India’s Consumption Puzzle: The Wage Growth Problem

Context

As the Union Budget 2026-27 approaches, attention is shifting from short-term consumption stimulus to the deeper structural drivers of growth. Despite tax cuts, GST rationalisation, and falling inflation, household consumption remains uneven. Wage growth, rather than prices or credit, is increasingly emerging as the decisive factor shaping India’s consumption trajectory.

Q1. Why has India’s household consumption become a key concern ahead of the Union Budget 2026-27?

1. Household consumption is the largest contributor to India’s GDP and a key engine of growth.
2. Recent tax cuts and GST rationalisation were expected to strengthen consumer demand sustainably.
3. While headline indicators improved, underlying income and spending signals remain fragile.
4. Rural consumption, in particular, continues to face stress despite policy support.
5. Inflation has fallen sharply, but wage growth has not strengthened proportionately.
6. This raises doubts about the durability of consumption-led growth.
7. With limited fiscal space, policymakers must assess whether consumption can sustain itself.
8. Hence, consumption strength has become a central concern before the Budget.

Q2. What policy measures were taken in 2025-26 to support household consumption, and what were their immediate effects?

1. The government cut income tax rates under the new tax regime to raise disposable incomes.
2. GST rate rationalisation in September aimed to lower prices of consumer goods.
3. These measures contributed to a sharp fall in headline retail inflation.
4. Demand for consumer durables, especially vehicles, increased after GST cuts.
5. Consumer durable loan demand surged during the festive season.
6. This reflected improved short-term consumer confidence.
7. However, part of the demand was due to deferred purchases made earlier.
8. Therefore, the boost may have been temporary rather than structural.

Q3. What does consumer confidence data reveal about the strength of India’s consumption recovery?

1. RBI’s Consumer Confidence Survey showed overall improvement in sentiment.
2. Both rural and urban households reported better expectations for the future.
3. However, rural households perceived a decline in current income and spending.
4. Urban households reported slightly better incomes but weaker spending.
5. This divergence suggests uneven recovery across regions.
6. Current consumption remains constrained despite positive expectations.
7. Income uncertainty continues to weigh on household decisions.
8. Thus, confidence data points to a fragile and uneven recovery.

Q4. Why is wage growth emerging as the core constraint on sustaining consumption in India?

1. Consumption growth depends more on income growth than on price reductions.
2. Recent gains in real wages are largely due to falling inflation.
3. Nominal wage growth has not accelerated meaningfully.
4. As inflation rises again, real wage gains may weaken.
5. Without sustained wage increases, purchasing power will erode.
6. Temporary tax relief cannot substitute long-term income growth.
7. Weak wage growth limits both current and future consumption.
8. Therefore, wages have become the key structural constraint.

Q5. How have rural wages evolved recently, and why are inflation trends masking deeper weaknesses?

1. Real rural wages rose to about 4.1% in early 2025-26.
2. This increase followed nearly three years of stagnation.
3. The improvement was mainly due to sharp fall in rural inflation.
4. Nominal rural wage growth, though higher, remains modest.
5. Falling food prices boosted real wages temporarily.
6. If inflation rises again, real gains may disappear.
7. Rural income growth remains structurally weak.
8. Thus, inflation is masking fragile wage fundamentals.

Q6. What do urban wage trends indicate about income growth and spending capacity?

1. Urban wages are tracked through staff costs of listed companies.
2. Real urban wage growth improved to around 5.7% in mid-2025.
3. This was largely driven by very low inflation.
4. Nominal wage growth remained stuck near 7-8% since 2023.
5. Flat pay hikes indicate limited income expansion.
6. Urban households face rising living costs as inflation normalises.
7. Spending capacity may weaken without higher salaries.
8. Urban consumption growth thus remains constrained.

Q7. How is rising household debt affecting the sustainability of consumption-led growth?

1. Household borrowing increased sharply after the pandemic.
2. Financial liabilities rose significantly as savings were depleted.
3. Debt has grown faster than wage incomes over the years.
4. Many households are borrowing to sustain consumption.
5. This raises risks of over-leveraging and repayment stress.
6. Credit-led consumption is inherently less sustainable.
7. RBI has already tightened unsecured lending norms.
8. Rising debt clouds the long-term demand outlook.

Q8. Why does weak consumption outlook constrain private investment decisions?

1. Private investment depends on expectations of sustained demand.
2. Businesses hesitate to expand capacity amid uncertain consumption growth.
3. Wage stagnation weakens long-term demand visibility.
4. Credit-led spending does not assure durable market expansion.
5. Rising household debt increases macroeconomic risks.
6. Firms prefer to delay investments in such conditions.
7. This keeps private capital expenditure subdued.
8. Weak consumption thus feeds into slower investment growth.

Q9. What are the implications of limited fiscal space in the Union Budget for boosting consumption?

1. Economists believe fiscal space for new consumption stimulus is limited.
2. Past tax cuts and GST changes have already been absorbed.
3. RBI’s earlier rate cuts are still transmitting through the economy.
4. Inflation is expected to remain largely benign.
5. Budget focus is likely to remain on capital expenditure.
6. Labour-intensive export sectors may receive targeted support.
7. Direct consumption stimulus may be restrained.
8. Sustainable growth will depend on income and job creation.

Conclusion

India’s consumption recovery, though supported by tax relief and falling inflation, remains structurally fragile. Recent improvements in real wages are driven more by price softness than genuine income growth. Rising household debt, uneven confidence, and flat nominal wages limit the sustainability of demand. As fiscal space narrows ahead of the Union Budget 2026-27, durable consumption growth will depend less on temporary stimulus and more on sustained wage growth, employment generation, and productivity gains – making income-led growth the central policy challenge ahead.