India’s Missing Demand Engine Needs Urgent Policy Action To Revive Growth

India’s economy expanded 6.2% in the third quarter of 2024-25, according to data released by the National Statistics Office. While the headline number reflects resilience, particularly in public investment and services, the structural weakness in private consumption refuses to go away. Despite a year of robust GDP growth in 2023-24 and promising numbers so far in 2024-25, the economy’s most critical demand engine — household consumption — remains sputtering.

Private final consumption expenditure grew by 7.6% in 2024-25 according to the second advance estimates. This marks an improvement from the subdued 5.6% growth recorded in 2023-24, but it still falls short of pre-pandemic trends. 

The data confirms what has been evident on the ground — household consumption has yet to fully recover from the series of economic disruptions that began with the pandemic and continued through inflationary pressures and uneven wage growth.

Rural demand, which often acts as a buffer during urban slowdowns, has not recovered convincingly either. Rising input costs, climate-related disruptions, and depressed real incomes in agricultural households have all contributed to weakening rural consumption patterns. 

In urban centres, spending outside of premium segments remains cautious, as rising costs for essentials such as food, transport and healthcare leave little room for discretionary purchases.

The consequences of weak private consumption go far beyond slower sales for consumer goods companies or lacklustre footfall at malls. Private consumption is the foundational demand driver for new investment. 

Without visible and sustained improvement in household spending, businesses have little incentive to commit to new capacity creation, especially in sectors reliant on domestic demand. This hesitancy in turn dampens private capital formation, deepening the dependence on government capital expenditure to drive overall investment.

The persistence of this weakness in demand has led to calls for a direct and coordinated policy response. Fiscal policy, which has thus far prioritised infrastructure investment, must pivot toward supporting household incomes more directly. 

Several economists, including this author, have argued for expanded income support programmes targeted at lower-income households, where the consumption propensity is highest. This is especially relevant given that household savings, which traditionally fund future spending, have fallen to multi-year lows.

Tax policy could also play a role. Personal income tax slabs could be restructured to leave more disposable income in the hands of middle-income earners, where spending is most likely to flow into sectors with high employment multipliers. 

At the same time, targeted reductions in indirect taxes on essential goods and services could provide immediate relief to lower-income households, boosting their capacity for discretionary spending.

The case for a more aggressive income support and demand stimulus approach rests not just on short-term growth considerations. As India attempts to climb the development ladder, sustained consumption growth is essential to creating the conditions for broad-based investment, job creation, and upward mobility.

A consumption-led recovery is also likely to be more resilient than one anchored entirely in public infrastructure spending, which cannot be endlessly expanded without fiscal strain.

For years, policymakers have banked on a supply-side approach — incentivising investment through production-linked incentives, infrastructure creation, and easier credit conditions. 

That approach, while beneficial in parts, has failed to unlock the full potential of domestic consumption. The missing demand engine is no longer just a cyclical concern; it is now a structural gap in India’s growth model.

If that gap is not addressed decisively, India’s ambitions of sustaining 7-8% growth over the long term will remain aspirational. Households need more income certainty, stronger purchasing power, and the confidence to spend. Until that happens, the broader growth story will continue to rely on policy-driven investment rather than the organic demand recovery that a maturing economy should generate on its own.