This broad-based moderation in consumption in recent quarters, coupled with lower household savings, is evidence of a K-shaped economic recovery in India, as inflation continues its uptick despite the Reserve Bank of India’s policy rate cuts.
Nuvama Institutional Equities in a recent report said that overall, post-Covid, economic recovery may be strong in pockets, but it remains weak on the aggregate.
“Domestically, consumption momentum is clearly fading, and capex could follow suit amid slowing prices, rising cost of capital and slowing consumption and exports,” it added.
The consumer price index (CPI) inflation in India touched 6.5 per cent in January, after being 5.72 per cent in December and 5.88 per cent in November last year.
Moreover, India’s inflation has averaged 7.2 per cent YoY in H1FY23, following 5.8 per cent in the preceding two years.
To deal with higher input prices and the rising cost of production, companies across various sectors have been passing on the prices to consumers, who are feeling the heat.As a result, consumption and savings are taking a hit across India, especially for the lower strata of society.
A recent report by India Ratings said that industrial growth in India is expected to remain tepid because of the K-shaped recovery, which is neither allowing consumption demand to become broad-based nor helping the wage growth, especially of the population belonging to the lower half of the income pyramid.
Household financial savings plunged to just 4% of GDP in H1FY23
Household savings plunge
Higher prices for goods and services across various sectors, including essential ones like telecom, auto, fuel and FMCG have led to consumers shelling out more than they did in recent years, leaving less in their wallets.
MOFSL has pegged this number at a three-decade low.
“Our calculations suggest that HH net financial savings (NFS) plunged to a three-decade low of about 4.0 per cent of GDP in 1HFY23, from 7.3 per cent of GDP in FY22 and Covid-led 12.0% of GDP in FY21. Within financial savings, the decline was broad-based,” it said in a report.
Household total savings declined to just 15.7 per cent of GDP in the first half of the ongoing fiscal, the lowest in three decades (in comparison to around 20 per cent of GDP in the previous five years), it added.
However, while financial savings have taken a hit, the favour for physical savings like gold and property remains intact.
Slowdown in consumption
India’s economic growth saw further moderation in the third quarter of the ongoing fiscal to 4.4 per cent, down from 6.3 per cent in Q2FY23, as a series of interest rate hikes by the RBI hurt demand and weakness in the manufacturing sector continued.
“The palpable weakness in domestic consumption that we have been highlighting for long is clearly evident in the data as consumption remained virtually unchanged in real terms and barely above the pre-COVID level, virtually three years since the onset of the pandemic,” said Kunal Kundu, India Economist, Societe Generale.
As per a Motilal Oswal Financial Services analysis, while rural spending rose 5.3 per cent YoY in 9MFY23, consumption grew at the slowest pace in three-quarters of 4.6 per cent YoY in 3QFY23.
This slowdown, the agency argues, is led by a four-quarter low growth in real agriculture GVA, a continued fall in non-agricultural wages and nine-quarter low growth in two-wheeler sales.
In addition, farmers’ terms of trade saw a decline and so did real farm exports.
“Overall, consumption demand has started its southward journey. Both rural and urban consumption grew at a three-quarter low in 3QFY23,” it said.
(With inputs from IANS, Reuters)