View: First quarter GDP print tells the story of waning private consumption
Agencies
Synopsis
Of the numbers released on Tuesday, private consumption expenditure was conspicuous in its flaccidity – up 19.3% on-year, on a low base. Adjusting for that, and you get a decline of 8.9% on-quarter. Worse, at ~Rs 18 lakh crore, its level is ~12% ...
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With economy activity rekindling over the past few months, a lot of focus was on this fiscal’s first-quarter gross domestic product (GDP) data.
Of the numbers released on Tuesday, private consumption expenditure was conspicuous in its flaccidity – up 19.3% on-year, on a low base. Adjusting for that, and you get a decline of 8.9% on-quarter. Worse, at ~Rs 18 lakh crore, its level is ~12% lower versus the June 2019 quarter.
Why is this worrisome?
Private consumption, the frontal engine of the economy for years, has slunk to the back of the pack. That can create a vicious cycle: weak demand leads to poor investment appetite – even though the balance sheets of larger corporates have improved.
The bigger impetus will continue to be from the two relatively smaller engines – government investment and exports. Therefore, the overall pick-up in GDP growth will be gradual, unlike the years when private consumption was the driver.In the past, rapid growth in private consumption had necessitated higher capex by companies, ultimately setting of an investment cycle that continued to support growth for a few years.
The Covid-19 pandemic’s second wave, ensuing restrictions, continued hit to jobs and incomes, and fear factor have held back the Indian consumer. There is one silver lining though: seasonally adjusted data show private consumption held up better than other segments on a sequential basis. While private consumption fell 8.9%, government consumption fell more – by 24.9%, and fixed investment by 15.2%. To be fair, relatively lower decline in private consumption is also in the March quarter, it had registered slower sequential growth (compared with other two segments).
Private or household consumption started slowing from the second quarter of fiscal 2020 (or September 2019). As the first wave of the pandemic hit, private consumption contracted by to 26.2% on-year in the June 2020 quarter and another 11.2% in the September 2020 quarter, from an already dismal 2% growth in the March 2020 quarter.
In the road ahead, some factors could again restrain private consumption growth. Repeated lockdowns and hit to employment-intensive service sectors. The employment-intensive sectors in the Indian economy are agriculture, construction, and services sub-segments such as trade, repair, hotels and restaurants, transport, social and personal services. While good monsoon has benefited agriculture incomes, government spending has supported construction. But the services sub-segments, which provide jobs to close to a quarter of the total employed, have borne the brunt of lockdowns and social distancing norms.
Missing fiscal push to incomes. Globally, most economies that are recovering rapidly are doing so on the back of strong private consumption growth, which, in turn, is fuelled by a combined push from generous fiscal support to incomes and monetary support to keep financial conditions easy. In India, policymakers have refrained from extending a strong fiscal push backed by concerns about inflation as well as tight government fiscal position. In such a situation, recovery in private consumption will be slower as it hinges on other support factors.
Weak consumer confidence
The RBI’s latest consumer confidence survey points at slow consumption recovery. Interestingly, unlike most other macro indicators, the survey showed a bigger hit to consumer confidence by the second wave than by the first. The future expectations index saw a mild improvement in July, but it is lower than what was seen after the first wave.
Depleting savings cushion
The cushion from savings has shrunk. Household financial savings in India averaged 13% of GDP for nearly a decade until fiscal 2015. Thereafter, this ratio gradually slipped to 11% in fiscal 2020, as income growth slowed and households dipped into their savings. As the pandemic hit, the ratio shot up to 21% of GDP in the June 2020 quarter led by forced reduction in consumption on account of the lockdowns. Subsequently, household savings dropped to a low of 8.2% of GDP in the December 2020 quarter, the latest period for which the RBI estimates this data. Given that the second wave led to increased medical expenditure, both in rural and urban regions, it is likely that household savings would have shrivelled further. The income-hit are clearly consuming less and those who used their savings are prioritising rebuilding the coffers.
For several years, private consumption and investment have been the bulwark of economic recovery. This time, it’s different. Exports and government spending may have to do the heavy lifting, while private consumption and investment will trot over time. This is also why the Indian economy is not expected to catch up and cover up the pandemic-generated losses.
All in all, India’s GDP growth is expected to see a base effect-driven sharp rebound until fiscal 2023. We expect the economy to grow 9.5% this fiscal and 7.8% the next. In fiscal 2023, we expect some push to private consumption to come from pent-up demand and broad-basing of growth, as more people get vaccinated. This will particularly strengthen growth of contact-based services sectors. Beyond that, for sustained consumption growth, push to incomes and consumer confidence will be needed.
