SBI Research has analysed the trend of variations in Deposits and Advances during successive lockdowns to understand consumer behavior.
Deposits (Savings, Current and Term) increased significantly during Lockdown 1 as people were apprehensive in the beginning of spending and turned frugal. During Lockdown 2, there was a 25% decline in such Bank Deposits, but Term Deposit accrual was very healthy. “The increase in deposits is also attributable to government spending picking up pace with the hike in WMA limits,” reveals a report by SBI Research, which analysed the trend of variations in Deposits and Advances during successive lockdowns to understand consumer behavior.
The situation became critical during Lockdown 3 when such Deposit growth turned significantly negative, indicating people may have used the initial build up to start spending as they realized that Lockdown could be a recurring phenomenon. However, the depletion was only 12% of the deposit build up in Lockdown 1 and Lockdown 2, indicating significant risk aversion in consumer spending.
In Lockdown 4, there has been an increase in deposits again, indicating consumers are uncertain about spending and instead are saving much more in bank deposits. It is also possible that many households may have marginal propensity to consumption closer to zero because many types of spending are less available due to social distancing.
With India going into Lockdown 5, “we believe such consumer savings will continue to surge. As far as advances are concerned, there was a jump in term loans in Lockdown 1, and again in Lockdown 4. We believe while such jump in Lockdown 1 was genuine, as companies availed of unutilized limits, in Lock Down 4, it could be the result of both interest application and some disbursement of unutilized limits. The increase in Cash Credit in May might also reflect more the application of interest as most of the companies have taken moratorium. Thus, such growth in credit component needs to be treated with caution,” says Dr Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.
Meanwhile, during global financial crisis, to minimize the impact on the Indian economy, packages of measures were announced by the then Government and various estimates peg such value to 2.4%-3.5% of GDP. The nature of the crisis was such that there was no transfer to individuals, but mostly stimulating consumption through indirect tax cuts. The combined fiscal deficit (Centre and States), including the special securities issued to oil marketing and fertiliser companies, thus, reached 10.7% of GDP in 2008-09 (RBI).
However, this time more than 10% of the fiscal package has been in the form of transfer to individuals (includes DBT, cylinders, EPFO Contribution, Insurance, food for migrants and poor families). However, “so far government consumption has been much more restrained in this package and it is more about supporting businesses through liquidity. A study pegs the value of capital expenditure impact multiplier in India at 2.45. The present situation warrants more cash transfers and increased capital expenditures. However, the crisis is at an unprecedented scale and has severely impacted peoples’ ability to eke out a livelihood,” informs Dr Ghosh.
Additionally, international evidence also suggests the more severe and prolonged the economic downturn, the higher the share of households that will be liquidity constrained and the more households will need to use transfer income for basic needs, pushing up overall marginal propensity to consume and a faster recovery.