Sustaining GDP growth requires higher govt-spending and, equally important, critical supply-side reforms
Over the past few years, it is the rise in private consumption rather than investment that has held up growth, even if the pace has moderated in the last couple of years. With the economy reeling from the shock of the pandemic, consumers are likely to save more and borrow less. Households had already started to de-leverage in FY20; they borrowed about Rs 1.5 lakh crore, or about 1% of the GDP, less, despite a spike in the fourth quarter. Borrowings by households were averaging 2.9% of GDP in the six years to FY17. But in FY18, it shot up to 4.3% of GDP before tapering off to 3.9% in FY19, and further to 2.9% in FY20.
Had the borrowings not slowed, net financial savings would not have risen last year because gross financial assets of households actually fell by 50 basis points to 10.6% from 11.1% in FY19. However, the trend is expected to reverse. Given the severity of the slowdown in the economy, the health risks due to the pandemic and the uncertainty surrounding jobs and incomes, households are expected to turn thrifty for at least a couple of years. As economists have pointed out, the current disruption is very different from the one in 2008 post the global financial crisis; India was not as globally integrated as it is today, and therefore, the impact will be bigger.
Consequently, we could see further de-leveraging by households in the next two or three years, or at least until the economy shows signs of a sustainable revival. At the same time, we can expect an increase in savings even if some households are compelled to dip into them. The trend in savings is harder to discern because visibility on growth is very poor. The fact is that even pre-Covid, the economy was in bad shape; so, simply going back to those levels isn’t enough. Unless the economy grows at a sustainable pace of 5-6%, consumers won’t regain confidence. In the meantime, they will stay away from big-ticket purchases such as real estate, and instead park their savings with banks, post office products and in government bonds. The humble fixed deposit will become even more popular even if the returns fall steadily; deposit growth could rise from the current 11% y-o-y levels.
Parsimonious consumers are bad news for makers of cars, two-wheelers and a range of other goods as also services, and for the economy. Pranjul Bhandari, chief economist at HSBC India, points out that essential goods, which account for a third of the GDP, will drive growth, but to sustain the recovery India may have to move up on the value chain—from essential consumption to discretionary consumption, and finally to investment spending—for which certain enablers are needed.
Bhandari cites the examples of a strong and arguably ‘permanent’ fiscal stimulus after the global financial crisis and free-flowing personal loans that raised the demand for consumer durables in the FY14-18 period. Unfortunately, given stretched balance sheets, neither is possible at this point. She suggests the authorities spend a bit more, given rising savings, and RBI can support higher borrowings and carefully implement the most pressing supply-side reforms. The point could not have been better made; as India unlocks, the demand wave must not be met by supply constraints of finance, logistics and labour.