India’s Consumption Story: Factors to Watch in Union Budget 2025

Like every year, the start of 2025 also comes with the much-anticipated unveiling of India’s Union Budget. It’s that time when all eyes, ears, and spreadsheets turn to Finance Minister Nirmala Sitharaman as she prepares to lay out the full-fledged Budget for the third term of the Modi government on 1 February 2025.

This Budget, which will also be Sitharaman’s eighth consecutive speech, will be closely watched for the policies and reforms that could shape the nation’s growth trajectory, especially with India’s GDP slowing down. The government estimates that the growth rate may have slipped to a four-year low (the lowest since the Covid-19 year, 2020-21) of 6.4% in FY25, raising significant concerns and a need for action. 

Here’s a snapshot:

So, as the government faces these challenges, consumption poses to be one of the critical drivers of economic growth. With rising inflation and sluggish demand, boosting consumer spending could play a pivotal role. Let’s understand how.

Why Consumption is a Key Factor

Consumption remains a critical lever for India’s economic momentum, contributing approximately 60% to India’s GDP as of September 2024. However, several challenges, including inflation and high taxes, have dampened consumer demand. 

In simple terms, as the economy grows, individuals’ purchasing power increases, driving consumption demand for various goods and services.

If we recall the GDP numbers for July-September 2024, private final consumption expenditure growth declined to 6% from 7.4% in the April-June quarter. This was mainly due to a drop in urban demand in the face of inflation and tighter economic conditions, leading to an overall slow GDP growth.

Moreover, the government’s recent Household Consumption Expenditure Survey for 2023-2024 shows a shift in spending patterns. The survey, conducted from 2023 to 2024, showed that non-food spending like transport, clothing, and entertainment made up 53% of per capita spending in rural areas, up from 47% in 2011-12. In urban areas, it was 60%, up from 57% in 2011-12, while spending on food items like wheat and rice decreased. The shift is expected to decrease the weighting of food items in the consumer price index (CPI), a key indicator of inflation.

Food and Non-food Spending Data

These metrics show that India’s consumption-driven economy is at a turning point, characterised by changing long-term spending patterns and a significant reduction in private expenditure this year.

However, the report also mentioned that the urban-rural monthly per capita consumer spending gap narrowed to 70% in 2023-24 from 84% in 2011-12.

Consumption Boost: Need of the Hour

Before the Budget 2025 presentation, experts and industry bodies like the Confederation of Indian Industry (CII) and Deloitte have come up with key recommendations to revive consumption. For investors, understanding these dynamics is crucial in the upcoming fiscal landscape.

Impact of High Fuel Prices:

Elevated fuel prices have contributed significantly to inflation. Central excise duties on petrol and diesel remain high, constituting about 21% and 18% of their retail prices, respectively. Despite global crude oil prices dropping by approximately 40% since May 2022, excise duties have not been reduced. CII suggests that lowering these duties could alleviate inflationary pressures and increase household spending capacity.

Rural Challenges:

Persistent food inflation has disproportionately impacted rural households, which spend a higher share of their income on food. Enhanced allocations to schemes like MGNREGS, PM-KISAN, and consumption vouchers could boost rural demand.

Taxation Gap:

India’s highest marginal personal income tax rate, 42.74%, is starkly different from the corporate tax rate of 25.17%.. CII suggests reducing tax rates for incomes up to ₹20 lakh per annum to spur a virtuous cycle of increased consumption, economic growth, and tax revenue.

Inflation: 

Tackling inflation, particularly food inflation, should be a key priority. Long-term initiatives to strengthen agricultural value chains, reduce post-harvest losses, and promote digital marketplaces like eNAM could alleviate supply-side pressures. CII and Deloitte also suggest using direct cash transfers to support rural consumption, which remains vulnerable to inflationary shocks.

Where is India Lacking in its Consumption Story?

While consumption remains a cornerstone of India’s economy, specific structural weaknesses hinder its growth potential:

Uneven Demand Recovery

Demand recovery has been slower in urban areas than in rural due to marginal growth in the FMCG sector. Although rural demand is increasing, high food inflation and a slowdown in credit growth could pose challenges that may dampen progress.

High Inflation Impact

Rising prices, particularly in food and fuel, have significantly affected consumers’ purchasing power, leading to a notable shift towards smaller, more affordable product sizes. This trend indicates that while some sectors may report nominal growth, the volume of goods consumed decreases.

Stagnant Wages

Many consumers are facing stagnant wages, which, combined with high inflation, has reduced spending. The slowdown in income growth for large sections of the urban population has been a key factor in weakening demand in cities.

Key Sectors to Watch

If the government prioritises enhancing disposable incomes in the upcoming Budget, the following sectors are likely to benefit:

FMCG: Enhanced rural demand and increased disposable incomes could boost sales of essential and discretionary consumer goods.

Automobiles: Reduced excise duties on fuel could lower operating costs and stimulate vehicle demand, particularly in the entry-level and mid-segment categories.

Real Estate and Construction: Budgetary support for affordable housing and tax benefits could energise the real estate sector.

Banking and Financials: Higher credit demand for housing, vehicles, and consumer goods could benefit retail-focused banks and NBFCs.

Retail and E-Commerce: Increased consumer spending power is likely to drive growth in organised retail and online marketplaces.

Macro Indicators to Track

1. Changes in excise duties on fuel and inflation trends.

1. Allocation for rural schemes like PMAY, MGNREGS, and PM-KISAN.

1. Personal income tax reforms aimed at increasing disposable incomes.

In Conclusion

These recommendations for the Union Budget 2025-2026 underline the critical role of consumption in driving India’s economic growth. Let’s wait and watch how the government gleans the situation in its upcoming Budget allocations to rejuvenate demand. For investors, staying attuned to these policy shifts and focusing on consumption-driven sectors can unlock significant opportunities in the years ahead.