Low oil prices, falling food inflation and steading rising income growth can infuse a whopping Rs 1.4 trillion into economy by way of increased consumer spending this fiscal, says a Crisil report.
The agency attributes this to the coming back of real returns for savers and consumers, even though on a marginal scale, following the steep fall in fuel prices and inflation, coupled with the improving income growth.
“We estimate that the households’ spending power will increase by Rs 1.4 trillion in fiscal 2016 because of low fuel prices, benign food inflation and steadily improving income growth.
“Measured in nominal terms, the increase is close to 2 per cent of the annual spending of households. These converging tailwinds, we believe, will lend the economy a reasonably good consumption kicker,” agency’s chief economist Dharmakirti Joshi said in a report today.
According to him, the record low oil price and continuing fall in food inflation will together yield additional spending power of Rs 1.4 trillion next fiscal compared with nearly Rs 509 billion in FY15 (as the oil price fall began in the second half of the current fiscal).
Savings on fuel expenses alone will be Rs 300 billion, while on food it will be more than thrice at Rs 1.1 trillion, Joshi added.
According to him, these savings are most likely to be spent on discretionary items than salted away in formal savings because the rise in real returns would be marginal given that nominal interest rates are on the wane.
Other consumption boosters could be improving incomes and an increase in access to credit enabled by schemes such as the ‘Jan Dhan Yojana’.
Analysing the reasons for poor consumption in the past three years, Joshi said private consumption growth fell sharply in fiscals 2013 and 2014 to an average 4.9 per cent per year compared with 8.4 per cent in the five-year period preceding because consumer inflation was sticking around a high 10 per cent and income growth slowed.
During the fiscals 2013 and 2014, the average GDP per person in real terms (as per the old series) rose by just Rs 1,600 compared to Rs 3,100 in fiscals 2010 and 2011 when the Sixth Pay Commission report was implemented.
Consumer price inflation fell from 8.3 per cent in March 2014 to 5.4 per cent in February and is estimated to average at 6.5 per cent in fiscal 2015 – down from 9.5 per cent for last fiscal, before heading even lower to 5.8 per cent in fiscal 2016.
The sharpest fall will come from food where inflation is estimated to slide to 7 per cent in fiscal 2015 and further down to 5 per cent in fiscal 2016, from 11.3 per cent in fiscal 2014, Joshi said, adding every one percentage point rise in food inflation pushes up overall inflation by 40 bps.
This is the first round impact of falling food inflation on overall inflation.
Over the past four fiscals from 2011 to 2014, deflator-based inflation rose to average 7.6 per cent against 5.4 per cent in the preceding five-year period, thus discouraging consumption.