After a long pause, private consumption has seen a sharp rise in the first quarter of FY25. Mint It examines the significance of this development, what has triggered the revival, and what it means for India’s economic growth going forward.
Is consumer spending recovering?
Private final consumption expenditure, or simply, consumer Government spending grew strongly (7.4% in the April-June period of the current fiscal year), up from 4% in the previous quarter. This is the first time in seven quarters that private consumption has contributed positively to gross domestic product (GDP) growth. In other words, its growth was faster than that of GDP. In the past, while GDP grew at a fast pace, private consumption lagged behind (see chart), negatively affecting overall economic performance, which was predominantly driven by government spending.
What has caused this resurgence?
The main driver is the recovery of rural consumption. After the pandemic, demand in India grew unevenly. While demand in urban areas was strong, rural demand was sluggish due to irregular monsoons and lower production. But in recent months, rural demand has been picking up. In the April-June period, it outpaced urban consumption after a long lull. Experts have noted that all the factors that usually boost rural demand – adequate rainfall, good production and reasonable commodity prices – are improving. The World Bank recently raised India’s GDP growth rate due to the recovery in rural demand.
Did this revival help GDP growth in Q1 FY25?
Yes. Due to the election, government spending, which has driven economic growth, faltered in the first quarter of fiscal year 2025. This caused GDP growth to slow to 6.7% from 7.8% in the fourth quarter of fiscal year 2024. It would have been even lower if not for the recovery in private consumption. According to experts, the sharp recovery added one percentage point to GDP growth.
What does this mean for future growth?
Private consumption accounts for more than 50% of GDP and can therefore rapidly accelerate economic growth. If the recovery in consumer spending is sustained and accelerates, demand for products and services will rise, leading to improved capacity utilization, which in turn will boost private investment, another driver of growth. Despite government efforts, private investment is tepid. The private sector, unsure of a sustained recovery in demand, has refrained from making new investments to increase capacity.
Is the Indian economy hitting a good patch?
The possibility of three of the four engines of growth – government spending, private consumption and private investment – working at full capacity soon is real, provided private consumption accelerates. The recovery of exports, the fourth engine of growth, will depend on how the global economy and, more particularly, the economies of developed countries perform. In short: if three of the four engines of growth work well, something the economy has not experienced in the recent past, it would mean accelerated GDP growth for India.
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