Chennai: Urban dDemand in India is undergoing a cyclical slowdown, influenced by inflationary pressures, muted wage growth, and cautious consumer behaviour among the middle class. Towards middle to fag end of the fourth quarter when inflationary pressures ease and disposable incomes stabilize, urban demand is likely to regain its momentum.
Urban unemployment remains elevated at 6.8 per cent, with higher underemployment in informal sectors. This lack of job security contributes to lower consumer confidence and suppressed spending, more so on discretionary items, finds PL Capital.
Further, non-salaried urban workforce is facing real income squeeze amid high Inflation and wage stagnation. Income growth for the non-salaried urban workforce has averaged 3.4 per cent in Q1 FY25, compared to CPI inflation at 4.9 per cent and food inflation at 8.9 per cent, leading to a real wage contraction.
Food inflation, particularly in categories like cereals and vegetables, is significantly squeezing urban disposable incomes.
Moreover, urban households allocate nearly 22 per cent of their budgets to housing costs, which has seen an escalation as rental inflation has increased to 6-7 per cent in major metro cities. Fuel and utilities, including mobile recharge, now account for 15-17 per cent of household expenses, up from 12-13 per cent two years ago, compressing disposable income available for discretionary spending. The 20 per cent mobile tariff hike has also affected demand at the lower middle section of the population.
PL Capital expects food inflation to moderate with the arrival of the Kharif harvest and favourable conditions for Rabi sowing. Declining prices of tomato, onion and seasonal vegetables indicate that food inflation should be close to peaking out. A possible reduction in import duties on edible oils can provide some relief to consumers in coming months.
Discretionary demand among high-income segments continue to show resilience though the demand has softened among the low-middle section of urban middle class. Demand for premium education, healthcare, automobile, real estate and apparel and footwear is intact and growing. Mass-market demand for essential goods and digital services remains steady, providing a baseline for recovery.
While near-term challenges persist, driven by inflation and cautious spending, urban demand pressure seems to have bottomed out. Festival and wedding season in Q3 AND Q4 should support demand. As inflationary pressures ease and disposable incomes stabilize, urban demand is likely to regain its momentum towards middle to fag end of Q4 FY25, finds PL Capital.
