India economic outlook, August 2024
Urban and rural consumers’ changing preferences for discretionary goods and services are creating new business opportunities. Prudent government efforts can guide spending patterns strategically.
India took a big economic leap this leap year: The country ended fiscal year 2023 to 20241 with a big bang, surpassing all market estimates of GDP, with 8.15% year-over-year (YoY) growth. For three consecutive years, India’s economy has exceeded growth expectations (averaging 8.3% annual growth over this period) despite global uncertainties, driven by strong domestic demand and continuous government efforts toward reforms and capital expenditure.
Optimism prevails, as highlighted by a Deloitte pre-budget expectation survey, which shows high confidence among industry leaders in India’s continued robust growth.2 With prevalent signs of the rural economy rebounding, strong growth in manufacturing, robust bank balance sheets and credit growth, and stronger exports in services and high-value manufacturing, there is confidence that India’s underlying potential will help it outpace growth in the rest of the world.
Deloitte projects annual GDP growth to be between 7.0% and 7.2% in fiscal 2024 to 2025 and between 6.7% and 7.3% the following fiscal year as markets adapt to geopolitical uncertainties in their investment and consumption decisions. The global economy is anticipated to rebound synchronously in 2025, as major election uncertainties are resolved, and Western central banks possibly implement rate cuts as inflation concerns subside. India is likely to experience improved capital flows, boosting private investment and exports. Inflation concerns remain, but we expect them to ease in the latter half of the next fiscal year, barring any surprises from rising oil or food prices.
This quarter, we continue on our consumption story that we touched upon in the last edition of “India economic outlook.”3 Consumption spending has remained modest over the past five years despite overall strong GDP growth. The pandemic; high global and domestic inflation and consequent tightening of financial conditions; and the effects of poor agriculture output on rural demand seem to have capped private consumption growth in India. But amid all this, there is a silver lining: We notice distinct and broad-based shifts in the country’s consumption patterns.
In the April edition of this outlook, we noted a significant shift toward increased spending on luxury and premium goods and services.4 We also pointed to the possibility of this trend amplifying with the growing middle-income class. In this piece, we take a deep dive into state- and product-level data published by the Household Consumption Expenditure Survey (HCES 2022–23)5 and identify spending categories across various Indian states.
While urban households collectively outspent their rural counterparts over the past decade, the latter has quickly caught up in spending on discretionary durable goods (including automobiles and electric and electronic goods) as well as services. There is a broad-based shift in the composition of consumption toward more nonfood items, reflecting changing lifestyles and preferences that are here to stay. The declining share of spending on education is a concern though, especially in urban spending where the share declined by 2.43% since 2009–10.
Subsequently, we identified opportunities for businesses based on emerging spending patterns. However, we also cautioned about regional disparities in consumption and inflation hindering sustainable and widespread growth in household consumption, which the government has addressed in the recent Union Budget 2024–2025 that was tabled on July 23, 2024.
Decoding the fourth quarter of fiscal 2023 to 2024
India’s GDP grew 8.15% YoY over fiscal 2023 to 2024, with a sharp growth of 7.8% in the fourth quarter of 2023, beating the government’s second advanced estimate of 7.6% and Reserve Bank of India’s (RBI) estimate of 7.3%. Fourth-quarter economic activities pointed to three interesting trends: improvement in private consumption, exports, and manufacturing.
Firstly, private consumption spending fared better last year than reported earlier. There were upward revisions to the third-quarter data, suggesting consumers spent more generously in the quarter of festivals and the Cricket World Cup than previously believed. Third-quarter GDP growth was revised to 8.6%, up from the earlier estimate of 8.4%, on the back of a 50-basis point upward revision of private consumption spending. That said, private consumption growth remained capped at 4.03% over fiscal 2023 to 2024, owing to modest growth in the agriculture sector and persistent inflation that weighed on rural demand.
Secondly, Indian exports surged by an impressive 8.1% YoY in the fourth quarter—the highest this fiscal year. Merchandise exports improved remarkably that quarter (even though the quarter’s performance could not prevent annual merchandise export growth from contracting). Notably, high-value manufactured goods like pharmaceuticals, chemicals, engineering products, and electronics achieved record export levels this quarter, propelling overall growth in merchandise exports in the high value-added segment. This positive trend bodes well for India as it aims to strengthen its integration into the global value chain and increase its exports to US$2 trillion over the next six years. Growth in the traditional basket of exports, however, continued to decline (figure 1).
And finally, 8.9% growth in manufacturing that quarter points toward sustained momentum. The index of industrial production also hinted at a strong revival in the sector.
