Household kitchen budgets can be an interesting way to track changes in the broader economy over a one-year period. Or better still, how has the price of a samosa or a sweet has changed over a year?

The official consumer price inflation data that was released on August 12 has some interesting insights. Retail inflation, measured by the consumer price index, which captures changes in shop-end prices moderated to a 59-month low of 3.54 per cent in July 2024, sharply modest compared to 5.08 per cent in June 2024 and 7.44 per cent in July last year.

Importantly, food prices grew at a significantly slower clip in July compared to June and also far slower than July 2023.

Consumer food price inflation (CPFI) grew 5.42 per cent in July this year, compared to 9.36 per cent in June 2024 and 11.51 per cent in July last year.

The bigger story in the price data, however, in the food prices. Food prices have grown at a considerably slower pace. Prepared meals, for instance, a proxy for roadside snacks, grew 3.48 per cent in July 2024.

Consumer price inflation, which is the main marker that the Reserve Bank of India (RBI) tracks for interest rate related decisions, is now much within the comfortable range of 2-6 per cent. This trend, should it hold for the next few months, should be a reason enough for the central bank to start lowering the repo rate—the rate at which the banks borrow from the RBI.

The RBI has remained steadfast on its focus to rein in inflation rates, which had remained stubbornly high for several months. The goal is now keeping the price genie firmly bottled up for a considerable period of time, giving enough confidence to the central bank as well as consumers.

If this trendline holds for two more months, the RBI could well look at lower interest rates ahead of the festival season in October, the time when consumer buying peaks. A key determinant of a household's consumer buying is as much about borrowing rates as it is about current income levels.

It is essential for household consumption to rise in India to boost the broader economy. Greater family spending on goods, buoyed by rising confidence of future income and expectations of lower interest rates, would boost aggregate demand, and eventually prompt companies to add capacities.

The factory output data measured by the index of industrial production (IIP), which was also released on August 12, grew 4.2 per cent during June 2024, barely higher than 4 per cent growth in June last year, and moderating significantly from 6.2 per cent May 2024.

While consumer durables output grew 8.6 per cent in June 2024, a large part of this growth may have come about also because of a low base effect, a statistical phenomenon that magnifies small changes. Output of consumer durables—products such as refrigerators and televisions—contracted 6.8 per cent in June last year. Persistently high interest rates may have slowed down consumer durable purchases, prompting companies to clear up piled up inventories.

Consumption spending remains the strongest growth locomotive of India’s growth engines.
The laggard, however, is the capital goods output, a proxy measure of investment activity in the broader economy. Capital goods output growth has remained broadly flat—at 2.4 per cent in June this year from 6.3 per cent in the same month last year and 2.9 per cent in May this year.

A similar trend is noticeable in intermediate goods, where growth has plateaued at 3.1 per cent in June this year, from 5.2 per cent in the same month last year and 3.9 per cent in May 2024.

To be sure, the government has been emphatically focused on the investment-led growth model. In the Budget for 2024-25, which was presented on July 23, finance minister Nirmala Sitharaman pencilled in a capital expenditure of Rs 11.1 lakh crore, a growth of 11.1 per cent over 2023-24.

The focus on capital expenditure relies on the principle that higher public investment in infrastructure projects unleashes economic growth through multipliers.

This has grown on the back of a 33 per cent—from Rs 7.5 lakh crore in 2022-23 to Rs 10 lakh crore in 2023-24.

Highways and ports are long gestation projects, but can create jobs, with cascading benefits on intermediate industries such as cement and steel. The government’s decision to do the heavy lifting on capital expenditure appears to be a part of the well-crafted medium-term strategy to not just accelerate the pace of infrastructure project execution, but also to trigger a cycle of private sector investment, or what economists sometimes describe as the “crowding in” phenomenon.