There may not be a sharp pick up in consumption growth unless investment growth and job creation both pick up
Rajani Sinha & Rutuja Morankar
Consumption has been a key driver of India’s growth. In the last five years, the private final consumption expenditure (PFCE) has grown by 6.7% (CAGR), even while investment and export growth have slowed to 3.7% and 3%, respectively. Unfortunately, in the last few quarters, there has been a deceleration in consumption trend and a dip in consumer sentiments, leading to concerns on whether the healthy consumption trend will be sustained. PFCE growth has fallen to 6.7% in Q1 FY18 from a high of 11% in Q3 FY17. The deceleration is in line with the weakness in consumer sentiment. Consumer sentiment has hit a four-year low, and has been pessimistic for the last two quarters.
India’s consumption basket has been gradually moving towards discretionary items. The share of food and beverages in the consumption basket has reduced from 37% to 31% between 2005-2016. Discretionary items like personal care, recreation, etc, have recorded an increase in share in the period under review. Increasing share of discretionary items implies that consumption will be hit severely in case of a fall in consumer sentiment, as discretionary items can always be postponed or deferred. A lot of the pessimism is due to the employment situation and rising price levels in the economy. The interesting aspect is that while inflation has been quite contained, inflationary expectations have remained high. Household inflation expectations (three months ahead) is 7.2%, even while actual CPI inflation in the fiscal year so far is 2.6%. Such expectations could be a fallout of high and sticky service sector inflation and housing inflation.
As far as the employment situation is concerned, the concern is that India isn’t generating enough productive jobs to absorb those entering the workforce. CMIE-BSE data show that the unemployment rate has fallen from 9.6% in August 2016 to 2.9% in July 2017. But this could be a fallout of lower labour participation as the labour force could be opting out either to start a business or for further studies. However, in August-September, the unemployment rate has again moved up to 4.5%. Irrespective of the data, the general concern is that job creation needs to be handled appropriately. To add to the woes of rural consumers, the spatial distribution of rainfall has not been satisfactory this year.
Even with weak consumer sentiment, the prospects for the consumer goods are not completely bleak. A lot of the fall in consumption growth this year can be attributed to the disruptive effects of GST and demonetisation, which should be transitory. If we remove those factors, there are factors that are supportive of consumption growth. Auto sales, also a reflection of consumer sentiment, have been recording healthy growth. Passenger car sales and two-wheeler sales have grown by around 10% each so far this fiscal. Retail loans have been a key supporter of consumption growth in the last few years. Personal loans recorded a growth of 16% y-o-y on the back of 18% growth in the previous fiscal.
Consumption got a boost from the the 7th Pay Commission-recommended hikes. We may still see further positive impact as state governments and PSUs also hike salaries in keeping with the recommendations. Rising rural wages is another factor that would be supportive of consumption. Around 70% of our population is in rural areas, and it contributes around 40% to the sales of FMCG companies. Rural wages have increased by 8% in the current fiscal year as against 4.6% growth in the last year. Rural economy, while driven by agriculture, is increasingly getting more reliant on non-farm sectors. Hence, rural demand is likely to remain healthy, even while agri-income has fallen due to lower food prices. Loan waivers announced by five states, amounting to Rs 1.2 lakh crore, could also boost rural consumption demand. Consumption growth is likely to pick-up again as the effects of DeMo and GST wear off. Demand from rural areas and pay commission effects would be supportive of consumption. However, there may not be a sharp pick up in consumption growth, unless investment growth and employment generation also pick up.
Authors are Mumbai-based corporate economists