A few other factors affecting the growth numbers observed in the last quarter are:
- Modest investment: The momentum in gross fixed capital formation slowed to 6.5% YoY last quarter reflecting a temporary weariness due to national elections in India and other major countries, the escalation of geopolitical tensions in Central Asia, and the economic slowdown in China.
- Demand exceeding supply: The divergence between GDP and GVA (gross value added) narrowed marginally last quarter to 1.5% relative to the previous quarter’s 1.8%, but the gap continued to remain high. This possibly indicates that the demand side (as measured by the expenditure approach) is growing faster than the supply side (denoted by the production approach).
- Fiscal deficit defying expectations: The fiscal deficit narrowed to 5.63% of GDP, lower than both initial budget estimates (5.9%) and revised estimates (5.8%).
India’s near-term outlook
The robust growth in fiscal 2023 to 2024 and the continuity of the government at the center after the elections have increased confidence in the domestic economic fundamentals and buoyed India’s outlook. We expect India to grow between 7.0% and 7.2% in the coming fiscal year (2024 to 2025) in our baseline scenario, followed by 6.7% and 7.3% (admittedly, a much wider range due to uncertainties around several assumptions) in the subsequent years (figure 2).
Following a period of uncertainty in the first six months of the year, we believe India will see very strong growth in the second half. Some of the key contributing factors would be the continuity in domestic policy reforms, reduced uncertainties in the United States after elections, and a more synchronous global growth in a low inflation regime. Improved global liquidity conditions (as central banks in the West ease their monetary policy stance and cut policy rates) would improve capital flows and drive higher investments, especially in the private sector. A synchronous global economic recovery next year will likely help improve exports.
The growth range predicted for next year is higher, as these uncertainties can swing economic activities quite distinctly. That said, we will continue to see the difference between actual GDP and no–COVID-19 levels6 progressively narrowing as growth picks up pace (figure 2).
(For more on our baseline and pessimistic scenario assumptions, see “Key assumptions for Deloitte’s projections”.)
Inflation concerns are likely to fade as we expect food price–driven pressures to ease in the latter half of the year. However, risks of intermittent and spatial monsoons could lead to higher food prices for more extended periods of time. Besides, stronger growth may also keep pressure on inflation as demand outpaces supply. We expect inflation to slowly revert to the RBI’s target level of 4% from early next year and remain within its comfort value over the forecast period (figure 3).
Preparing for a new generation of consumers
In our April edition, we highlighted the prominent shift toward higher spending on luxury and premium goods and services, as well as the implication of a growing middle-income class on prospects of this category of spending.7 For this edition, we conducted an in-depth analysis of the data from the HCES released in June 2024, identifying spending categories across various Indian states.
Urban households have outspent their rural counterparts over the past decade, with the former spending an average of INR2,686 higher than the latter monthly in 2022–2023 (up from INR930 back in 2009–2010. That said, rural spending patterns within food and nonfood categories have quickly caught up to those of urban populations (figure 4).
- A shift toward a protein-based diet: Within the food category, there is a discernable shift away from carb-based food toward a more protein-rich diet, particularly in rural areas.
- Processed food and beverages are in demand: The share of processed food and beverages is the highest in both rural and urban populations, suggesting a broad-based change in consumer preference for convenience and variety in food choices. Since this industry is a major contributor to economic growth, employment, and tax revenues, it makes sense for the government to focus on manufacturing processed food products.
- Discretionary goods and services demand increases: In the nonfood category, spending on services (including conveyance) has been the most, followed by spending on durable goods (that includes mobiles, electrical products, and vehicles, among others).
- The spending share on health and education is a concern: The declining spending share on education and the rising share of spending on health are a concern. Higher spending on health is resulting in higher financial burdens for consumers, limiting their ability to spend elsewhere. At the same time, a reduction in the priority given to education in household budgets could impact future employability and add to disparities in income opportunities.
Changing spending preferences are creating new business opportunities
Rural spending preferences have immense potential to create demand for discretionary goods and services, especially durables and conveyance. Therefore, the revival of rural demand is key to sustainable growth in this segment. Since rising income leads to a more pronounced increase in demand for these items compared with demand for necessities such as food, it is obvious to expect businesses to target states with higher per capita income.
