India's consumption growth has lost its roar.
A series of setbacks have been scalping away its potential for about half a decade now. First came the widespread decline in economic growth, followed by the demonetization-induced slowdown, and GST rollout that led to a large-scale disruption in economic activity.
Just when things were getting better, the Covid-19 pandemic landed a roundhouse punch, dragging down the growth rate from the peak of 8.1% in Q4, FY18 to a low of 3.1% in Q3, FY20.
It's not just consumption, but every economic metric dropped like a stone in FY21, eroding an estimated Rs 10 lakh crore from national output. The good news is, the latest Economic Survey declared FY23 as the year of full recovery. But is it? Consider just these two facts to understand if we indeed made a complete recovery.
One, Q3, FY23 clocked a sub-5% growth yet again, and nowhere near the growth-going-gangbusters rate. Two, going by the long-term trend growth of 6%, national output would be lower by Rs 13 lakh crore in FY23! Sadly, much of the loss is being borne by MSMEs and the middle-income households -- the two life-sustaining arteries of the Indian economy. Household capital formation alone accounts for about 40% of the total gross capital formation.
In the absence of reliable time-series data on MSME and household earnings and consumption trends, many surveys, reports, and data indicators confirm that all's not well with the rural as well as the urban economy.
Consider urban India. The growth in real wages and salaries has either been stagnant or negative for most workers, including entry-level white-collar workers. For example, the table below shows how real wages, except for plantations, recorded negative growth for a decade now.
News reports also confirm that entry-level salaries in the IT sector have been stagnant for many years. Therefore, it's not surprising that RBI's consumer confidence surveys have been turning in a poor reading, reflecting low confidence about the future, for years on the trot.
Likewise, within the rural economy, the level of household earnings itself is low and the pandemic-led reverse migration increased the dependence on agriculture income. As seen in the table below, the average monthly household income (not per capita) is just above Rs 10,000 per month.
Or take two-wheeler sales -- one of the biggest items of expenditure, excluding housing, among the middle-class. Vehicle manufacturers are seeing a joy drought lately, and the consistent decline in sales only confirms the sagging sentiment.
Even if we take savings as a proxy, the picture isn't different. The level of household savings, particularly, investments in gold and silver, has been seeing a worrisome decline for years. FY21 saw a surprise upside, but that's largely due to the decline in nominal GDP by 1.4% and consumption by 1.7%. As they say, numbers conceal more than they reveal and it'll be interesting to see if the savings rate will sustain itself in the coming years.
The current low level of savings implies that an average household has a smaller equity base to leverage future earnings for its investment and consumption, which, in turn, implies that we cannot expect the credit-led consumption and investment growth to accelerate. We have already started observing this phenomenon in the declining share of affordable housing and mass-market vehicle sales, even though bankers were more than willing to lend at record-low interest rates.
Textbook theory dictates that the obvious solution to slowing household consumption and investment is via higher government and business consumption and investment. But both have been and continue to be reluctant and cautious spenders, respectively.
The government's fiscal consolidation process has begun much before the output loss caused by the pandemic is recovered. For example, the government consumption expenditure has grown by 8.8% per annum since 2019 -- marginally higher than 7.8% nominal GDP growth rate per annum. If we look at the last decade, it has grown at the same rate as the GDP at 10.5% per annum, notwithstanding two severe droughts and policy mishaps like demo and poor GST rollout.
Similarly, the non-household investment (government and industry) has grown at a CAGR of 5% -- a rate slower than the household investment, which has grown at a CAGR of 5.4% since 2014. While the government is focused on fiscal consolidation, industry is unwilling to loosen the purse strings either, despite government reminders about their Hanuman-like abilities. It's indeed surprising that the animal spirits haven't been unleashed, though companies are far more confident about future than households. One of the reasons private investment being held back is capacity utilization, which continues to be low. Moreover, consumer confidence remains in the 'pessimistic zone’, and perhaps the industry too thinks that such pessimism isn't entirely misplaced.
Given that India has been and continues to be a consumption-driven economy, where industry and government remain a cautious investor and a reluctant participant (consumer as well as investor) respectively, it's the household earnings and savings that determines Asia's third-largest economy's ability to grow.
Household earnings drive consumption and investment and the savings provide the required risk-capital for businesses. Unless real earnings and savings rise, GDP growth rate will barely move an inch.
It means, the primary problem of falling household savings and consumption is topped with another irksome layer of declining government consumption and private investments. Put another way, it's a puncture of the jugular veins -- the crucial blood vessels stretching from head to heart -- and the consequences are well-known.
In national economic interest, both the Centre and state governments must slow down on fiscal consolidation and instead invest and consume for growth. On its part, the industry must invest ahead of demand to drive value-creation and productivity at the same time.
Professor Anil Sood is a professor and co-founder at the Institute for Advanced Studies in Complex Choices (IASCC). He has been an adjunct faculty at the Indian Institute of Management, Bangalore and Vizag and taught a course on Valuation. He is also an honorary Senior Professor of Finance and Strategy at the Centre for Organisation Development, Hyderabad.