India's consumption story may not be ending yet but suspense should keep govt on tenterhooks

Could the Indian revival story get spooked by people not spending as much as they once used to? Ambit Capital has raised this question in a report. It doesn’t say that consumption levels will fall, but says that there are reasons to worry that the decade-long credit-fuelled consumption boom (from 2002 to 2012) could peter out. If that happens, that will be very bad news for the economy. Because, right now, it is private consumption that is holding up growth. The Ambit report points to the private consumption figures in the first quarter (Q1) of the current fiscal year; consumption growth, it points out, grew only 6.7 percent over Q1 of the previous year – a six-quarter low. It says private consumption is not being supported by private sector investment and this raises doubts about how sustainable the former is. Other signs that it points to are the Reserve Bank of India’s quarterly consumer confidence survey, which shows a dip across parameters; the fact of the household savings ratio being at an 18-year low – this, it says, will affect consumption in the future; the poor show of manufacturing and construction sectors – both large job generators. On the face of it, the note looks a tad alarmist, since it is based on Q1 economic data. Let’s not forget that Q1 was facing the hangover of the effects of demonetisation. N. Bhanumurthy feels people could have postponed spending because of uncertainty over the goods and services tax (GST). The GST rates had been publicised well before and the prices of some goods were set to fall. While retailers were offering heavy discounts to get rid of old stocks, this pushed up sales mainly of goods which were to become more expensive. [caption id=“attachment_3460520” align=“alignleft” width=“380”]  Representational image. Reuters[/caption] One will really have to wait for the second and perhaps even the third quarter data to completely write off the consumption story. Consumption could well pick up because (a) the initial effect of GST will play itself out; (b) the central government has just hiked the dearness allowance for its employees and pensioners – this comes into effect from 1 July, so that means 1.1 crore people will have a lot of cash in hand; (c) the festival season in September and October will also prove crucial. However, there is no room for complacency for the medium and long term. One ray of hope is the fact that pay revisions for employees of state governments, public sector undertakings and universities are pending. Over the next year or so, pay hike announcements are bound to be made. Even if the hikes are kept to the minimum, the very fact of an increase will give a big boost to consumption. On the flip side, as Devendra Pant, chief economist of India Ratings cautions, how hard the informal sector has been hit by demonetisation and whether it has benefited from re-monetisation is not known. Bhanumurthy also points to the patchy coverage of monsoons. Though the country has not faced a drought this year, rainfall has been deficient in Uttar Pradesh, Madhya Pradesh, parts of Maharashtra, Tamil Nadu and Kerala. This could affect rural spending, going forward. Not much is known about the long-term effect of GST on consumption. If the revenue buoyancy thanks to GST is more than 1.1, Bhanumurthy points out, it will adversely affect private consumption. This will have implications for investment demand, without which sustained and sustainable growth is not going to happen. Private consumption needs to go back to the 60 percent of GDP levels it was in during the boom years of 2004-2008. Industry needs to achieve full capacity utilisation (now hovering around the 70 percent mark) before it will even begin to think of expansion of capacities and new projects. Even with present levels of private consumption, Pant says, chances of an investment recovery in the current fiscal are low. If even this demand collapses, expect nothing till the end of 2019. There are limits to how much government capital expenditure will help, though the central government has frontloaded spending in this financial year. The government’s economic managers clearly cannot afford to take their eyes of the economy.