Won’t be easy to stimulate either govt or private spending.
As anticipated, much of the slowdown in the economy during Q3FY19—growth came in at just 6.6% year-on-year (y-o-y)—was due to slower government consumption and, to a lesser extent, moderating private consumption. Government consumption moderated to 6.5% y-o-y from 11.1% y-o-y in Q2FY19. Private final consumption expenditure increased at a lower 8.4% y-o-y, from a revised 9.8% y-o-y in Q2FY19. Even this is hard to comprehend given the festive season was one of the dullest ever, resulting in weak sales of durables such as cars.
Tighter financial conditions since September 2018, after the crisis in the Non-Banking Financial Companies (NBFC) space, have choked off the flow of credit to consumers. Liquidity will remain tight given the relatively slow growth of deposits, making loans costlier for consumers. Again, much of the consumer credit has been in the form of unsecured loans, and banks will be forced to cut back on these. The big drag on consumption from the subdued agriculture growth—just 2.7% y-o-y in Q3FY19, and the slowest in 12 quarters—will remain, given the rabi crop is expected to be only a modest one. At least 30% of the sales of consumer durables and staples now emanates from rural India, so these will be impacted by the relatively weak purchasing power in the hinterland. Also, slowing global growth will exacerbate the cyclical slowdown, not just hitting exports but also singeing both manufacturing and investments. That, then, will keep consumption subdued because very few new job opportunities will be created.
To be sure, the large amounts of FDI flowing into the e-commerce sector are resulting in jobs—both for the skilled and unskilled. But that is not enough to keep consumption growth at the current pace. Given much of the local investments are being channeled into buying stressed assets—either via the IBC route or otherwise—no new jobs are being created. Thus, even the limited investments won’t sustain since promoters don’t have unlimited resources, are fairly leveraged and are unlikely to take big bets until the elections are over. Indeed, even if RBI trims the repo rate by 50 basis points, it won’t have much of an effect since the liquidity in the banking system will probably stay in a deficit with the currency in circulation remaining elevated.
To be sure, there will some election-related spending on automobiles and other items, but that will taper off in a few months. Unfortunately, government spending which has been holding up consumption in the last couple of years will remain muted since tax revenues have fallen way short of targets. The relatively poor GST collections threaten to crimp government expenditure in 2019-20, too. Also, off-budgetary spends have been uncomfortably high and could be curtailed further, and that will lower spends.