Inflation-adjusted employment costs for listed non-financial companies — a proxy for real urban wages — declined 0.5% in July to September from a year ago, according to data from Elara Securities Inc.
Figures from others, like Motilal Oswal Financial Services Ltd., also show a steady slowdown in wage growth, alongside a spike in inflation — pointing to financial stress for India’s urban middle class despite optimistic data showing the economy grew more than 8% last fiscal year.
Consumers are now cutting back on everything from soaps to cars. Some of the country’s biggest companies from Maruti Suzuki Ltd. to consumer bellwether Hindustan Unilever Ltd. have posted weaker earnings recently, saying urban middle class spending has been languishing. About half of companies in the NSE Nifty 50 Index missed consensus estimates in their second quarter earnings, according to data compiled by Bloomberg.
For Prime Minister Narendra Modi’s government, the slowdown is an obstacle to ambitious growth goals and will make it difficult to deliver on pledges to create more jobs. Already cracks are starting to emerge on how to deal with the slump, with the finance and trade ministers calling for interest rate cuts, but the central bank governor holding firm on his inflation target.
India’s main opposition party has also accused Modi’s government of ignoring the economic plight of the middle class.
Data due at 4 p.m. local time on Friday is expected to show further evidence of the slowdown. Gross domestic product likely grew 6.5% in the three months to September, according to economists surveyed by Bloomberg. That would be the slowest pace in six quarters and lower than the central bank’s projection of 7% for the period. Consumption by households and businesses make up almost 60% of GDP.
“Slow hiring in technology sector and muted profitability for manufacturers is likely impacting real income and wage growth amid elevated inflation,” said Elara’s economist Garima Kapoor.
Major IT services exporters — Tata Consultancy Services Ltd., Infosys Ltd., Wipro Ltd., and HCL Technologies Ltd. — reported a 3.3% increase in employee cost in the three months to September from a year ago, down from about 8% in the same period in 2023, according to data compiled by Bloomberg.
Falling wages mean households would need to dip into their savings or take on more debt to keep spending.
“Consumer spending flows like blood in any economy,” analysts Nikhil Gupta and Tanisha Ladha of Motilal Oswal Financial Services Ltd. wrote in a report this month. “The primary factor responsible for weak consumer finances in India is the subdued income growth.”
BloombergHousehold consumption will remain a “drag in this quarter and next,” Kapoor from Elara said. The brokerage has revised its GDP growth estimate to 6.8% for the year through March 2025 compared to 7.1% earlier.
Other economists have been downgrading their full-year growth projections for the world’s fastest-growing major economy as well, with investment banks like Goldman Sachs Group Inc. predicting an expansion of 6.4% for the current financial year. The Reserve Bank of India remains more bullish, sticking to its forecast of 7.2% growth.
Another reason for subdued growth last quarter is the slow pick-up in government spending after the national elections earlier this year. India’s Economic Affairs Secretary Ajay Seth recently said the government may “undershoot” its public spending target of 11.1 trillion rupees ($132 billion) in the current year. In the first half of the fiscal year, the government has spent only 37% of its budgeted capital expenditure, compared to 49% last year.
Government spending “should recover somewhat, but still may remain underwhelming, given the relatively slow pace of overall public spending, especially at the state level,” wrote Rahul Bajoria, an economist at Bank of America Corp. in a note this month.
Rural spending has also picked up, suggesting the worst of the slump may be over, according to Bloomberg Economics.
What Bloomberg Economics Says
Growth was held back by restrictive monetary, fiscal and regulatory policies in the first half of the fiscal year. But government spending is catching up with what’s budgeted; spending was delayed due to the April-May election. Also, rural consumption is starting to get a bounce from a bumper harvest this year. All these point to the start of a cyclical rebound, which will gather pace after the central bank starts easing — we expect — in February.
–Abhishek Gupta, India economist
India’s central bank maintains that the economy is “sailing through smoothly.” Its rosier outlook is based on the view that both rural spending and private investments are improving. The RBI has refrained from cutting interest rates despite a pivot by the Federal Reserve, with Governor Shaktikanta Das saying that an easing at this stage would be “very risky” given inflation risks.
“An upturn in rural consumption and agriculture output should drive growth when industrial activity has seen a deceleration and urban demand is a tad soft,” said Sameer Narang, an economist with ICICI Bank Ltd.