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Wage and consumption slump poses challenges for PM Modi's growth plans, notes Bloomberg report. (Photo courtesy: Pixabay)

Declining wages in India hit economic growth

| @indiablooms | Nov 30, 2024, at 05:35 am

New Delhi: India witnessed a contraction in wages last quarter for the first time since the pandemic, slowing the economy as consumers reduced spending amid a corporate profit slump, reported Bloomberg News.

Inflation-adjusted employment costs for listed non-financial firms fell by 0.5% year-on-year during the July-September period, as per Elara Securities Inc.

Data from Motilal Oswal Financial Services Ltd. also indicated sluggish wage growth combined with rising inflation, signalling financial strain for the urban middle class.

Consumer spending and corporate earnings hit

The economic slowdown has led to reduced consumer spending across categories, from essential goods to automobiles. Companies such as Maruti Suzuki and Hindustan Unilever have reported weaker earnings, citing a slump in urban middle-class consumption. Nearly half of NSE Nifty 50 Index companies missed earnings expectations in the second quarter, Bloomberg data shows.

Implications for government growth targets

The wage and consumption slump poses challenges for Prime Minister Narendra Modi's ambitious growth plans and job creation promises. Internal differences on addressing the issue are emerging, with finance and trade ministers advocating interest rate cuts, while the central bank governor remains focused on inflation control. The opposition has also criticized the government for neglecting the middle class's economic struggles.

Analysts' concerns over consumer finances

Analysts from Motilal Oswal Financial Services noted that weak income growth is the primary reason behind poor consumer finances, which is likely to drag household consumption for the current and next quarters. Elara Securities has downgraded its GDP growth estimate for the fiscal year to 6.8%, while others, like Goldman Sachs, predict growth at 6.4%. In contrast, the Reserve Bank of India (RBI) remains optimistic, projecting 7.2% growth.

Government spending and rural recovery

Delayed government spending after national elections earlier this year has contributed to the slowdown. By the fiscal year's halfway point, only 37% of the budgeted capital expenditure was spent, compared to 49% last year. However, rural spending shows signs of recovery, buoyed by a strong harvest, suggesting the slump's worst phase may be over.

Outlook and RBI's stance

Economists anticipate a rebound once government spending accelerates and the central bank eases monetary policy, potentially starting in February. The RBI, however, maintains a cautious stance on rate cuts, emphasizing inflation risks.

ICICI Bank economist Sameer Narang noted that an upturn in rural consumption and agriculture output could offset the softening of urban demand and industrial activity, supporting growth in the coming quarters.

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