India, the world’s fifth-largest economy, often buoyed by its title as the world’s fastest-growing major economy, is starting to show cracks. The country’s GDP growth rate of 6.7% might seem robust, but beneath the surface lies a troubling reality: a sustained weakness in consumption. This slowdown in spending is no longer confined to rural areas; it has permeated urban centres, casting a shadow over hopes for a comprehensive recovery.
While Gross Domestic Product (GDP) growth remains a respectable 6.7% for the first quarter of the current fiscal year (2024), the underlying story is less rosy. Consumption, the bedrock of India’s economic growth, has been weak since 2020, and its fragility is now permeating across income groups—from rural poor to urban affluent consumers.

For years, rural India’s purchasing power has been under strain, driven by stagnant income growth and rising inflation. But now, urban India, once resilient, is showing signs of slowing down. Sales of fast-moving consumer goods (FMCG) in cities are growing at nearly one-fifth the pace they achieved last year. Meanwhile, rural consumption has inched up slightly, but it is far from a robust recovery. Big names in corporate India are beginning to feel the heat. Hindustan Unilever reported a 2% drop in net profit for the July-September quarter. Reliance Retail saw a 1% drop in revenue and reduced store space by 2% from June levels. Upscale retailer Shoppers Stop has logged two consecutive quarters of losses. The festive season, traditionally a time of heightened spending, failed to provide relief: even marquee carmakers like Maruti Suzuki struggled to clear inventory.

As consumption weakens, a bigger worry emerges—stagflation. Simply put, stagflation occurs when the economy faces slow or stagnant growth while prices keep rising, causing high inflation. This creates a tough challenge because addressing one issue, like inflation, can often worsen the other, such as sluggish growth. Now, defined as a period of low economic growth paired with high inflation, stagflation can destabilize macroeconomic stability. However, recent analysis by the Reserve Bank of India (RBI) done in November, 2024 offers a glimmer of hope. The likelihood of stagflation in India has fallen to just 1%, down from 3% in August, according to a research chapter in the RBI Bulletin.

This analysis leverages two approaches. The first examines phases where low growth coincides with high inflation. The second approach utilizes the “Inflation at Risk” (IaR) and “Growth at Risk” (GaR) frameworks, applying quantile regression methods to evaluate the likelihood of stagflation. Based on data spanning from Q1 – 1996-97 to Q2 – 2023-24, researchers found that supply shocks, tighter financial conditions, and currency depreciation are the primary drivers of stagflation risks in India.

Compared to previous global crises like the Asian Financial Crisis, the Global Financial Crisis, and the COVID-19 pandemic, India’s current stagflation risk is markedly lower. The easing of financial conditions, stable crude oil prices, and the moderation in the rupee’s depreciation have all helped mitigate risks. But this fragile stability is contingent on a delicate balance. Any sharp increase in commodity prices, worsening global financial conditions, or depreciation of the rupee could upset this equilibrium. Further, global factors such as post-pandemic monetary policy normalization delays and geopolitical tensions pose latent risks. For a nation where consumption accounts for nearly 60% of GDP, a sustained slowdown in spending could have far-reaching consequences. Weak income growth and declining consumer confidence underscore the need for structural reforms. India must invest in job creation, improve rural incomes, and address inflationary pressures to reignite consumer demand.

Corporate India, too, must confront this reality. Nearly half of the top 100 listed companies reporting earnings for the September quarter missed analyst estimates by over 4%. Companies can no longer rely on the assumption that this slowdown is an aberration. India’s slowing consumption is a warning sign, and while the risks of stagflation have receded for now, complacency could be costly. Policymakers, businesses, and households must navigate this economic landscape with caution. A proactive approach to fostering growth, maintaining price stability, and reviving consumer sentiment will be critical to avoiding deeper economic pitfalls. India’s economy may still be among the fastest-growing in the world, and India’s economic growth remains a point of pride, but sustainable progress requires more than just headline numbers. Strengthening the foundation of consumption and staying vigilant against stagflation risks will be crucial for long-term stability.