The revision in the previous years’ data has had a marginal impact on the third quarter GDP estimates, but higher inflation as well as a fall in incomes and employment along with continued uncertainty over the economic climate has dented private consumption in the October to December 2022 quarter, many economists feel. They expect private consumption to remain muted even in the fourth quarter as the base effect wears off and pent-up demand fades away.
“The revision of the data of previous years has some effect on the third quarter figures but not a very strong effect. When incomes fell due to the impact of the Covid-19 pandemic, the precautionary motives of households increases and they started holding on to savings. That effect has continued beyond the pandemic due to the continued uncertainty,” said DK Srivastava, chief policy adviser, EY India, adding that private consumption would rise once employment and incomes take off in small scale businesses and MSMEs.
According to the NSO data released on February 28, real GDP is estimated to have grown by 4.4% in the October to December 2022 quarter of the fiscal from 6.3% in the second quarter and 13.2% in the first quarter. More worryingly, indicating a dampening of private demand, private consumption expenditure is seen to have grown by a mere 2.1% in the quarter under review in real terms. In nominal terms, it increased by 8.1% to `43.9 trillion in the third quarter compared to `40.5 trillion in the second quarter of the current fiscal.
However, the finance ministry has pointed out that the revision of GDP data for previous year has made the third quarter growth seem understated.
Madan Sabnavis, chief economist, Bank of Baroda said the consumption growth is slow due to high inflation. “Are people buying more? Probably not. Consumption is likely to remain under pressure in the fourth quarter as well as the pent-up demand in services will also go away. Auto sales could continue to remain high as the supply side issues are normalising,” he said.
Data such as that on industrial output also shows that consumer durables have shown negative growth in many months. Industrial output grew by 4.3% in December 2022 from a year ago with consumer durables contracting by 10.4% in the month while consumer non-durables grew by 7.2%. With retail inflation rising to a higher than expected 6.52% in January, there is heightened expectation of a further hike in the repo rate, which is already at 6.5%, in the April policy review.
Analysts also point out that while consumer demand in higher income levels is still resilient, it remains subdued in mid and low income groups. “The pandemic and inflationary pressures have hurt a lot of people at the bottom of the pyramid and they are yet to recover,” said an analyst. According to a report by Emkay Global Financial Services, the implied real GDP growth rate for the fourth quarter of the fiscal is 5.1% with PFCE seen to be rising by just 1.5%.
Sachchidanand Shukla, Chief Economist, Mahindra Group said, “We expect private final consumption expenditure to remain under a spot of bother and manifesting in the form of prolonged K-shaped recovery due to the lagged effect of interest rate hikes, subdued export demand, which will impact incomes in export intensive sectors like IT and textiles etc; and lastly the contraction in the centre’s revenue expenditure this year at about 4% YoY.”
While there is some expectation of a pick up in rural demand, but the current heatwave as well as concerns of El Nino are beginning to raise questions.
A report by Motilal Oswal said that overall, consumption demand has started its southward journey. Both rural and urban consumption grew at a three-quarter low of 4.6% and 6.6% year on year, respectively, in the third quarter of the fiscal. “Going ahead, though the central government continues to focus on the rural sector, weak income growth combined with higher interest rates could bring down overall consumption demand further,” it said.
An SBI Ecowrap report however, noted that PFCE is expected to increase to Rs 164 trillion in FY23, with the yearly growth moderating to 14.8%. “The growth rate has moved back to double digits post Covid, indicating the positive growth momentum. Per capita PFCE also shows an improvement of over 10% yoy to Rs 63,595 crore in FY22 after dipping to Rs 57,728 crore in FY21,” it further said.
