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3/3/2025
India Consumption Slowdown: Cyclical or Structural?
Ivy-sw Ng
APAC Chief Investment Officer
Tommy Law
Institutional Product Specialist Analyst
The India stock market has had a bumpy start to the year. The MSCI India index is down 5.7% year-to-date (YTD, as of February 18, 2025), lagging behind the MSCI AC Asia Pacific Index which returned 4.7% in the same period. Consumption, which accounts for close to 60% of India’s Gross Domestic Product (GDP), stands out as one of the worst performing sectors. While the expectation and announcement of tax breaks coming out from the India Union Budget 2025 – 26 led to a slight rebound, the recovery has proven to be short-lived.
Figure 1: YTD Index Performance of MSCI India, MSCI India Consumer Discretionary and MSCI India Consumer Staples.
| Figure 2: Weighted Average Revenue Growth of India Consumer Sectors: Q1 2023 – Q2 2025 Forecast
|
India consumer goods sales have been moderating for a few quarters now. Sales of two wheelers and passenger vehicles have been sluggish, and companies in the consumer sectors are experiencing a slowdown in top-line growth. The overall slowdown has been driven by weaker urban consumption. On the other hand, rural areas have outpaced urban regions for four consecutive quarters in fast-moving consumer goods (FMCG) sales volume, indicating that the rural demand has been more resilient than urban.
Figure 3: YoY Growth of India Two Wheelers and Passenger Vehi-cles Registration, 3-month Moving Average: Apr 2023 – Jan 2025
| Figure 4: FMCG Sales Volume Growth QoQ, Q1 2023 – Q4 2024
|
The slowdown in urban consumption can be attributed to several factors. Firstly, inflation has remained stubbornly high while wage growth has lagged, resulting in diminished purchasing power. The spike in inflation during Q3 and Q4 of 2024 driven primarily by food prices, has forced many in the urban middle class to tighten their belt, leading to reduced spending on discretionary products.
Secondly, personal loan growth has significantly moderated, declining by nearly 50% at the end of December 2024 compared to the previous year. This decline follows the Reserve Bank of India’s (RBI) decision to increase the risk weightings of unsecured loans from 100% to 125%, citing concerns over systematic risks associated with banks’ elevated unsecured loan portfolios. The combination of eroding real purchasing power and slowing personal loan growth has contributed to weakened consumer confidence among urban middle-class consumers.
Figure 5: India Wage Growth and Inflation: 2020 – 2024 Q2
| Figure 6: Personal Loan YoY Growth: Jan 2024 – Jan 2025
|
On the other hand, rural consumers are faring relatively well, thanks to a favorable monsoon season that has boosted crop yields. Crop production in 2024 is promising across most categories, with rice production exceeding the 5 year (5Y) historical average by 12%. Additionally, the rise in the minimum support price (MSP) for Kharif crops has further fueled optimism regarding future incomes in rural areas.
Moreover, the government continues to support rural development initiatives. In the Union Budget for 2025/26, the allocation for the Rural Development Ministry has increase by 5.8% compared to the previous budget. These factors are expected to continue to support rural consumer confidence and spending in the short to medium term.
Figure 7: India Crop Production: 2024 – 2025 vs. 5Y Historical Average
| Figure 8: India Minimum Support Price (MSP) for Kharif Crops: 2023/24 vs. 2024/25
|
Despite a current cyclical downturn in its consumer sector, India, the world’s most populous country, retains significant market potential. According to HSBC, a country experiences an exponential rise in discretionary spending after crossing the $2000 mark of per capita GDP. As disposable income of household increases, there will be a change in consumption patterns, offering new investment opportunities.
India and China, both characterized by large populations and urban-rural disparities, are frequently compared regarding consumption development. The Engel coefficient, representing the proportion of household expenditure allocated to food, provides a useful metric for comparing living standards and stages of consumption development in both countries. Engel’s Law posits that as household income increases, the proportion spent on food decreases, with a greater share of income allocated to categories such as education and leisure.
Based on the Engel coefficient, India’s household consumption structure currently mirrors that of China around 1999/2000. Food accounts for approximately 42% of urban household expenditure and 51% of rural household expenditure in India. If China’s growth trajectory can provide any indications, India can likely anticipate increased expenditure on housing, transportation & communication, education & entertainment, and healthcare.
