India's Consumption Growth May Lose Steam: Axis Bank Warning
Axis Bank warns that India's consumption growth could lose steam as government subsidies and household borrowing reach their limits.
While the Indian economy currently appears to be performing reasonably well, a warning has emerged regarding the sustainability of its India consumption growth outlook. According to Tanay Dalal, Senior Vice President of Economic Research at Axis Bank, the growth in household spending may face significant challenges in the coming months as the pillars supporting it—namely government subsidies and rising borrowings—reach their limits.
Red Flags in Retail and Auto Sales
Despite healthy high-frequency indicators across the broader economy, certain sectors are already flashing caution signs. Dalal pointed to a noticeable slowdown in retail sales and a dip in automobile demand as key indicators of cooling consumption.
- Retail Sales: Data from the Retailers Association of India indicates that growth slowed from 10 per cent in August to 8 per cent in October.
- Automobiles: Passenger vehicle sales witnessed a sharp 20 per cent decline during the Navratri period.
- Travel: Air travel has also emerged as an area showing signs of weakness.
The Hidden Support System: Subsidies and Debt
A critical point raised by Axis Bank is that headline consumption figures may be misleading because they are heavily propped up by public sector spending and credit.
Government Intervention
Dalal noted that public sector spending, estimated at around 1.7 to 2 per cent of GDP, has been a primary driver. Indirect support—which includes LPG and fertilizer subsidies as well as excise duty cuts on fuel—has contributed roughly 1.7 per cent of GDP. This figure could potentially climb to 1.92 per cent if crude oil prices stay above USD 100 per barrel.
The Credit Bubble
Household borrowing is another major factor keeping consumption afloat, but it may not be sustainable. The report highlights a surge in borrowing patterns:
- NBFC credit to households stands at approximately 40 per cent.
- Unsecured loans from banks are growing at a year-on-year rate of about 30 per cent.
- There is continued strength in loans against shares and gold loans.
Inflation and Shifting Consumer Behavior
Rising prices are forcing Indian households to rethink their spending habits. Dalal estimated that retail inflation might have reached approximately 6.3 per cent in October.
"There were already signs of households trying to save a buck, households slowing down personal consumption, households straining on the credit side," Dalal stated.
This financial pressure is leading to a shift in consumer behavior, with many households moving toward lower-priced products to manage their budgets as inflation eats into their purchasing power.
The Silver Lining: Where the Economy is Winning
Despite the concerns over domestic consumption, Axis Bank highlighted several areas where the Indian economy continues to show strength:
- Medium-Tech Exports: India is seeing a pickup in the export of medium-technology products while importing low-technology items.
- Global Capability Centres (GCCs): The expansion of GCCs continues to provide a boost to economic activity.
- Refining Capacities: Strong crack spreads have led to a higher utilization of spare refining capacities, supporting overall growth.