The year 2025-26 has been about supporting household consumption. First, the Union Budget presented last year lowered income tax rates under the new regime. Then, in September, the long-awaited rationalisation of the Goods and Services Tax (GST) was finally announced. Now, with the Union Budget for 2026-27 around the corner, it is expected that segments other than the consumer will be the focus.
But it is worth examining if consumption – even after the two supportive measures of the last one year – is indeed doing well. The problem is that there is no clear answer.
Yes, demand for consumer durables rose in the aftermath of the GST rate cuts, with vehicle sales increasing significantly, in particular as households took advantage of lower prices. According to credit bureau TransUnion CIBIL, demand for consumer durable loans was incrementally higher by around one-and-a-half times in the 20-day festival window between Dussehra and Diwali compared to the previous year. This, the firm said last month, was indicative of “renewed consumer confidence”.
While goods and services have definitely become cheaper – helping lower headline retail inflation to a record low of 0.25% in October – the entire tax cut may not have been passed on to consumers. Further, consumers likely postponed purchases ahead of the rollout of the tax cuts, leading to artificially inflated demand starting from the last week of September.
Then there is the Reserve Bank of India’s (RBI) latest Consumer Confidence Survey, conducted during November 1-10. While the assessment of the current situation and expectations about the future improved for both rural and urban households compared to September – the only metric of the four to see a decline was rural consumer confidence for the current period – the headline index numbers hid something interesting. As per the qualitative responses, perceptions about current income and spending deteriorated in November for rural households compared to September. And while urban households did report a slight improvement in current income, their assessment of current spending deteriorated.
Inflation and wage growth
The prevailing narrative on consumption is that urban demand is subdued but recovering, while rural demand is doing well thanks to the good monsoon. Data seems to back this: as per Labour Bureau data, real rural wage growth – or wage growth after adjusting for rural retail inflation – rose to 4.1% in the first quarter of 2025-26 after averaging zero over the previous three years.
However, this rebound in real rural wage growth has been due to a sharp fall in inflation, with rural Consumer Price Index (CPI) inflation averaging 2.4% in April-June 2025, less than half the 5.5% recorded a year ago. In nominal terms, rural wage growth was 6.5% in the first quarter, the highest since mid-2023. This needs to continue.
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According to Gaurav Kapur, Chief Economist at IndusInd Bank, nominal wage growth needs to be aligned to inflation, which bottomed out in the final quarter of 2025 and will now start rising. “Thus, to sustain rural demand, nominal wages will need to rise too, particularly in relation to core inflation. Otherwise, prolonged deflation in food prices may have an adverse effect on overall rural income and demand going forward,” Kapur said.
For urban wage growth, a proxy often used is the increase in staff costs of listed companies. According to an analysis of data compiled by RBI on the performance of more than 3,000 non-financial private companies, real urban wage growth – or the growth in staff costs after adjusting for urban CPI inflation – in July-September 2025 was 5.7%, the highest in over two years. Again, this was due to low inflation of 2.1%. In nominal terms, this proxy of urban wage growth was 7.8% in the quarter – a level it has been broadly stuck at since mid-2023.
Borrow to spend
What about loans? As mentioned above, personal loan growth for banks has indeed risen; but it is worth recalling that the RBI acted in November 2023 to curb the boom in retail lending, especially unsecured loans. As has been well chronicled, the financial situation of Indian households worsened in the wake of the pandemic, when they drew down on their savings.
Since then, households have borrowed a fair bit more: in 2019-20, their financial liabilities amounted to 3.9% of GDP. This rose to 6.2% in 2023-24 before declining to 4.7% in 2024-25. Their net financial assets, meanwhile, had fallen to a multi-decade low of 4.9% of GDP in 2022-23 and stood at 6% in 2024-25.
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“Between FY09 and FY23, while industrial wages rose 1.9x, real personal bank debt rose 2.9x, reaching 3.6x by FY25,” ANZ economists Dhiraj Nim and Sanjay Mathur said in a note last year. “There has been a marked rise in real household debt burden over the years, especially relative to income, underscoring a stress in household balance sheet.”
Given these numbers, it is hardly a surprise, then, that private investment continues to meander – why invest in capacities when the foundations of future demand are unclear?
Budget action?
So, what can Finance Minister Nirmala Sitharaman do on Sunday to help drive consumption? Not much, according to economists, who think the fiscal room is unavailable.
Further, IndusInd Bank’s Kapur sees the forces supporting consumption remaining in play, with the RBI’s 125 basis points worth of interest rate cuts announced in 2025 still being passed through the system. And with the outlook for inflation benign, Sunday’s Budget can continue to focus on capex and supporting labour intensive export sectors directly impacted by the US tariffs, while maintaining discipline to keep building fiscal buffers to act in the future “if the need arises to support growth through a boost to consumption”.
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