Why in the News? 

India’s economic strategy for 2025-26 focuses on increasing household spending through tax cuts, GST relief, and easier credit. However, the article points out a key problem: consumption is rising without strong wage growth. Nominal wages have improved only occasionally, while real wages remain weak and uneven between rural and urban areas, largely supported by low inflation rather than higher incomes. At the same time, household debt is rising, consumer confidence is stagnating, and private investment is slowing, raising doubts about how long this demand-led growth can last.

Is India’s consumption recovery income-led or policy-supported?

1. Tax rationalisation: Lower income tax rates under the new regime increased disposable income without raising real wages.
2. GST rate cuts: Rationalisation reduced prices of select goods, stimulating demand for consumer durables.
3. Durable goods demand: Vehicle sales and consumer durable loans rose sharply post-GST cuts.
4. Credit-led spending: Consumer durable loans increased by ~1.5 times during the Dussehra-Diwali window, indicating borrowing-driven consumption.

What do consumption confidence indicators reveal?

1. Consumer Confidence Survey: RBI survey showed improved headline confidence in November compared to September.
2. Rural divergence: Rural households reported deterioration in income and spending perceptions despite headline improvement.
3. Urban marginal improvement: Urban households reported slight improvement in current income but worsening future spending outlook.
4. Hidden stress: Decline in rural consumption confidence persisted for the fourth consecutive period.

Has wage growth kept pace with inflation?

1. Nominal rural wage growth: Rose to 6.5% in Q1 2025-26, highest since mid-2023.
2. Real rural wage growth: Increased to 4.1% after adjusting for rural CPI, reversing a three-year average stagnation.
3. Inflation-driven effect: Real wage recovery primarily resulted from rural CPI inflation falling to 2.4% (April-June 2025), down from 5.5% a year earlier.
4. Sustainability concern: Real wage gains remain vulnerable to any inflation rebound.

Why is urban wage growth structurally weaker?

1. Proxy measurement: Urban wage growth inferred from listed company staff cost growth.
2. Real urban wage growth: Adjusted for urban CPI, real wage growth stood at 5.7% in July-September 2025, highest in two years.
3. Nominal stagnation: Nominal urban wage growth remained stuck near 7.8% since mid-2023.
4. Inflation dependence: Improvement driven primarily by low inflation (2.1%) rather than productivity-linked wage increases.

How does household borrowing distort the consumption picture?

1. Personal loan surge: Retail lending expanded rapidly until RBI intervention in November 2023.
2. Household liabilities: Rose from 3.9% of GDP (2019-20) to 6.2% (2023-24).
3. Net financial assets: Declined to 4.9% of GDP in 2022-23 before marginal recovery to 6% in 2024-25.
4. Debt stress: Real household debt burden rose sharply relative to income, indicating balance sheet strain.

Why is private investment failing to respond?

1. Demand uncertainty: Weak income-led consumption undermines long-term demand visibility.
2. Capacity hesitation: Firms delay capital expansion when consumption is credit-driven rather than income-backed.
3. Structural signal: Consumption without wage growth weakens investment multiplier effects.

Conclusion

India’s consumption recovery remains fragile and uneven, driven more by tax reliefs, low inflation, and credit expansion than by durable wage growth. Rural real wages have improved largely due to inflation compression, while urban wages show nominal stagnation. Rising household indebtedness and weakening consumption confidence signal structural stress. Without sustained real wage growth aligned with productivity, consumption-led growth risks becoming transient and investment-inhibiting.

PYQ Relevance

[UPSC 2022] “Economic growth in the recent past has been led by increase in labour productivity.” Explain this statement. Suggest the growth pattern that will lead to creation of more jobs without compromising labour productivity.

Linkage: Recent economic growth reflects higher output from existing workers due to technology and efficiency gains, not proportional expansion in employment or wages. This links to current concerns where productivity rises but wage growth and job creation remain weak, making growth less inclusive and consumption fragile.