India's middle class tightens its belt, squeezed by food inflation

CHENNAI/NEW DELHI: India's city dwellers are cutting spending on everything from cookies to fast food as persistently high inflation squeezes middle class budgets, threatening the country's brisk economic growth. They are considered a key demographic both economically and politically, with middle class frustration seen as a significant factor behind Prime Minister Narendra Modi's weaker election performance this year.Asia's third-largest economy is expected to expand 7.2% in the financial year ending March 2025, the fastest among its major peers.Belying those rosy projections, however, are signs of a sharp slowdown in the household sector.Indian urban consumption hit a two-year low this month, according to an index published by Citibank that captures indicators such as airline bookings, fuel sales and wages. "While some of the fall could be temporary, the key macro drivers remain unfavourable," Citi's chief India economist Samiran Chakraborty said.Growth in inflation-adjusted wage costs for listed Indian firms - a proxy for earnings of urban Indians - has remained below 2% for all the three quarters of 2024, well below the 10-year average of 4.4%, data from Citi showed.Chakraborty cites this as a key factor impacting urban consumption, along with declining savings and tighter rules for personal loans.Headline inflation has averaged 5% over the past 12 months, but food inflation has held above 8% as weather shocks elevated prices of vegetables, cereals and other essential foods. "India's central bank expects 7.2% GDP growth for the fiscal year ending March 2025 on the back of improved rural demand and a strong services sector.Higher government investment could also support demand, said Rahul Bajoria, head of India and ASEAN economic research at Bank of America. "If government spending kicks in, that probably does have some multiplier effects on private consumption spending as well," said Bajoria, who expects GDP growth at 6.8% in the current financial year.Some are less optimistic with Citi and IDFC First Bank economists expecting GDP growth in the July-September quarter to miss the central bank's projected 7%, weighed by slower urban consumption.That pessimism has hit consumer stocks with the Nifty FMCG index declining 13% since Oct. 1, compared with a 7.4% drop in the benchmark Nifty 50.Of the FMCG index's 15 constituent firms, only one reported a pickup in sales volume growth in the September quarter.Consumers in large cities are swapping branded items from hair oil to tea for cheaper unbranded alternatives, reflected in the first sales volume decline in 11 quarters for the foods and refreshment group at Hindustan Unilever.