Reduced Spending by Middle-Income Households in India

Context (IE | ET): Leaders in the fast-moving consumer goods (FMCG) sector have raised concerns over declining consumer demand among urban middle-income households.

Reasons for Reduced Spending

• High Food Inflation & Essential Service Costs: Rising costs in areas like food, healthcare, and education have reduced disposable income, cutting into discretionary spending.
• Muted Real Income Growth: The Economic Advisory Council notes that while India’s economy has grown, wage growth has not kept pace, particularly in urban areas, limiting purchasing power.
• Shift to Premium Products: Consumers are increasingly opting for premium products, which raises per-unit expenses while overall purchase volumes decline, as observed by Tata Consumer Products.
• Macroeconomic Uncertainty: Economic instability, job security concerns, and global economic conditions have led households to save more and spend less.
• Government Schemes for Low-Income Households: Programs like the National Food Security Act and Pradhan Mantri Garib Kalyan Anna Yojana have alleviated essential costs for low-income households, allowing them more spending flexibility, while middle-income households face relatively higher expenses.

Economic Implications of Reduced Spending

• Impact on FMCG Sector: Companies such as Hindustan Unilever are experiencing stagnant or declining sales due to reduced consumer demand.
• Employment Challenges: The decrease in consumer spending may lead to fewer jobs and possible layoffs in retail and service industries, with Reliance Retail noting a 3.5% revenue decline.
• Government Revenue Decline: Lower consumer expenditure can result in reduced GST collections, impacting government finances and welfare schemes.
• Pressure on Monetary Policy: The Reserve Bank of India (RBI) faces the challenge of balancing inflation control with the need to stimulate growth through interest rate adjustments.
• Long-Term Behavioral Shifts: If spending remains reduced, households may adopt more conservative financial habits, potentially leading to broader economic stagnation.

Way Forward

• Stimulating Demand: Targeted fiscal measures, like tax rebates or cash transfers, could help increase disposable income and spending power, as demonstrated by programs like Pradhan Mantri Garib Kalyan Anna Yojana.
• Financial Literacy Programs: Enhancing financial literacy can improve household financial management and savings, supported by insights from the World Bank Financial Literacy Report.
• Monetary Policy Adjustments: The RBI could consider a rate cut to encourage consumer loans and stimulate expenditure.
• Supporting Job Creation: Focusing on growth sectors like renewable energy, expected to generate 1.2 million jobs by 2030, could enhance employment prospects.
• Strengthening Social Safety Nets: Expanding benefits such as unemployment support and healthcare assistance, through initiatives like MGNREGA, can offer critical income stability for households.