India is currently witnessing a shift in its economic landscape, with consumption outpacing capital expenditure (capex), a trend reminiscent of the period during the pandemic. A report by Nuvama Wealth Management highlights that in the past two quarters, the capex-to-GDP ratio has shown signs of deceleration, while consumption-to-GDP has been on the rise.
During the pandemic years, India’s capex-to-GDP ratio experienced a sharp decline, particularly in FY21, as the economy grappled with widespread disruptions. However, there was a notable recovery in FY23 and FY24, driven by increased infrastructure investments and government spending. Yet, recent data suggests that this recovery phase may now be slowing down.
This shift in economic patterns, with consumption gaining greater prominence, raises concerns about the long-term sustainability of the Indian economy’s growth. A continued focus on consumption could signal a weakening of the robust recovery seen in the past few years, potentially leading to slower economic momentum.
The report pointed out that over the last two quarters, the slowdown in capex-to-GDP has been accompanied by a pickup in consumption-to-GDP, a pattern similar to pre-pandemic times. If this trend persists, it could indicate a loss of economic buoyancy.
India’s consumption demand, which has shown a K-shaped recovery, has been well-documented. A clear divergence in consumption patterns is evident, particularly in vehicle sales. While SUVs and passenger vehicles (PVs) saw strong demand growth, driving a surge in GST collections, recent data shows a significant slowdown in PV sales, with GST growth falling below the 10 percent mark. This decline in demand, visible across various consumption segments, is one reason behind the faster-than-usual growth in GST collections relative to nominal GDP.
While certain consumption segments remain strong, this emerging trend suggests that the broader economic landscape may face challenges ahead.
