Axis Bank Warns of Sustainability Risks in India's Consumer Spending

India's consumption growth faces potential headwinds as it relies heavily on government subsidies and rising household debt, raising sustainability concerns despite current high-frequency indicators showing healthy economic activity.

Economic Sustainability Concerns

India's consumption growth may face challenges in the coming months as household spending is increasingly supported by government subsidies and rising borrowings, which may not remain sustainable, Tanay Dalal, Senior Vice President, Economic Research at Axis Bank, said in an exclusive interview with ANI. Dalal said the Indian economy is currently performing reasonably well, with several high-frequency indicators showing healthy activity. However, some sectors are showing signs of caution, particularly retail sales and automobile demand.

He pointed out that retail sales growth, according to data from the Retailers Association of India, slowed from 10 per cent in August to 8 per cent in October. Passenger vehicle sales during Navratri also declined 20 per cent, while air travel was another area showing signs of weakness. Beyond these indicators, Dalal raised concerns about the sustainability of household consumption, saying that headline spending numbers do not fully reflect the support coming from government spending and borrowing.

Government Support and Debt Reliance

"Consumption numbers look good at a headline basis, but probably are supported by public sector spending of around 1.7 to 2 per cent of GDP," he said. He explained that indirect government support, including fertilizer and LPG subsidies and cuts in excise duty on fuel, has contributed around 1.7 per cent of GDP. This could increase to 1.92 per cent if crude oil prices remain above USD 100 per barrel.

Household borrowing is also playing an important role in supporting consumption. Dalal said non-banking financial company (NBFC) credit to households is around 40 per cent, while unsecured loans by banks are growing around 30 per cent year-on-year. "This consumption tailwind might not be sustainable going ahead," he said, warning that growth could face headwinds if financial and public sector support weakens.

Inflation and Spending Adjustments

Dalal also highlighted the impact of rising prices on household spending. He estimated that retail inflation could have reached around 6.3 per cent in October, although he said he had not completed his calculations. He said households were already adjusting their spending patterns by shifting towards lower-priced products as prices increased. "There were already signs of households trying to save a buck, households slowing down personal consumption, households straining on the credit side," he said.

He also pointed to continued strength in gold loans and loans against shares, saying these sources of support may not continue to drive consumption in the future.

Bright Spots in the Economy

Despite these concerns, Dalal said several other parts of the economy were performing reasonably well. He highlighted a pickup in medium-technology exports, with India importing low-technology items while exporting more medium-technology products. Expansion in global capability centres (GCCs) and higher use of spare refining capacities amid strong crack spreads were also supporting economic activity.

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