India's Spending Momentum Faces Critical Test as Jobs and Wages Hold the Key
India's recent consumption surge now faces a crucial challenge. Policy support has boosted household spending, but economists warn that sustaining this momentum requires stronger job creation and wage growth.
Rural Recovery Provides Temporary Boost
The Centre for Monitoring Indian Economy's latest survey shows consumer confidence remained elevated from October through December. Rural areas led this improvement with a nearly 3% increase in economic conditions in December following November's contraction.
Several factors contributed to this rural uplift:
- Two consecutive healthy cropping seasons
- Above-normal monsoon rainfall
- Higher reservoir levels
- GST cuts on select appliances and electronics
Real agricultural wages grew over 5% year-on-year between April and November 2025-26, marking the fastest pace in nearly eight years. This supported a near 20% rise in tractor sales during the same period.
Radhika Rao, senior economist at DBS Bank, noted that cash transfers and welfare spending by state governments ahead of regional elections provided additional discretionary support. However, she cautioned that sustaining current momentum requires higher farm terms of trade and stronger non-farm rural job creation.
Urban Sentiment Shows Signs of Fatigue
Urban households reported softening financial conditions in December, suggesting recent consumption gains rely more on policy support than income improvements.
QuantEco Research observed that urban job openings showed only marginal improvement in November and December, with overall employment conditions remaining lacklustre.
Madan Sabnavis, chief economist at Bank of Baroda, explained the corporate hiring landscape:
- Financial services continue adding headcount
- Manufacturing and IT sectors remain cautious
- Most companies operate with surplus capacity
- Hiring focuses more on replacement than expansion
Wage growth presents another concern. BSE500 companies reported only 6-7% year-on-year wage bill growth in Q2FY26, marking the sixth straight quarter of sub-10% growth.
Broader Economic Challenges Emerge
Aon's latest salary survey projects about 9% growth in 2026, the weakest projection in 15 years excluding the pandemic-affected 2020. This tempered outlook could further weaken urban sentiment as policy support diminishes.
Inflation adds another layer of complexity. India's consumer price index rose to 1.33% in December from 0.7% in November. Sakshi Gupta, principal economist at HDFC Bank, expects inflation to settle around 4% in 2026-27.
Soumyajit Ghosh, chief operating officer at Balancehero India, highlighted the borrowing challenge: "Real wages need to increase for borrowings to sustain and expand beyond the upper-income class." He expects discretionary credit demand in rural and lower-income groups to stagnate as inflation rises.
Looking Ahead: The Path Forward
QuantEco Research projects softer private consumption for the remainder of 2026-26, with real GDP growth in H2 FY26 slowing to almost 7% from 8% in H1.
Bank of Baroda's Sabnavis summarized the situation clearly: "From here on, the responsibility of sustained consumption rests squarely on higher employment with higher incomes."
The Reserve Bank of India faces delicate balancing act. While potential rate cuts in February might provide some relief, monetary conditions may not turn significantly more accommodative given inflation expectations.
India's consumption story now enters a critical phase where policy tailwinds must give way to fundamental improvements in employment and income generation.
