Can an impulse in consumption stimulate the economy of India?

This report is from the “India Inside” Bulletin of CNBC this week, which brings timely and insightful news and market comments on emerging power and large companies behind its meteoric increase. How do you see? You can subscribe here.

India’s first budget under Prime Minister Narendra Modi‘S current government was highly anticipated since the country states with a deceleration economy, depreciating the rupee and winds against global in the macroeconomic head.

The government’s message was subtle, but of course: the average income class has to spend more to boost corporate profits and stimulate the economy.

In a blow of one and two, the Minister of Finance of India, Nirmala Sitharaman, Deleted taxes for people With annual profits of up to 1.2 million Indian rupees ($ 13,694), above an anterior threshold of 700,000 Indian rupees.

The measure is expected to benefit 10 million more taxpayers with savings that can be channeled towards investment or the purchase of goods and services. This translates into a 1 billion deficit of Indian rupees in annual treasure income.

Consumer levels in India almost have Tripplicate to 200 billion Indian rupees in the last decade, along with growth in the country’s population to 294.3 million households. The segment now represents around 60% of India’s economy – Making it the main growth driver.

Upasana Chachra, chief economist of India by Morgan Stanley describes consumption as “one of the pillars of the Indian economy.”

“It cannot be denied that he plays an important role in stability towards the final demand,” CNBC told India Inside.

Creek cracks

However, the government laser focuses on increasing consumption, on the development of infrastructure, in which it is historically concentrated, occurs in response to deep cracks in consumer spending.

Excluding the luxury market and the segments that serve the rural population, the levels of consumption in all sectors have decreased as the inhabitants of the city of India, which hit 522.9 million From 2023 – Reduce spending.

Among the factors that cause this are assembly inflation levels and stagnant wages, a Recent report Of the market research consultant Kantar Habets.

From supermarket chains to car manufacturers, companies have been feeling the pinch. Several of the largest corporations in India, such as Hindustan Unilever, Maruti Suzuki and Reliance retail: the retail arm of Trusted industries – reported a slowdown in the weakest income and profits last year, due to the languishing of urban demand.

Domestic spending failures are also an amateur for foreign companies that compete for a part of the very mortgaged future growth of India.

A cyclical deceleration

India’s pause in consumer spending is due in part to a “cyclic deceleration in consumption”, as homes reduce expenses to save more or service loans incurred during post-covid 19 Boom of pandemic expenses, says Dhiraj Nim, strategist and currency economist in Anz Bank.

“Naturally, the consumption will be weaker in this part of the cycle. Therefore, we do not have to worry too much, since there are policy levers to address this, as a cut of the rates by the RBI,” Nim told Inside India of CNBC. The Central Bank of India is It is widely expected to reduce interest rates On February 7, at his first policy meeting with Sanjay Malhotra as governor.

In this context, NIM says that the government movement to reduce taxes “will not translate into considerable impulse to GDP growth.”

Marginal propensity of households to consume (MPC) It is 0.6 to 0.7, which means that its expense will only increase by 600-700 billion Indian rupees, despite the 1 billion tax concessions of Indian rupees, NIM estimates. MPC captures the will of an individual to spend, for each additional dollar of income. A 0.6 or 0.7 reading implies that only 60% -70% per dollar cattle will be spent.

Although it reduces the tax deficit ratio, this fiscal relief will also result in a decline in government routine spending by 0.4 percentage points of GDP, so “will completely compensate for any increase in fiscal relief,” Nim said.

For him, a more effective approach would be to provide a “broad relief for the economy”, for example, reduce fuel prices or adoption of measures that reduce inflation and increase revenues simultaneously. Such measures, Nim adds, will reinforce the greatest costs with which consumers are dealing with through income levels.

Is an impulse of consumption enough?

The great size of the consumption contribution to the GDP of India is a sufficient reason to attract the attention of the government. However, with the true growth of the GDP of India A minimum of four years is expected to be achieved 6.4% In the current fiscal year that ends in March, experts are asking for other measures to hinder deceleration.

