Urban slowdown weighs on economy; income tax relief, rate cuts to aid revival: Report

Weakening wage and job growth cycle is impacting consumption sentiment, and tax cuts and rate cuts will help accelerate momentum, according to a report by ICICI Bank Global Markets.

The report highlights that wage growth for listed Indian companies nearly halved in the financial year (FY) 2025, slowing to 7.5 per cent from an average of 15 per cent year-on-year (YoY) between FY22 and FY24, impacting consumption.

The deceleration in wage growth can be attributed to the tepid demand and global economic uncertainty.

The report adds that the slowdown, coupled with high inflation and elevated interest rates, has eroded consumers’ discretionary income, particularly in urban areas. Spending across sectors has dampened.

“Lower interest rates should lead to further recovery in consumption as repo-linked loans get repriced lower and reduce the interest outgo for consumers,” according to ICICI Bank Global Markets report.

“We believe further monetary support is required to spur consumption when inflation is easing,” it said.

Backing its assertion, the report added that Fast-Moving Consumer Goods (FMCG) sales in urban centres are trailing rural markets. In contrast, passenger vehicle sales growth has sharply decelerated to 4.5 per cent in FY25 from 8.8 per cent the previous year.

On the job growth front, the report added that once a strong hiring engine, the IT sector continues to grapple with demand challenges from tech disruptions, monetary tightening, and trade volatility. Net hiring peaked at 293,000 in FY22 and saw a net contraction of 70,000 by FY24.

The Indian economy grew by 6.5 per cent in real terms in the recently concluded financial year 2024-25, according to the Ministry of Statistics and Programme Implementation’s official data.
While the economic growth was 7.4 per cent in the January-March quarter (Q4) of FY25. This was a sharp rise from the 6.2 per cent recorded in the previous quarter.

Given the underlying weakness in urban demand, the government announced an income tax relief of Rs 1 trillion in the Union Budget 2025-26.

The other factors favouring a consumption recovery are lower food inflation as well as the recent uptick seen in GST collections. In the last two months we have seen a visible acceleration in GST collections, with gross GST revenues increasing by 16.4 per cent YoY in May and 12.6 per cent YoY in April, respectively.