With GDP due today, India’s middle class consumption story has 3 protagonists

The ripple-effects of the slowed consumption was seen in India Inc’s performance for the second quarter which clocked a revenue growth of 16-quarter-low. Moreover, India is due to report its Q2 GDP figures today, which may further push the Indian consumption story.

According to a report by Marcellus Investment Managers, three key factors are contributing to this phenomenon: increasing automation in routine jobs, a cyclical economic downturn, and deteriorating household balance sheets.

1. Automation and the Loss of Routine Jobs
As technology advances, the replacement of human labor in routine, repetitive tasks has intensified. Marcellus report, published on November 24, highlighted that clerical and supervisory roles, both in offices and factories, are being automated even without the use of advanced artificial intelligence (AI). Catch live updates of GDP

India is witnessing a similar trend, with supervisory and clerical roles in manufacturing and services seeing a marked decline. PC Mohanan, former acting chairman of the National Statistical Commission, notes that the rise in contractual labor and outsourcing has rendered many managerial and supervisory roles redundant.

The report quoted Rishad Premji, Chairman of Wipro, who noted the disruptive nature of technology, said, “I think that two-three… elements that people think which are very important is the disruption of the technology process… the reality is, there are going to be some jobs that will disappear…I think the good part is the opportunity to disrupt virtually every aspect of our life with the productivity that AI can bring is going to be incredibly powerful.”

2. A Cyclical Economic Downturn
India’s economy is also facing a cyclical slowdown following three years of robust post-Covid growth. Corporate earnings have slumped, with Marcellus describing this as one of the steepest downturns in two decades. While such slowdowns are normal in free-market economies, they contribute to reduced middle-class consumption in the short term.

“Leaving aside AI, the Indian economy is undergoing a cyclical downturn after three years of bumper economic growth (FY22, 23 & 24) post-Covid. The force of this cyclical downturn can be seen in the potency of the slump in corporate earnings – see exhibit below which seeks to capture what appears to be the steepest slump in earnings growth in 20 years (leaving aside exigencies like the Global Financial Crisis and covid). This sort of downturn is typical for any free-market and democratic economy, and given the right course correction from monetary and fiscal policy actions, the pain from the downturn is likely to be short-lived,” Marcellus said in its report.

3. Household Balance Sheets Under Strain
The financial health of Indian households is at its weakest in 50 years, with net household financial savings as a percentage of GDP at their lowest since 1976. While gross household savings remain steady at around 10-11% of GDP, rising household liabilities, particularly in the form of unsecured debt, have eroded net savings.

Despite these challenges, Marcellus notes that technology has a “complementary effect” alongside its “substitution effect.” While automation replaces some jobs, it can also create new opportunities by boosting productivity and enabling higher earnings.

Marcellus notes that middle-class consumption may remain muted for the foreseeable future, but the longer-term dynamics of technology and economic adjustments offer hope for recovery.