When referring to economic policies in other countries such as China, Chachra de Morgan Stanley said that an increase in government capital spending (CAPEX), together with consumption, could stimulate growth through the younger generation. This would imply investing in aspects such as the creation of employment or the development of cities, which would benefit the growing educated and aspirational millenary population of India.

“Incremental growth for GDP to invest in CAPEX is more than for consumption. When the CAPEX collects and created jobs, income levels will also increase. That will ensure that the growth of consumption also remains sustained,” Chachra explained.

On 3% of GDP It has been assigned to Capex for the financial year of India as of April. The proposed initiatives include an impulse to direct foreign investment flows and a fund aimed at infrastructure and redevelopment initiatives in cities, which covered the recent budget.

Hope is now that these initiatives work together to create jobs, improving productivity and salaries. If it runs well, this long process could stimulate urban consumption, and combine very necessary economic growth.

The Bank of the India Reserve will probably reduce interest rates. Economists expect The Central Bank of India will announce a cut of 25 base points At your repo rate during your policy meeting on Friday. If the bank makes lower rates, it would be the first adjustment in almost five years. Investors will also analyze the statements of the governor of RBI Sanjay Malhotra, who Assumed paper in Decemberto evaluate the management of the Bank’s monetary policy.

The Bharatiya Janata party is expected to win the Elections of the Delhi Assembly, as shown by the starting surveys. If the Prime Minister of India Narendra Modi’s BJP forms the government In the capital of the nation, it would be the first time that the party prevails in 27 years. The head of the AAM AADMI party has dismissed the exit surveys, questioning its precision.

The Indian budget prioritizes the reduction of the budget deficit. The Indian government points to a Fiscal deficit of 4.4% of the gross domestic product For fiscal year 2025 to 2026, the Minister of Finance, Nirmala Sitharaman, announced on Saturday. This objective has dropped from a 4.8% deficit established in the current year and a peak of more than 9% in fiscal year 2020-2021. Changing Debt to GDP GDP as metric in the next fiscal year, the government also said it plans to reduce its level of debt to 50% of GDP before March 31, 2031.

The president of the United States, Donald Trump, invited Indian Prime Minister Narendra Modi to an official visit. The White House announced the invitation on Monday, With the scheduled visit for the week of February 10After the United States deported illegal Indian immigrants to the country the same day. Modi received a call with Trump on January 27, during which leaders discussed bilateral ties and commercial relations. India also wants to avoid the American tariffs Trump has imposed so far to Mexico, Canada and China.

Volkswagen sued the Indian government for its fiscal demand of $ 1.4 billion. In September India issued a fiscal notice of $ 1.4 billion to Volkswagensaying that the German car manufacturer paid lower duties than 5 to 15% by erroneously classify of 30-35%. Volkswagen said in his presentation, that it was reviewed by Reuters, that the fiscal dispute could compromise its investment of $ 1.5 billion in India.

Indian actions were negotiated last week, after showing signals from a collection the previous week. He Ingenious 50 The index closed at 23,508.40 points in the week that ended on January 31, an increase of 1.8% compared to the previous week.

The 10 -year -old Indian government bond performance has increased slightly to the 6.78%brand.

On CNBC TV this week, Anand Gupta, main portfolio manager of Allianz Global, said that global geopolitics is “playing the advantage of India”, which is the less exposed to the risks of a commercial war caused by Trump’s rates. Towards this, Gupta cited growth in the electronic manufacturing sector and China’s change during Trump’s first mandate.

Meanwhile, the chief economist of the Indian of HSBC, Pranjul Bhandari, said that the Indian government is “trying to do many things” with its 2025 budget, that is, to “reduce the fiscal deficit, give a great impulse of consumption And also hold on to his capex thrust. cannot give a great boost to the economy.