India’s Diwali Spending Season Shows a Lingering Pandemic Divide

India’s peak retail season, which culminates soon after the Diwali festival, is showing signs of robust shopping despite higher prices. But an uneven return to discretionary spending among India’s consumers could spell challenges ahead for the economy, companies and economists say.

This festival season, retail sales in India’s stores are expected to be around $18 billion, up 50% from the same period last year and nearly double those in the pre-pandemic year of 2019, according to the Confederation of All India Traders.

“After two years, the current Diwali festivity will be celebrated with no Covid restrictions, which is prompting the consumers to throng the commercial markets,” said Praveen Khandelwal, secretary general of the trade association. Prices of goods have gone up 10% to 15% since 2019, he added.

Yet this season’s spending shares a key feature of India’s overall recovery—goods catering to India’s tiny sliver of its very wealthiest are doing well, while demand for entry-level appliances and products appears to be more sluggish. India’s economy grew 13.5% from April to June, partly driven by robust growth in spending.

“Post Covid, we really see the divide between the rich and the poor expanding,” said Manish Raj Singhania, president of the Federation of Automobile Dealers Associations, an industry group. As an example, Mr. Singhania pointed to the gap between demand for luxury cars versus motorcycles and scooters, the first vehicle that many Indian families can afford.

Despite being more expensive than before the pandemic, waiting lists for premium cars such as those from BMW and Mercedes-Benz that cost more than 6 million rupees, equivalent to $73,000, are so long that buyers have to wait on average four months to get delivery, he said. “It’s that crazy,” Mr. Singhania said.

The delays are partly due to supply-chain issues, but also because demand has outstripped production. The number of luxury cars registered in India in the first nine months are up 28% compared with last year, according to the automobile dealers group, though they remain 12% below sales in the same period in 2019.

Meanwhile, at the other end of the income spectrum, there has been lacklustre growth in sales for two-wheelers, especially the cheapest variants costing around 60,000 rupees. In the first nine months of this year, sales of all two-wheelers were around 12.7% higher than the same period last year but 18% lower than in the same period in 2019, according to the automobile dealers group.

Narendra Kumar, a resident of a village in the northern Indian state of Uttar Pradesh, said he had saved up to buy a motorcycle two years ago. It would have been the first motorised vehicle in his home. But the Covid-19 lockdowns, followed by two years of reduced farm income—the mainstay of Mr. Kumar’s household—depleted his savings.

Now, buying the bike looks harder than ever to the 23-year-old. The bike’s price has risen by 60%, Mr. Kumar said, while his family’s earnings aren’t back to pre-pandemic levels.

“Whatever plans one had have gotten off track,” he said.

Income inequality has long been reflected in India’s consumption, with the Boston Consulting Group predicting in a 2020 report that the share of spending by the most affluent households—those earning one million rupees a year or more—would grow from 33% of household consumption in 2019 to about half in 2030. India relies on consumption for more than half of its economic growth.

Still, new entrants to the lower rungs of the middle class in the country of more than 1.3 billion people have also been a significant contributor to the economy, especially for certain product categories in a country where per capita income hovers around $2,200 a year.

“At some point, the destiny of the two are related,” said Pranjul Bhandari, chief India economist at HSBC Securities & Capital Markets (India) Pvt. If a big segment of the population is not doing well, it would limit the ability of companies’ to grow and earn profits, she said. “We’ll be punching below our weight,” Ms. Bhandari said.

India’s economy still appears to be a bright spot compared with countries that are bracing for a sharp slowdown, and possibly recession. It could expand by 6.8% in the financial year that ends in March 2023, estimates the International Monetary Fund.

That, however, marks a downgrade from the 7.4% growth the IMF had forecast in July. India isn’t immune to the global headwinds from Russia’s war in Ukraine, which have sent food and fuel prices up, and from interest rate increases in the U.S. India’s rupee has deteriorated to all-time lows against the U.S. dollar, making its import bill more expensive.

Inflation crossed 7% in September, and the central bank has raised interest rates four times this year.

Against this backdrop, lower middle-class consumers—especially in rural areas—are likely to pause before spending on goods that aren’t daily necessities.

Shilpi Jain, an analyst with Counterpoint Technology Market Research, said premium smartphones, those costing above 30,000 rupees ($360), have been doing well ahead of Diwali. In the first six months of this year, demand for the phones rose 26% compared with the same period a year ago. However, the demand for phones that cost less than 8,000 rupees, was 24% lower than the first six months of last year.

Because of shortages in imported components earlier this year, and an increase in their prices, mobile phone companies haven’t offered deals on low-end smartphones this Diwali, Ms. Jain said.

Meanwhile, for refrigerators, sales of smaller, single-door variants have declined by around 15% this year compared with pre-pandemic levels, whereas sales for larger, double-door refrigerators are up by around 30%, said Eric Braganza, president of the Consumer Electronics and Appliances Manufacturers Association.

Some companies are already deploying resources to meet demand from higher-end consumers. The Indian unit of appliance-maker Whirlpool Corp. said in September that it had started manufacturing premium, front-loading washing machines at its factory in south India.

“The kinds of consumers who are buying mid- and premium are actually splurging much more,” Whirlpool Managing Director Vishal Bhola told an Indian business news channel.

Entry-level consumers include the hundreds of thousands of workers who went back to their villages after a nationwide lockdown was imposed in March 2020, leaving them without earnings for a long stretch. India’s economy didn’t fully reopen in 2021 either, as the country grappled with the deadly Delta variant of the coronavirus.

Some labourers remained in their villages even as cities reopened, making do with lower incomes.

Mr. Kumar, the 23-year-old who had to put off his motorcycle purchase, graduated from college in 2020. But because of the lockdowns, he couldn’t travel to a large city to seek work. Eventually, he enrolled in a master’s degree in horticulture, which used up his savings, he said.

Meanwhile, erratic weather conditions reduced produce at his family’s small farm during the past two years. He is worried that unseasonal rains this month could hurt this year’s harvest of rice as well. The upshot: Diwali festivities at his home will be curtailed, with fewer firecrackers and other treats, Mr. Kumar said.

“How will we burst crackers when the pocket is completely empty?” he said.