The data on private final consumption expenditure for Q3FY19—a growth of 8.4%year-on-year (y-o-y)—was somewhat puzzling given the festive season had been a particularly dull one.
The consumption engine that was expected to drive the economy, in the absence of meaningful private sector investments and slowing government expenditure, seems to be sputtering. That has been evident, for some time now, from the lacklustre home sales and weak passenger vehicles sales. Moreover, the pace of growth in retail loans from banks, too, has been trending down since November, 2018. Now, the sales of consumer staples has slowed. In fact, the data on private final consumption expenditure for Q3FY19—a growth of 8.4%year-on-year (y-o-y)—was somewhat puzzling given the festive season had been a particularly dull one. But then, there has often been a lack of correlation between the macro-numbers and the high-frequency data.
While smaller spends on relatively big-ticket items such as homes is not so surprising in a slowing economy, the limited purchases of two-wheelers and cars, for nearly six months now, is worrying. Moreover, the loss of momentum has been seen in both rural and urban markets. True, there has been a fairly sharp increase in prices of cars and bikes, thanks to changes in the regulations. But, if the economy is doing so well and so many well-paying jobs are being created, as the government claims is the case, spends on these items should be more robust. Hero MotoCorp reported an 11% fall in volumes in Q4FY19 while TVS Motors reported a volume increase of just 2.1% y-o-y. That established products aren’t able to push through volumes reflects how purchasing power has been limited. Economists point out this is due to incomes growing slowly or staying flat, or even, in some instances, shrinking. Household savings have fallen over the past few years. The physical plus net financial savings of households as a share of GDP was 18% in FY16,17.1% in FY17 and 17.2% in FY18. These levels were much lower than the 20%-plus seen in earlier years—the recent peak was 23.6% in FY12. Physical savings,which were 15-16% of GDP in FY12 and FY13, dropped to sub-10% in FY16, recovering to 10.8% in FY17 and 10.6% in FY18. Again, the net financial savings of households—as a share of GDP—has come off to 6.3% in FY17 and 6.6% in FY18.
Unless incomes rise meaningfully, neither spending nor savings can pick up. The new government cannot afford to spend beyond a point since tax revenues are not particularly buoyant. An uncertain regulatory environment, tax terrorism and weak labour laws have sapped the confidence of the business community. There needs to be better regulation, whether in telecom, oil&gas or labour; else, companies will not invest. Since the government does not have the ability to kickstart the economy with a stimulus, better governance is the only way out.