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Of the numbers released on Tuesday, private consumption expenditure was conspicuous in its flaccidity – up 19.3% on-year, on a low base. Adjusting for that, and you get a decline of 8.9% on-quarter. Worse, at ~Rs 18 lakh crore, its level is ~12% lower versus the June 2019 quarter.
Why is this worrisome?
Private consumption, the frontal engine of the economy for years, has slunk to the back of the pack. That can create a vicious cycle: weak demand leads to poor investment appetite – even though the balance sheets of larger corporates have improved.
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With capacity utilisation below 70% for the manufacturing sector (as per the Reserve Bank of India’s OBICUS survey), there is little reason to invest. Which means the economy is unlikely to get the additional thrust needed from the engines of private consumption and investment.The bigger impetus will continue to be from the two relatively smaller engines – government investment and exports. Therefore, the overall pick-up in GDP growth will be gradual, unlike the years when private consumption was the driver.In the past, rapid growth in private consumption had necessitated higher capex by companies, ultimately setting of an investment cycle that continued to support growth for a few years.
The Covid-19 pandemic’s second wave, ensuing restrictions, continued hit to jobs and incomes, and fear factor have held back the Indian consumer. There is one silver lining though: seasonally adjusted data show private consumption held up better than other segments on a sequential basis. While private consumption fell 8.9%, government consumption fell more – by 24.9%, and fixed investment by 15.2%. To be fair, relatively lower decline in private consumption is also in the March quarter, it had registered slower sequential growth (compared with other two segments).
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To be sure, as restrictions ease, vaccination rates rise and the economy ticks up, private consumption should improve. The pace, however, won’t be as needed because of ongoing slackness in private consumption.Private or household consumption started slowing from the second quarter of fiscal 2020 (or September 2019). As the first wave of the pandemic hit, private consumption contracted by to 26.2% on-year in the June 2020 quarter and another 11.2% in the September 2020 quarter, from an already dismal 2% growth in the March 2020 quarter.
In the road ahead, some factors could again restrain private consumption growth. Repeated lockdowns and hit to employment-intensive service sectors. The employment-intensive sectors in the Indian economy are agriculture, construction, and services sub-segments such as trade, repair, hotels and restaurants, transport, social and personal services. While good monsoon has benefited agriculture incomes, government spending has supported construction. But the services sub-segments, which provide jobs to close to a quarter of the total employed, have borne the brunt of lockdowns and social distancing norms.
Missing fiscal push to incomes. Globally, most economies that are recovering rapidly are doing so on the back of strong private consumption growth, which, in turn, is fuelled by a combined push from generous fiscal support to incomes and monetary support to keep financial conditions easy. In India, policymakers have refrained from extending a strong fiscal push backed by concerns about inflation as well as tight government fiscal position. In such a situation, recovery in private consumption will be slower as it hinges on other support factors.
Weak consumer confidence
The RBI’s latest consumer confidence survey points at slow consumption recovery. Interestingly, unlike most other macro indicators, the survey showed a bigger hit to consumer confidence by the second wave than by the first. The future expectations index saw a mild improvement in July, but it is lower than what was seen after the first wave.
Depleting savings cushion
The cushion from savings has shrunk. Household financial savings in India averaged 13% of GDP for nearly a decade until fiscal 2015. Thereafter, this ratio gradually slipped to 11% in fiscal 2020, as income growth slowed and households dipped into their savings. As the pandemic hit, the ratio shot up to 21% of GDP in the June 2020 quarter led by forced reduction in consumption on account of the lockdowns. Subsequently, household savings dropped to a low of 8.2% of GDP in the December 2020 quarter, the latest period for which the RBI estimates this data. Given that the second wave led to increased medical expenditure, both in rural and urban regions, it is likely that household savings would have shrivelled further. The income-hit are clearly consuming less and those who used their savings are prioritising rebuilding the coffers.
For several years, private consumption and investment have been the bulwark of economic recovery. This time, it’s different. Exports and government spending may have to do the heavy lifting, while private consumption and investment will trot over time. This is also why the Indian economy is not expected to catch up and cover up the pandemic-generated losses.
All in all, India’s GDP growth is expected to see a base effect-driven sharp rebound until fiscal 2023. We expect the economy to grow 9.5% this fiscal and 7.8% the next. In fiscal 2023, we expect some push to private consumption to come from pent-up demand and broad-basing of growth, as more people get vaccinated. This will particularly strengthen growth of contact-based services sectors. Beyond that, for sustained consumption growth, push to incomes and consumer confidence will be needed.
. For reprint rights
:
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