New Delhi [India], December 3 : Urban demand witnessed a contraction in the second quarter of FY25 because of declining incomes in the corporate and government sectors coupled with an increasing tax burden on households, according to a report by Systematix Institutional Equities.
The report highlighted that the slowdown in corporate income and reduced government expenditure have significantly impacted urban households. Corporate spending on employee compensation in the non-financial sector decelerated to 6.3 per cent in Q2FY25, down from a peak of 16.4 per cent in June 2022.
This marks the sixth consecutive quarter of declining growth in employee compensation, attributed to a slowdown in sales growth, which stood at 3.8 per cent during the same period.
It said, "Due to the contraction in income from both the fronts i.e corporates and government coupled with increasing tax incidence on households is manifesting into contraction in urban demand".
The report also noted that the urban real compensation growth in key sectors like non-financial services, financial services, and manufacturing was modest, at 1.7 per cent, 4.9 per cent, and 3.6 per cent, respectively.
Meanwhile, the government's real revenue expenditure, excluding interest payments, contracted sharply by 10.5 per cent year-on-year in September 2024, marking its lowest level since FY13.
As 31 per cent of the government's spending goes towards interest payments, leaving less room for other expenditures.
Additionally, weak employment trends have further strained urban incomes. The net proportion of individuals reporting a rise in employment levels dropped to -7.3 per cent in September 2024, marking the third consecutive quarter of negative sentiment. This reflects the prevalence of low-quality jobs, which has resulted in slower income growth.
It said "The weak perception of employment has also continued. The net proportion witnessing a rise in employment levels fell to -7.3 per cent (Sept'24), marking the third straight quarter which recorded a negative response".
The report also highlighted that the rising inflation has compounded the challenges for households, shrinking their real incomes and forcing them to prioritize spending on essential items.
The prevalence of low-quality jobs is translating into lower income growth. Combined with a rise in inflation level, households are facing shrinkage in their real incomes, making their spending concentrated majorly on essential items.
The report underlined the need for measures to stimulate income growth and improve employment opportunities to revive urban demand in the coming quarters.
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