GrowthExpected to Hit a Four-Year Low of 6.4%In the current fiscal year ending in March, experts are calling for other measures to stymie the slowdown.

Drawing Reference to Economic Policies in Other Countries like China, Morgan Stanley’s Chachra Noted that a Rise in the Government’s Capital Expenditure (CAPEX) – Along with Consumption Via the younger generation. This would Involve Investing in Aspects Such as Job Creation or The Development of Cities, which would benefits India’s Growing Educated and Aspirational Millennial Population.

“The incremental growth to gdp from investment in capex is more than for consumption. Sustained, “Chachra explained.

Over 3% of GDP Has been allocated to Capex for India’s Financial Year Starting in April. The proposed initiatives include a boost to Foreign Direct Investment Flows and a Fund aimed at infrastructure and redeevelopment initiatives in cities, which BUDGET ENCOMPASSSEDED.

The hope now is that these initiatives work in tandem to create jobs, eventually improving productivity and wages. If Executed Well, this long process could stimulate urban consumption-and fuel much-needed economic growth.

The reserve bank of India will likely cut interest ratesEconomists Expect India’s Central Bank to Announce a 25-Bas-Point Cut To its repo rate during its policy meeting on Friday. If the bank does lower rates, it would be the first trim in nearly five years. Investors will also scrutinize the Statements of RBI Governor Sanjay Malhotra, who Assume the role in DecemberTo Assess the Direction of the Bank’s Monetary Policy.

The Bharatiya Janata Party is expected to win the Delhi Assembly Elections, Exit Polls Show.If India Prime Minister Narendra Modi’sBJP forms the government In the nation’s capital, it’d be the first time the party prevails to do in 27 years. The incumbent aam aadmi party has dismissed the exit polls, questioning their accuracy.

India’s Budget Prioritizes Reducing Budget Deficit.The Indian Government is Aiming for a Fiscal Deficit of 4.4% of Gross Domestic Product For the fiscal year 2025 to 2026, Finance Minister Nirmala Sitharaman Announced on Saturday. That target is down from a 4.8% deficit set out in the current year and from a peak of over 9% in the fiscal year 2020-2021. Switching to debt-to-GDP from deficit-to-GDP as a metric in the next fiscal year, the government also said it plans to reduce it plans to reduce its debt level to 50% of the GDP by March 31, 2031.

Us President Donald Trump Invited Indian Prime Minister Narendra Modi for an official visit.The White House Announced The Invitation on Monday, With the visit scheduled for the week of Feb. 10After the US deported illgal Indian migrants back to the country the same day. Modi had a call with Trump on Jan. 27, DURING SEAD TEADERS DISCUSSED Bilateral Ties and Trade Relationships. India also wants to avoid us tarifs that trump has so far imposed on mexico, canada and china.

Volkswagen sued the Indian government over its $ 1.4 billion tax demand.In September, India Issued A $ 1.4 Billion Tax Notice to VolkswagenSaying that the German Automaker Paid Lower Duties of 5–15% by misclassifying its imports of car components as “individual parts” individual parts “from separe shipments rather than” Complety knocked down units, ” Which would have attracted a Levy of 30–35%. Volkswagen said in its filing, which was reviewed by reates, that tax dispute might compromise its $ 1.5 billion investment in India.

Indian stocks tradeed mixed in the past week, after showing signs of a pick up the week before. The Nifty 50 Index Closed at 23,508.40 Points in the Week Ending Jan. 31, A 1.8% Rise Compared to the Previous Week.

The Benchmark 10-Year Indian Government Bond Yield has ticked up Slightly to the 6.78% Mark.

On cnbc tv this week, anand gupta, lead portfolio manager at allianz global, said that global geopolitics are “playing to the advantage of India,” which is the Least exposed to the risks of a trade war Sparked by Trump’s tariffs. Toward this, gupta cited the growth in the electronics manufacturing sector and the shift away from china during trump’s first term.

Meanwhile, HSBC Chief India Economist Pranjul Bhandari said that the Indian government is “Trying to do a lot of things” with its 2025 Budget, Namely to “Bring Down the focal deficit, give a Big CONSUMPTION Boost and also hold on to its Capex Thrust. ” However, “Something’s Gotta Give” in that that Ambitious Goals, Bhandari Said, Adding that If the New Delhi Administration Wants Wants to Reach Its Deficit Target, It can’t give a big push to the economy,