Tax Relief May Spur Urban Consumption, But Wage Growth Remains Key

Income tax cuts and lower inflation could revive short-term demand, but economists stress structural job and wage concerns remain critical for a sustained recovery

India’s urban consumption, which has been under pressure due to stagnant wage growth and tighter lending norms since FY24, may receive a short-term boost from recent tax reliefs, falling inflation, and a potential Goods and Services Tax (GST) rationalisation. However, economists caution that these measures alone cannot drive a sustainable recovery unless underlying structural constraints—particularly weak income growth and limited job creation—are addressed.

Income Tax Cuts and GST Reform Offer Immediate Relief

The Union Budget for FY26 exempted individuals earning up to ₹12 lakh annually from paying income tax under the new tax regime. This move, combined with declining inflation and expectations of further GST reform, is expected to increase disposable income for middle-income urban consumers.

• Income tax exemption up to ₹12 lakh in FY26 under the new regime expected to boost consumption.

• GST restructuring proposal, aiming to eliminate the 12% slab and reduce rates on multiple products to 5%, could benefit urban buyers.

• Lower interest rates and easing inflation add further momentum to potential short-term urban demand growth.

Paras Jasrai, Associate Director at India Ratings and Research, stated that a combination of lower taxes, GST rejig, and softening interest rates could provide the necessary push for urban consumption revival.

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FMCG Sales Show Early Signs of Urban Revival

In Q1 FY26, Fast-Moving Consumer Goods (FMCG) sales in urban India grew 7.7%, marginally outpacing rural sales (7.1%) for the first time in six quarters, according to Bizom data. Analysts attribute this growth to a rise in demand for branded food items, personal care, and dairy products.

• Urban FMCG growth outpaces rural India in Q1 FY26, hinting at early signs of recovery.

• ITC and Godrej expect mid-premium and mass segments to benefit from tax relief and improved monsoon.

• Consumer durables remain under pressure, with May showing contraction in both durable and non-durable goods output.

Kamal Nandi of Godrej Enterprises highlighted that income-tax-led gains may support purchases in consumer appliances beyond the premium category, especially if good monsoons support rural incomes.

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Structural Weaknesses Could Limit Recovery

Despite tax relief, economists warn that sustained revival in urban consumption is constrained by weak income growth and high household indebtedness. Dhiraj Nim, Economist at ANZ, notes that urban consumption may remain subdued in the near term due to persistent wage stagnation.

• Private Final Consumption Expenditure (PFCE) grew 7.2% in FY25 but is expected to slow in FY26.

• CareEdge estimates FY26 consumption growth at 6.2%, below the recent average of 6.7%.

• Wage growth in FY26 projected to slow to 6.5%, from 7% in FY25, says India Ratings and Research.

Rajani Sinha of CareEdge warned that employee costs have moderated across sectors, with the IT sector showing flat headcount, impacting urban income momentum.

Wages, Savings, and Pessimism Continue to Weigh

Urban wage growth has been tepid since H2 FY24, with pandemic-era household savings buffers largely exhausted. Gaura Sengupta of IDFC First Bank emphasized that the softness in demand is visible across both consumer durables and essentials.

• Household savings now below pre-COVID levels, limiting capacity to spend.

• RBI’s rate cuts and inflation easing offer limited relief as company profits and wage increments remain weak.

• Salary growth projected at just 9.2% in 2025, lower than the 2022 post-pandemic high of 10.6%, per Aon report.

Consumer confidence in urban India remains low, with the RBI’s May 2025 index dipping to 95.4, well below the 100 optimism threshold.

Rural Demand Recovery Key to Consumption Stability

While urban consumption faces persistent headwinds, rural demand has emerged as a potential growth engine, particularly as agricultural prospects brighten due to a good monsoon forecast. FMCG majors like ITC see rising rural incomes, connectivity, and awareness as demand drivers.

• Rural FMCG sales may offset urban weakness, aided by favourable monsoons.

• Two-wheeler sales declined 13% in June, but interest remains strong amid early rural activity pickup.

• FADA warns of mixed rural sentiment, with concerns over supply chain issues and pricing.

However, Godrej’s Nandi pointed out that early monsoon showers also hurt sales in the appliances segment, with air conditioners seeing a 15% year-on-year decline.

Madhavi Arora of Emkay Global notes that urban income constraints and tighter credit conditions have depressed leveraged consumption. She believes rural recovery will need to be stronger and more sustained to counterbalance urban slowdown.

• Personal loan growth slowed to 8.3%, while credit card loans grew 8.5%, indicating muted demand.

• Dependence on rural recovery intensifies, as macro levers like rate cuts and tax relief alone appear insufficient.

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