The gap between consumption and capital expenditure (capex) will reduce in FY25 due to structural support from improving consumer sentiment, likely better weather, and agricultural outlook, Morgan Stanley report said in a report on Wednesday. India’s consumption growth is expected to average 6.1 per cent in FY24 and 6 per cent in FY26, improving from 4 per cent in FY24. Capex growth to average 7.9 per cent in F25 and 8 per cent in F26 compared to 9 per cent in F24.
However, the report cautioned that even though growth is enjoying upgrades, there are concerns arising from a weaker trend in consumption growth compared to capex growth. Consumption growth, while recovering, is tracking at 4 per cent – below capex growth of 6.5 per cent and GDP growth of 7.8 per cent in the quarter ended March 2024, as per the research report.
According to Morgan Stanley, consumption has lagged capex mainly because of exogenous shocks including the pandemic disruptions, followed by high inflation in calendar years 2022 and thereafter weak monsoon and agriculture growth in 2023, which have weighed on consumption recovery.
“These factors have meant that while labour market conditions improved gradually from mid-2022 as the economy opened – as reflected in reduced demand for work under the government's national rural employment guarantee scheme (NREGA) – balance sheet repair has taken longer,” the research report added.
Consumption growth has remained weak since the pandemic, recovering at a slow pace. Private consumption is recovering, with growth tracking at 4 per cent in the quarter ended March 2024 compared to 1.5 per cent in year-ago period but it is just catching up to the pre-pandemic trend and remains below the pre-pandemic average of 6.3 per cent in 2019.
It also raised concerns about the durability of the recovery as the trend in rural consumption has lagged that of urban consumption.
The research report also mentioned the 2002-2007 cycle, when the capex growth outpaced consumption growth. Further, recovery in consumption was led by a pickup in urban consumption, followed by improvement in rural demand.
Morgan Stanley Research expects the policy direction to remain unchanged with support from capex growth (through infrastructure investment and manufacturing), maintaining macro stability, and targeted redistributive spending.
“In our view, the focus on infrastructure spending and increasing investment rate in the economy is the right strategy to ensure that the virtuous cycle of growth unfolds,” it said.
With an increase of nearly 9.5 million in the working-age population on an annual basis, the key is creating more non-farm jobs. In this context, while redistributive spending can provide short-term income/consumption support, it will not help in providing sustained income growth, the report added.
“In our view, increased job creation will help to shift surplus labour from agriculture to non agriculture jobs, which then helps to increase internal remittances (from urban to rural areas), providing support to rural demand,” the report said.
