The Indian economy grew 8.2 per cent (provisional) in FY24 while private consumption, which includes the spending by households and businesses across the nation, grew at just 4 per cent.
Currently, India’s economic growth is largely driven by the government’s robust focus on capital expenditure, which is making up for the significant lag in private consumption. A lower consumption is indicative of a household or business’ savings and ability to spend and such stands to have an impact on a nation’s economy.
Put simply, if you don’t spend, the companies won’t produce. If the companies don’t produce, they won’t pay salaries or wages. If they don’t get paid, the government won’t get any taxes.
Economists have been quick to point out this stark difference between the headline GDP figure and weak consumer demand. Some media reports have suggested that the government is mulling tax cuts for individuals in certain income brackets as it attempts to fix this gap.
Can the Union Budget fix worrying private consumption?
National accounts’ estimates show that India’s private consumption growth of 4 per cent in FY24 was a 20-year low, excluding the pandemic years. The household consumption survey estimates have seen both rural and urban consumption decelerate in FY23.Select sectoral data in recent months have also highlighted the weakness in recent weeks. For example, auto retail in India dropped to a two-and-a-half-year low in June. Auto sales are regarded as a significant indicator of private consumption in India. According to government data, the country’s auto industry contributes 7 per cent to the GDP.”Rising frequency of weather disruptions, including in 2023 – leading to weaker agriculture incomes; persistent high food inflation – eating into households’ discretionary spending; and an incomplete service sector recovery – leading to weaker employment opportunities in urban areas, are key factors behind the slowdown in household consumption,” Dipti Deshpande, Principal Economist, CRISIL told ET Online.
Food inflation remains a worry for the Reserve Bank of India, given its volatile nature and weight in the overall inflation calculations.
Consumption worries are not necessarily confined to rural areas, as RBI’s consumer confidence survey for urban areas reflects some weakness in sentiments for the current period.
“While the high-income category has been spending, the lower-income category has been cautious in their consumption spending. Weak hiring by some of the sectors like IT also dampened consumer sentiments,” Rajani Sinha, Chief Economist, CareEdge said.
“The dichotomy between the slower growth in consumption at 4 per cent and the economic growth of over 8 per cent can be explained by the ‘K-shaped’ growth since Covid, where the affluent are driving the activity,” PTI cited UBS Securities’ chief India Economist Tanvee Gupta Jain.
Economists’ Budget 2024 Prescription
Among the many suggestions, economists have suggested that the government has to focus both on short-term, and long-term. “In the upcoming budget, in addition to the continued thrust on capex – which will pave the way for durable long-term growth, some steps to lift growth in the short term are expected to help,” Deshpande said.
Among the short-term measures, Rajani Sinha suggested that the government could provide some tax reliefs to the lower-income category as it could boost consumer sentiments and propel their spendings.
“The government has the challenging task of balancing fiscal prudence while continuing the focus on capex induced growth. Keeping that in mind it will be a tightrope walk for the government. Focussed measures for rural economy like boosting rural infrastructure and rural income should help improve rural demand that has been a bane for the economy,” Sinha added.
On other hand, Deshpande highlighted that the years before and during the Covid-19 pandemic saw large spending under schemes such as PMAY, PMGSY and NREGA. “These schemes are not only employment generating but also asset creating. In addition, they cushion the rural economy in times of weather distress. Spends under these heads saw some normalisation post the pandemic, as the economy recovered,” Deshpande said.
Experts have also suggested as the private consumption growth is currently lagging, core inflation is benign and the overall growth is strong enough to enable the Narendra Modi government’s fiscal consolidation path, the option to leverage the additional fiscal buffer from higher-than-expected RBI dividend of Rs 2.11 lakh crore for welfare spending may be a reasonable choice.
With the long-term in mind, the government has been asked to look at measures to fix employment gaps.
“Over a longer period, the most crucial aspect would be improvement in employment scenario. This will help improve consumer sentiments on a sustained basis. The new government should focus on creating more job opportunities in the organised and unorganised sector. It will also be critical for the government to skill the population adequately to enable them to get absorbed in the labour force,” Sinha said.