Alexandra Hermann, Lead Economist at Oxford Economics, says India will likely experience a slowdown in consumption in the middle of next year due to the lagging effects of external demand headwinds.

New Delhi

India's consumer sentiment has been buoyed by cyclical demand, but recent data indicates a slight downturn in consumption. Experts suggest that while lower inflation and GST reforms may provide short-term relief, external demand headwinds are expected to weigh more heavily on the economy in the coming year, potentially leading to a slowdown in overall consumption.

Despite these concerns, India is still projected to maintain strong growth rates, with structural reforms such as GST changes and ongoing government investment in infrastructure playing a key role. These measures are expected to support business investment and labor markets, helping to offset some of the anticipated challenges.

Expected slowdown in India's overall consumption next year

So if this is cyclical demand that's driving the upbeat consumer sentiment in India at the moment, how long before we cycle out of that and we start to see some of these structural weaknesses or these cracks show up in the consumer space? Because as perhaps you know as well, consumption is such a big if not the biggest driver for the Indian economy and insulating them from a lot of these external headwinds. Consumption is certainly the single largest expenditure component in the Indian economy. So yes, we've actually seen some high frequency data from Q3 where consumption actually already saw a cyclical downturn, a little bit of weakness. We do think that Q4 into Q1 will benefit from the lower inflation figures overall, from the GST reforms that also push down prices that we will see show up in the inflation figures. But then towards the middle of next year, we are more worried that the external demand headwinds weigh on the economy overall much more strongly and then that's when we will probably see a slow down in overall consumption. But then coming from a low base, we will still see the strong growth numbers in both consumption and in Indian headline growth. We don't see any faltering to below six or even towards the five percent range. That probably not, but base effects are also a strong story there. So if we have about, let's say, eight months before the middle of next year, we start to see these structural cracks start to show up in the cyclical demand cycle out, is there anything that they can do in that time period to address some of the structural issues to make sure that that impact is mitigated or is this something that India will just have to brace for by the time we get to mid 2026 if this all plays out? I think structural reforms will play a large role in that. So when we speak about the GST reforms, for instance, we are obviously focusing on the near-term inflation impact, the actual, the direct price impact that consumers will feel and that will bolster demand to some extent at least. What has been positive about the GST reforms is sort of the more structural side of things, the compliance issues being addressed, the sheer reduction in the number of tax brackets from four to two, that makes business compliance also a lot easier. So I think these types of structural reforms, not just the cyclical boost, the cyclical fiscal stimulus that we are, that we will probably be seeing by the GST reforms and other tax cuts, for instance, over the next few months and quarters, that is the positive side and that will drive overall investment and that will also help, you know, strengthen the labour market, strengthen urban labour markets, increase productivity, increase not only urban productivity, so the classic urban sector jobs, more service sector driven, that can also strengthen manufacturing productivity, that can also strengthen agricultural productivities to some extent. So what we're looking out for are a lot of these structural reforms, the GST, like I said, being one very positive aspect in those other structural reforms potentially down the line, otherwise fiscal spending on infrastructure build-out, that continues to be very strong, the government commitments to infrastructure spend, to CAPEX spend in that regard are still very strong, that will also help drive business investment. So those are the kind of things that we look out for, for India's structural story, obviously also feeding into the cyclical aspects, but that's sort of the structural patterns that we continue to monitor.

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