Consumption at the bottom of the income pyramid is likely to stay strong as the government welfare spending on education, health and housing will grow. However, the squeeze of the urban middle class is likely to continue because of the slowdown in government wages, sluggish private sector job creation and overall economic slowdown.
An analysis done by Credit Suisse says as the government plans to raise spending on rural infrastructure till 2017, this will help productivity and wage growth in rural areas. Almost three-fourth of government spending goes to welfare schemes like education and health and a fifth to rural infrastructure. While welfare spending has grown sharply over the past decade, the number of people employed has not risen much, indicating no direct impact on rural wages. On the other hand, the pick-up in spending on rural roads, housing and electrification, together with the spread of mobile telephony, has had a strong impact on wages.
Spending by both the Centre and states on education has risen sharply after FY06, despite the minor slowdown in FY12. The combined spending in education is over six times the expenditure on employment generation programmes. Similarly, spending on health and sanitation grew at 20% between 2007-12 and spending on other welfare schemes like upliftment of scheduled castes and tribes and social security saw a 25% growth between 2007 and 2012.
The report says that, while expenditure on employment generation schemes peaked two years ago, spending on welfare schemes like education and health is not going to slow meaningfully in the coming year as state governments have enough fiscal room and several elections are now due. The growth in welfare expenditure may not create jobs directly immediately, but will boost consumption.