But more importantly, the other factor that decides market opportunities is how broad-based and mature the market is. States with tapering urban and rural spending gaps offer penetration-led volume growth to the country’s GDP. If increasing income in states results in a relatively equitable distribution and higher rural spending, businesses can tap into a larger proportion of the state’s population that resides in the rural areas. This gives businesses access to a large consumer base and a sustainable consumer spending demand, as compared to states with a widening gap. Consequently, businesses are able to:
- Focus on volume growth by tapping into the growing rural middle class and previously underserved rural markets for discretionary products
- Achieve greater economies of scale in production, distribution, and marketing, leading to more competitive pricing and further stimulating rural consumption of these products
- Create opportunities through innovative products and services, such as alternate financing options
Figure 5 shows the distribution of states across parameters such as per capita income and urban-rural consumption gap. Several states have improved the urban-rural spending gap, driven by rising income. These states hold the promise of a large consumer base in rural areas where preferences and consumption behaviors are changing toward nonfood spending categories.
State-wise consumption patterns also offer some interesting insights into the variation of spending across food and nonfood segments (figure 6) to businesses.
- Most states have been big spenders on consumer services including conveyance and entertainment, while the distribution of states’ spending on durable goods is scattered and lacks coherence.
- Demand for processed food has been among the highest in most states, suggesting a shift toward ready-to-eat options. Rapid urbanization, increasing women’s participation in the workforce, and marketing and availability are driving these changing dietary habits.
- When it comes to social spending, household spending on education and health is the least among most states in India. Some states have relatively higher spending on health such as Kerala and Punjab.
Government interventions will provide the much-needed thrust to consumer spending
India is primarily a consumer demand–driven economy, with private consumption accounting for above 60% of GDP. Therefore, sustained momentum in this key growth driver is pivotal.
- Address the high urban-rural consumer spending gaps: For broad-based growth, rising income must also be associated with a reduced disparity in consumption spending between urban and rural consumers. The government will have to address this gap in several states (as observed in figure 5) by improving access to resources and support for agricultural income.
- Allocate more towards health and education: There is a significant variation in household spending on health and education across different states in India.
o Higher spending on health weighs on consumers’ discretionary spending power and can push more households below the poverty line. States with households spending a higher share on health will be required to increase public spending to reduce financial burden.
o Some states have a very low share of household spending on education. Besides, the overall trend of a declining share of education is a concern for the bottom strata of the population, as it can lead to disparities in educational opportunities and outcomes across different regions and socioeconomic groups. States with a lower household spend on education will be required to have targeted interventions to enhance the quality of education and keep education inflation under check.
- Curb inflation and unemployment: Cumulative inflation and poor agriculture output have weighed on rural consumers more than their urban counterparts. Aspirational rural consumers would like to see affordability improve and the government will have to address inflation and create more employment opportunities that boost income.
The newly elected government—serving its third term—tabled its first union budget after elections on July 23, 2024. This time, its policy pivots were toward improving agriculture productivity and income, creating jobs for the youth, and in manufacturing, and addressing the longstanding challenge of access to finance for micro, small, and medium enterprises, among others. All these are likely to have a direct effect on improving supply, curbing inflation, and propping up consumer spending, especially in rural areas and among the middle class. In short, we believe that policy push from the government will help address many of the challenges mentioned above, and we will likely see reduced urban and rural spending gap in the coming years resulting in a sustained growth in overall private consumption spending from a larger consumer base.
Key assumptions for Deloitte’s projections
Deloitte’s assumptions can be grouped into two buckets, namely an “optimistic” scenario and a “pessimistic” scenario, with the former being more likely.
Optimistic scenario
The world will enjoy synchronous growth in 2025 with minimal impact of regional wars on global supply chains and the economy. Election outcomes in the United States and the European Union will reduce uncertainties and help these economies see strong rebounds next year. Political stability, policy continuity, and strong reforms in India increase investor confidence and boost investment leading to an increased number of jobs and higher income.
- The US Federal Reserve cuts policy rates once later this year as inflation moderates.
- Crude oil prices remain low and range-bound owing to modest growth in China’s economy, while the pace of the global energy transition keeps oil prices from rising.
- The RBI maintains a tighter monetary policy to keep inflation under check, a vigil on unsecured lending, and the interest differential with the US Fed policy rate attractive for global investors.
- Government efforts toward expense consolidation continue, supported by buoyant revenues and higher dividends from public sector undertakings and the RBI.
- The dollar price index could swing either way depending on election outcome results and growth in the United States. This could cause the Indian rupee to marginally appreciate or lead to its modest depreciation.
Pessimistic scenario
Regions with ongoing conflicts see continued uncertainties for a prolonged period. The United States and Europe enter a period of recession because of political and policy changes. China’s economy slows down, and global trade and investments fall. The crisis in the global banking system and continuous supply chain disruptions cause inflation to remain high and the monetary policy stance in the West to remain tight.
