Why has the great Indian shopper gone silent?

By Mihir Sharma

India-watchers were startled by recent data showing that growth slowed last quarter — by a lot. Gross domestic product expanded only 5.4 per cent between July and September compared to the same period in 2023.

While healthy by developed-world standards, that was considerably lower than the Bloomberg consensus estimate of 6.5 per cent or the Reserve Bank of India’s forecast of 7 per cent.

There are plenty of possible reasons. In particular, many economists point to lower spending by the government. For some years now Indian growth numbers have been pumped up by continually increasing federal capital expenditures.

But you can’t leave the fiscal tap running forever. Elections earlier this year forced a pause in spending — and now, if GDP comes in lower than expected, the finance ministry will have to set aside less money for capital investment if it wants to meet its deficit target. Once you start slowing down, you get caught in a vicious circle.

Other quarterly data tell an even more disturbing story. The salary bill at publicly traded companies is often used as a proxy for urban wages, particularly in India’s largest cities — the “metros,” as they’re known. Earnings reports show that such wages contracted last quarter. That normally only happens during crises such as the Covid-19 pandemic.

India’s swelling urban middle class has been the engine of its growth for far longer than government capex has. Nobody is prepared for the effects — on the country’s politics or economics — if that engine stalls out.

Consumer-goods companies have been warning of this possibility for some time. Earlier complaints of a “K-shaped recovery” from the pandemic — in which richer consumers did fine, while rural distress was growing — have given way more recently to concern about shrinking middle-class spending in India’s metros.

Bloomberg analysis showed that at least seven of India’s largest consumer-facing companies have warned that consumption demand is flagging.

We don’t know the reason for the malaise. Or maybe there are so many possible reasons that the slowdown is overdetermined. Either way, rural distress or small-town hiccups have long been common in India. This is the first time in living memory that the country’s biggest cities might suffer a sustained slump.

How will India handle it? There has never been a real political coalition for liberal economic reforms. Prime Minister Narendra Modi sometimes gestures rhetorically in that direction. More often than not, though, he, his party, and the opposition are debating welfare and not growth.

Whatever momentum economic reform possesses has come from the solid support that forward-looking policies tend to receive from the middle classes, who have seen their living standards increase year after year for decades.

The last time there was a minor hiccup in this trend — when India endured an inflationary surge in the early 2010s — it discredited the entire political class, and Modi, an outsider from a rich western state, rode popular anger to power in New Delhi.

If the urban middle-class sees a sustained decline in living standards now, its members are unlikely to lay the blame on Modi. Over more than a decade in power, the prime minister has succeeded in detaching his personal popularity from India’s material prosperity.

Without anyone to blame, those who have benefited from India’s three decades of liberalization will more likely begin to ask questions about the implicit bargain they’ve made: supporting welfare for villages and the poor in exchange for growth-promoting policies.

This was always an incomplete picture — food and energy subsidies long benefited the middle class disproportionately — but it was one that the metros accepted.

That consensus will not survive a sustained slowdown. Unless the government figures out a way to get cities growing faster, officials might find themselves caught in another trap.

Poor economic outcomes will lead to demands for welfare for the middle class rather than growth-first policies, which will in turn drive down growth even lower. India might have two vicious circles to break, not one.