Good monsoon, higher wages to boost consumption growth: India Ratings and Research

According to the rating agency, the real wage growth of lower income strata is likely to improve due to a decline in inflation. Retail inflation is expected to decline to 4.5% in the current financial year from 5.4% recorded in 2023-24.

New Delhi: Above-normal monsoon and increase in real wages are expected to boost consumption growth to 7.4 per cent in the current financial year from 4 per cent in the previous year, India Ratings and Research said on Friday.

“The rural agricultural and non-agricultural real wage growth turned positive in July 2024. With inflation moderating and more-than-normal rainfall, the real wage growth is expected to remain in the positive territory, which would be positive for consumption growth in FY25,” said Devendra Kumar Pant, Chief Economist at Ind-Ra.

According to the rating agency, the real wage growth of lower income strata is likely to improve due to a decline in inflation. Retail inflation is expected to decline to 4.5 per cent in the current financial year from 5.4% recorded in 2023-24.

“The nominal rural wage growth has remained range bound during April-July 2024. The decline in inflation has resulted in real rural wages growth both for agricultural and non-agricultural activities increasing to 13-months high in July 2024,” said Paras Jasrai, Senior Analyst, Ind-Ra.

Jasrai further noted that real urban wages (minimum wages fixed by the government for construction activities) growth increased to 10-month high in July 2024. “This has brightened the prospects of consumption demand from the households belonging to the lower income strata of the population,” he added.

As per Ind-Ra analysis, a one-percentage point change in real wage growth translates to a 110 basis points (1.1 percentage point) change in private final consumption expenditure (PFCE) growth. The PFCE growth is inversely related to inflation and strongly impacts real GDP growth.

Services have the highest proportion in PFCE followed by non-durables. In the past four years, the production of services (gross value added of the service sector) is nearly 25 per cent less volatile than industrial production. Ind-Ra expects the gross value added of services to grow faster in the current financial year than the previous year, thus giving stability and strength to PFCE growth, the rating agency said in a note.