Fast income growth is critical to a consumption-driven economy

India's economic expansion hinges on household income and job security to a considerable extent

- Rajani Sinha & Sarbartho Mukherjee are, respectively, chief economist and senior economist at CareEdge Ratings.

India's economy is consumption-driven, with private final consumption expenditure contributing nearly 60% to India's gross domestic product (GDP). The consumption trend also has a strong bearing on private investment and hence is critical for the overall growth of the economy. After the pandemic, we saw a sharp bounce-back in consumption, supported by pent-up demand. While that demand has fizzled out in recent years, worries have arisen that our consumption recovery is not broad-based. In the last year, robust agricultural activity has supported rural demand, but there are concerns of weak urban demand.

An important factor for a sustainable pick-up in consumption is optimism among consumers about their present situation and future. According to the Reserve Bank of India's (RBI) routine survey of households, the Current Situation Index (CSI) of urban consumer confidence—which reflects perceptions of current economic conditions, employment, price levels and income—has recovered from its pandemic lows but remains in pessimistic territory. Rural consumer confidence, the index reading of which was in the pessimistic zone, has turned neutral. The central bank's survey also shows that income perceptions of rural and urban households are weak, although there has been an improvement lately.