Record diwali consumer spending expected to boost India's economy

Diwali measures consumer sentiment consistently, and accurately. Markers to track during Diwali month purchases are transaction volumes, credit growth, gold buying and select consumer goods sales. Cities drive the festival consumption with rural incomes bunching up after the harvest. Early indicators suggest the spurt in consumption this October is likely to set a record unlikely to be broken in the near future. Credit card use, UPI transactions, automobile sales and even gold purchases were on a tear in September, and are expected to speed up this month. Supply chains for consumer goods are struggling to keep up with demand spike after GST rates were lowered, and order backlogs are likely to boost industrial activity during this quarter.

Typically, though, the festive consumption spike is short-lived, abating the month following Diwali. But, this time, things may be different. Policymakers are anticipating a gradual tapering of consumption based on I-T cuts and GST rate rationalisation announced over the course of the year. The tax changes are designed to place mass consumer goods within affordable limits as rural incomes recover to pre-pandemic levels. This is likely to affect the premiumisation plans across a host of industries. A return to volume-led growth should soak up industrial capacity and trigger investment plans by consumer-facing companies. There will be some drag from the uncertainty over exports, but domestic consumption can provide adequate ballast to the economy.

A broad-based recovery in consumption led by festival spending should be a more stable growth driver. This works particularly well in a low inflation environment, as now. Monetary policy retains headroom to support growth, and upward revision of RBI's estimate subsumes the impact of tariff hikes by the US, still India's biggest trading partner. The tariff environment remains fluid, even as downside risks may have bottomed. A long tail after Diwali month spending will build greater immunity in the Indian economy to the external environment.