Economic growth outsmarts advertising for the first time as businesses cut ad budget

Digital retailers could attract more ad spending, resulting in less money headed to Google and social media companies like Facebook and Snap.

For the first time in the last 15 years, growth of the Indian economy was faster than that of the advertising space in 2023, thanks to geopolitical headwinds in the first half of the year.

The growth in the media and entertainment (M&E) business slowed down last year to 8 percent from 21 percent in 2022.

Ashish Pherwani, M&E sector leader at Ernst & Young, a professional services network, said that when the gross domestic product (GDP) grows above 4 percent, advertising grows one-and-a-half to two times. "Last year was the first in the last 15 years, barring the Covid year, when India's nominal GDP grew 9 percent but advertising grew 8 percent," he said.

"There was supply chain impact due to war that impacted a lot of ad spend. Then, a lot of the VC (venture capital) funding which kind of tightened during 2023 impacted ad sales. A lot of the high-yield categories that were spending like D2C brands have been cutting down a lot of ad spends. These factors show that the Indian advertising is far more dependent on international factors now than ever before," Pherwani pointed out.

But India wasn't alone where advertising lagged the GDP growth rate. Globally, too, ad growth was 6 percent compared to the global nominal GDP growth rate of 9.9 percent in 2023.

Pherwani added that the advertising-to-GDP ratio is low in India. "The real problem is our advertising-to-GDP ratio, which is still an abysmal 0.3 percent, and falling. In most developed economies, the minimum ratio is 0.6 percent and it goes all the way to 1 percent. This shows that there is still a lot of headroom for growth and that's what we expect to see over the next few years."

Television advertising reduced the growth of India's ad market by 28 percent as sports advertising on TV fell from the 2022 level, according to a FICCI report on media and entertainment industry released on March 5.  Total TV advertising fell 6.5 percent due to a slowdown in spending by gaming and D2C brands, which impacted revenues for premium properties. The Hindi-speaking market (HSM) was also soft as lower yield categories increased their share of ad volumes. TV's total share in advertising reduced to 26 percent in 2023 from 36 percent in 2019.

On the other hand, digital surpassed traditional advertising for the first time last year, and will drive growth in the sector moving forward. Digital media had a 52 percent share in total ad spends last year, up from 31 percent in 2019. It is expected to reach 57 percent by 2026.

Growth of 5G, rising per-capita income of Indians and the growing SME (small and medium-sized enterprises) advertiser base are some of the factors driving digital ad spends. The SME category and other advertisers who had a contribution of Rs 20,800 crore in 2023 are estimated to increase their share to Rs 30,400 crore by 2026 to total advertising.

This year, many marketers plan to increase their ad spends on digital by 10 percent.

The overall advertising is expected to grow at 9 percent compound annual growth rate (CAGR) till 2026, while digital media will grow at 14 percent and traditional media at 5 percent.