Household consumption demand in India is lagging fiscal 2020 levels by 3%, according to the latest National Statistical Office estimates on India’s gross domestic product (GDP) for this fiscal. That makes it the worst performer among the expenditure-side components of GDP post-pandemic, says a research note.
In the report, rating agency CRISIL says, “Job losses and lower earnings over recurrent waves, and the pressure on medical expenditure during the pandemic, have taken a toll on household savings, which might have shrivelled further since. Those suffering income losses are clearly consuming less, and those who used up their savings are prioritising rebuilding buffers.”
India’s consumption cycle badly needs a lift; the rating agency says, “Private consumption was slowing even before the pandemic. On a per-capita basis, consumption growth slipped to 4.4% in fiscal 2020 from 6.8% in fiscal 2017. It contracted sharply by 10.1% in fiscal 2021. Beyond that, the catch-up has been slower than for other demand components of GDP. By the end of this fiscal, it would not even have sighted fiscal 2019 levels.”
According to CRISIL, rural wage growth in India remains tepid. With reduced budgetary allocation to rural employment schemes in fiscal 2022 and weak economic activity, wage growth has slowed in the farm and non-farm sectors.
The Reserve Bank of India (RBI) data shows farm wage growth in nominal terms slowed to 5.7% in fiscal 2022 (April-November average), from an average of 6.6% in fiscal 2021. Non-farm wage growth halved to 3.2% from 6.4%. In fact, discounting for the high inflation, non-farm wages in real terms show negative growth (or decline) on-year, the rating agency says.
Consumer sentiment is weakening due to a lower savings cushion, CRISIL points out. It says, “Household financial savings in India averaged 13% of GDP for nearly a decade through fiscal 2015. This ratio gradually slipped to 11% by fiscal 2020, as income growth slowed and households dipped into their savings. As the pandemic hit, it shot up to 21% of GDP in the June 2020 quarter, led by a forced reduction in consumption on account of the lockdowns. But savings dropped to a low of 8.2% in the December 2020 quarter.”
According to CRISIL, high inflation is eroding the purchasing power of Indian consumers. Inflation in the essentials category like food, fuel, rent, clothing and health for the three years through this fiscal was, on average, 180 basis points (bps) higher than for the three years ended fiscal 2019. In contrast, it says that inflation in the discretionary categories was only 30 bps higher.
The current consumption slowdown is also a consequence of the income inequality spawned by the pandemic, the rating agency says. “Lower income segments, especially those employed in the small and medium enterprises, unorganised sectors and contact-based services, were most affected in terms of purchasing power because of repeated COVID waves, continuing restrictions, social distancing norms and the fear factor. GDP in construction, a ‘low-skill’ labour-intensive segment, is estimated to be only 1.3% above its pre-pandemic level.”
In rural areas, consumption is affected due to inadequate support for employment schemes there. For fiscal 2021, the government announced a higher allocation under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and rural construction works, providing assistance to workers in the hinterlands.
But that was short-lived. CRISIL says, “In the Union Budget 2022, these allocations were downsized as COVID cases were contained. However, data suggests that in the absence of employment opportunities in urban areas, demand for rural works stayed high even this fiscal, a large part of which remained unmet.”
The past few budgets have emphasised the Union government’s intent to drive potential growth by leaning on a mix of capex and reforms. “But with the pandemic affecting low-income segments the most, near-term measures to support incomes and private consumption are crucial to strengthening the bridge to the medium-term growth path,” it added.
According to the rating agency, delaying a sharp fiscal correction to make room for boosting employment and infrastructure spending is probably the best bet at this juncture.
It says, “Our back-of-the-envelope calculations show that the government could create additional fiscal space of Rs35 lakh crore over fiscals 2022-2026, by postponing the fiscal deficit milestone of 3%. Moreover, though nominal GDP growth is estimated to decline to 12-13% in fiscal 2023 from 17.6% in fiscal 2022, it remains strong. A broad-based recovery and improved compliance should also benefit tax collections.”
“Together with a gradual path of deficit reduction, this can provide room to accommodate spending on supporting rural and urban employment generation—near-term consumption-supporting measures as outlined below—and to fund capex over the next four fiscals,” CRISIL says.
The rating agency advocates generating employment that also supports asset creation. It says, “Policy support focus on incomes must continue for longer, till growth becomes broad-based and demand conditions show sustained improvement.”
The MGNREGS remains the only lifeline for the vast section of the landless, informal sector and migrant workers, who have borne the brunt of repeated pandemic waves and lack of employment opportunities in urban areas. A higher allocation for the MGNREGS must be prioritised this fiscal.
According to CRISIL, there is also merit in introducing similar employment generation schemes in urban areas, given how swathes of workers such as in urban construction and contact-based services remain un or underemployed, even if lockdowns have become less restrictive.
“The case for a national urban employment guarantee scheme has repeatedly been put forth by experts as well as the Parliamentary Standing Committee on Labour in its August 2021 report. The time is ripe for its realisation,” it added.
However, CRISIL says it does not advocate steroidal lift. “Any support measures will have to be designed carefully after weighing their impact on consumer price inflation, which remains high with risks tilted upwards.”
Since inflation takes away from all, the government must ease pressure on inflation, the rating agency says, adding, “Fiscal policy can help control inflation by further bringing down excise duty on fuels. The reduction of excise on petrol and diesel by Rs5 and Rs10 per litre, respectively, in November 2021 was welcome, but consumers could do with more relief now. Easing the fuel tax burden will augment disposable income while simultaneously trimming the input cost burden for producers.”
