Urban centres cannot hold demand

For years, India’s consumption story was simple. Urban demand would grow, rural one would sustain, and together they would keep the growth engine running. This story has nuances now. Although consumption is not weakening uniformly, it is not expanding broadly. In essence, there are splits across geographies, price-points, and categories. Private final consumption expenditure, which accounts for nearly 60 per cent of GDP, is the single-largest driver of growth, but its composition is increasingly uneven. In its June 2025 bulletin, the Reserve Bank of India stated that high-frequency indicators sent mixed signals on aggregate demand, which was visible across products.

Although the sales of passenger cars boomed after the GST cuts in September 2025, there are signals about the lack of enthusiasm for entry-level products. Utility vehicles accounted for two-thirds of the sales in FY25, which indicated that the market’s momentum was carried by higher-value vehicles. According to media reports, the sales of SUVs remained strong post-GST cuts, with “faster inventory turnover, and better residual values compared to the sedans.” In January 2026, the overall sales grew by more than seven per cent, and the strong demand for SUVs drove much of the growth.

Similarly, the patterns in the FMCG sector were counterintuitive, to say the least. According to NielsenIQ, the sector recorded a value growth of 7.8 per cent in the October-December 2025 quarter. Surprisingly, perhaps shockingly, this was lower than the previous four quarters, when growth ranged from 10.1 per cent in October-December 2024 period, and 13.8 per cent in April-June 2025 one. “The moderation reflects a combination of a higher festive base in the previous year, and transitional adjustments linked to GST 2.0 rate revisions. Both price and volume softened sequentially, particularly within Traditional Trade, which experienced temporary supply and pricing calibrations during the initial phase of (GST) implementation,” stated its press release.

One needs to look at the distinctions between the rural and urban markets, especially in FMCG. “Rural markets continue to outpace urban consumption for the eighth consecutive quarter; however, the growth gap narrowed in OND (October-December) 2025. Rural regions recorded 2.9 per cent volume growth, moderating against a higher base, while urban markets grew 2.3 per cent, supported by recovery in Metro consumption, and normalisation in e-commerce demand,” stated the NielsenIQ release. E-commerce, which accounts for 14 per cent of the FMCG sales across the metros, got a boost due to quick commerce, which accounts for three-fourths of the sales.

According to Sharang Pant of NielsenIQ, “While the initial supply and pricing adjustments led to moderated consumption… organised channels responded faster to the structural changes. We expect the positive impact of GST 2.0 on consumption to become more visible from the January-February-March (2026) quarter onwards.” In other words, while the earlier, possibly, repressed demand in the cases of passenger vehicles and two wheelers was unleashed after GST 2.0, the ongoing and regular demand in FMCG suffered because of the price disruptions, and changes. Different sectors, different dynamics, different strokes.

Several macro changes account for these subtle, but crucial, trends in private consumption, and urban-rural divide. Inflation matters. Even as headline inflation moderated, and food inflation became invisible, the Iran war has perked them up. Despite the low hikes now, the earlier ones impacted household budgets, which never fully reversed. This was more in the cases of lower- and middle-income consumers. Spending adjustments tend to show up first in discretionary categories, and frequency of purchases rather than in absolute withdrawals.

A second factor is the uneven nature of income recovery. Formal sector income growth is relatively stable, despite the disruptions due to the pandemic, Russia-Ukraine war, tech changes, and Iran war, for the high-income segments. Joblessness mostly affects the youngsters, and new entrants. These support higher-income consumption. But wage growth in informal and semi-formal segments are inconsistent. This creates divergence within the urban markets. Rural markets have their own dynamics, largely due to farm incomes. Migration trends change, as rural women still opt out of the jobs market.

A third layer is linked to consumption behaviour. Urban buying is being redistributed rather than uniformly expanding. A larger share of discretionary spending is moving toward services such as travel, entertainment, and experiences. This shift affects categories that rely on repeat, high-frequency purchases, and adds another layer to the slowdown in mass consumption. The result is an environment where signals are mixed rather than uniformly positive or negative. Rural demand, which was the real engine of growth, has sputtered a bit. But the high-value urban consumption may make up for it.

For companies, the implication is that relying on a single narrative of consumption expansion is no longer sufficient. Growth strategies need to account for the divergences across income groups, geographies, and product categories. Pricing and product mix can support revenues in the short term, but sustained expansion requires recovery in volumes. If this imbalance persists, the risks are clear. Volume-led growth may remain weak, premium segments may become crowded as firms chase the same consumers, and pricing-led growth may begin to lose out. Over time, this can affect the quality and durability of earnings.

Urban India has the income and credit capacity to support discretionary spending, but this is becoming selective. In effect, parts of urban India are spending, but not in the categories that once gave firms dependable volume growth. This is where the “plateau” risk comes in. The easiest urban gains are finished. High-base comparisons make year-on-year growth harder to sustain. Entry-level categories show strain. Firms lean on mix and pricing. The stronger sections of urban demand are in upper-middle-income and affluent consumers. FMCG giant, Marico, in the Q4-FY25 update, noted healthy sentiment among upper-middle and affluent urban segments, and described the broader picture as mixed.

The fragility becomes important in the current external environment. India’s private-sector growth fell to a three-year low as the Middle East war weighs on demand, and elevated crude prices become a macro risk. SBI Research concluded that if global crude oil stays near $100 a barrel, India’s GDP growth could fall to 6.6 per cent, and inflation rise to 4.1 per cent. At $130 a barrel, the impact on growth might be severe, down to six per cent. These estimates matter for consumption because broad-based demand is hardest to sustain when external shocks raise costs. The strengths at the top, and gradual recovery at the bottom of the consumption pyramid are not enough, not at present.