Waning wealth effect from falling stocks, tapering oil-prices new risks to urban demand.
The Indian stock market has been falling hard since the start of this year, just as markets in other countries have. The Sensex is down some 8% in this period, but it has plunged 20% from its peak closing value (29,681.77 on January 29, 2015), which represented a 24% increase from mid-May 2014, or when the new government took charge and economic confidence began to surge. The gains realised from this boom in equities generated substantial wealth effects which spurred private consumption, or rather, its urban component. Spending picked up, helped additionally by lower fuel prices last year. The stock market crash and the end of the equity boom have now turned into headwinds for urban consumer demand. With a moribund housing market, slowing income growth and fading impetus of low fuel prices, the sustainability of urban consumption ahead is seriously in doubt.
Around the last quarter of 2014, domestic institutional investors (DIIs) in equities, who had been net sellers since 2008, turned into net purchasers. By the last quarter of 2015, their ownership share of outstanding stocks had reached their highest-ever level of 19%, close to the 21% shareholding of foreign portfolio investors (FPIs) who have long held sway over the Indian stock market. In August 2015, DIIs bought as much as 85% of the FPI sell-off (compared to 60% in 2008), testifying to their increased capacity, interest and confidence. Likewise, mutual funds, through which most retail investors take exposure to Indian stocks, have seen consistent inflows from 2014. Net resources mobilised by mutual funds increased 100% year-on-year in 2014-15, according to RBI data. In December 2015, assets under their management showed a 20% year-on-year growth, in further confirmation of retail investors’ perceptions and interest. At the aggregate level too, nominal financial flows of the household sector in shares and debentures rose to R571 billion in 2014-15 from R324 billion the year before.
Rising stocks, which represent a positive increase in investor wealth—equity market capitalisation, for instance, increased 25% year-on-year in dollar terms in 2014-15—induced similar changes in spending. This benefited consumption demand, which also benefited from lower fuel prices in 2015. Although price declines weren’t fully passed on to end users, petrol and diesel were 10% cheaper and supported household demand.
These effects are distinctly reflected in the consistent improvement in private consumption indicators from the second half of 2014. The deepening contraction in consumer goods’ output from 2012, for instance, bottomed out in October 2014 and moved into positive terrain by March 2015. The consumer goods’ index has grown 4.1% so far (April-November, 2015) against minus 5.7% corresponding growth last year, indicating a maintained uptick although growth is not very strong.
Disaggregated data shows the divergence in urban-rural demand: while consumer durables’ growth is 12% in the period compared to minus 16.0% last year, the non-durables’ subcomponent has actually decelerated minus 0.5% in April-November 2015, over an already weak 1.8% growth in April-November 2014. Usually, non-durable goods are the first to revive when the cycle turns up. More visible is the strong rebound in car sales where each successive quarter from July 2014 onwards has seen brisker growth in the number of cars sold; monthly sales’ growth averaged in October-December 2015 was double that in the corresponding quarter of 2014. On the other hand, sales of motorcycles, other two-wheelers, etc, have decelerated.
With the stock market now in reverse gear, there is substantial destruction of wealth gained by investors in the past one and half years. This has repercussions for spending by urban consumers who have been eager investors. Further, in 2016-17, the impetus from low oil prices is unlikely to persist. While recent trends in international oil prices are still downward, the likelihood of Indian consumers benefiting more is dim. Fiscal strains are likely to compel the government to retain these by way of higher taxes, as recent responses indicate. Reported revenue measures being considered for funding the Swachh Bharat Abhiyan include a 0.5% cess on petrol, diesel and telecom services, besides a further 0.5 percentage point increase in service tax. Then, state governments are increasing VAT on fuels too. All these factors are likely to dampen consumer demand that, to recall, is currently a nascent propeller of demand in the economy.
Prospects of the stock market resuming its upward climb to previous highs are dim given the volatility arising from China, the visible lack of demand and a consolidating view of the world economy tipping into recession. Domestic factors affecting stocks are weak too. Corporate earnings growth in October-December 2015 is largely expected to be subdued: aggregate net sales are likely to continue contracting with poor profit growth and margin benefits from lower commodity prices reaped. Recent data on trends in industrial production, exports, composite purchasing managers’ index, etc. also suggest that growth may have moderated last quarter. Business confidence and sentiment indicators too are not unanimously positive or upbeat as they were a year ago.
In recent months, the revival and sustenance of private consumption has been scanned with great anxiety, i.e. ever since realisation dawned that practically all drivers forecast to lift demand at the beginning of 2015-16 were drying out one by one: A second, successive monsoon dented rural demand; exports have been contracting unstoppably; private investment, it became clear, would not revive due to high indebtedness of many firms, lack of demand, vast unused capacity and high uncertainty; while the effects of public capital spending remain subdued. This left alone the urban spending segment to propel an upturn. With the stock market going into reverse gear, there is reason to worry as the dampened wealth effect will entail some reduction in domestic demand. At a time when global growth projections have been just downsized and financial volatility seems to define the year, the damage to a segment looked upon by all as a critical driver of domestic demand, may hurt growth prospects ahead.
The author is a New Delhi-based economist