Housing: In China, household expenditure on housing increased at 12.4% compounded annual growth rate (CAGR) from 1999 – 2024. Economic development often comes with accelerated urbanization with more people buying or renting a house, pushing up property prices and thereby raising housing expenditure as a proportion of total consumption. Expectation of future price increases further fuels investment in property, creating a virtuous circle of rising prices. In India, housing price gains are non-linear, where the National Capital Region saw the highest price gains of 32% in Q3 2024, followed by Bengaluru at 24%. Overall, residential property prices across 10 Indian cities have only grown modestly at 3-4% over the last 3 years.[1]
Transportation and Communication: China has experienced a remarkable 30-fold growth in real spending in transportation and communication from 1999-2024.[2] These spending includes purchases of high-end goods and services such as smartphones, laptops and air travel. They come naturally with the rising middle class in both India and China as they seek consumption upgrade with higher disposable income. The same wealth effect applies to travel, amplified by the large working population who seeks an upgrade in quality of life in India, supporting this fast-growing service consumption. Post-COVID, Indian Nationals’ departure from India is on track to increase by ~40% from 2022 – 2024.[3]
Healthcare: The healthcare sector was the second fastest growing sector, with a 9.4x increase in spending from 1999 to 2024, which was first driven by increased accessibility of medical services because of higher disposable income and improved insurance coverage in China. While ageing population is still not a concern for India, there will likely be a similar expansion in access to healthcare for the mass public and an upgrade in healthcare services as a result of the income and wealth effect, both leading to an increase in healthcare spending.
Education: Expenditure on education, culture and entertainment increased at 11.2% CAGR from 1999 – 2024. As household disposable income increases, household typically seek to improve living standards by investing more into human capital. The education industry in India is now experiencing higher enrolments, increased demand for new courses and upward fee revision.[4] Although the current investable universe of education is limited within the listed market, opportunities may arise in the future as India startups account for 7 out of 29 largest education unicorns globally in 2023.[5]
Figure 9: India Household Consumption Structure: 2023/24
Source: Ministry of Statistics and Programme Implementation (MOSPI), as of December 31, 2024.
Figure 10: Change in China Urban Household Consumption Structure: 1999 – 2024
Source: National Bureau of Statistics of China, as of December 31, 2024. | Figure 11: Change in China Rural Household Consumption Structure: 1999 – 2024
|
While the current macroeconomic environment presents challenges for consumer goods sales, India’s underlying consumption growth trends remain intact. For the time being, companies with greater revenue exposure to rural areas would likely exhibit more resilience. However, with inflation moderating to 4.3% in January 2025[6] and the tax incentives announced in the Union Budget 2025/26 tickles down the economy, a recovery in consumer sentiment is possible. Furthermore, the recent correction in the Indian stock market has resulted in many consumption-related companies trading at a discount compared with their historical average, although valuations remain rich compared to similar sectors in other countries. Consequently, a price recovery in these sectors can be expected upon a turnaround in urban consumption figures.
Figure 12: MSCI India Index Characteristics of Selected Global Industry Classification Standard (GICS) Industry
Source: Bloomberg, as of February 18, 2025. Yellow color coding on market capitalization represents the size of market capitalization. Green / (Red) color coding represents whether the GICS industry is currently trading at a premium/(discount) to its own five-year average P/E ratio.
Ministry of Statistics and Programme Implementation, as of January 31, 2025.
Bank for International Settlements, as of Q3, 2024.
National Bureau of Statistics of China, as of December 31, 2024.
Ministry of Tourism, as of October 31, 2024.
Crisil Ratings, as of December 31, 2024.
Failory, as of January 22, 2024.
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Source: Bloomberg, as of February 18, 2025. 
Source: Bloomberg, as of February 18, 2025.
Source: Bloomberg, as of February 18, 2025. 
Source: NielsenIQ, as of Q4, 2024.
Source: Ministry of Statistics and Programme Implementation (MOSPI); Bloomberg as of Q2, 2024 
Source: NielsenIQ, as of Q4, 2024.
Source: Foreign Agricultural Service, US Department of Agriculture, as of 2024 
Source: Ministry of Agriculture & Farmers Welfare, as of June 19, 2024
