Almost the entire growth in economic output in the first six months of the current fiscal has been derived from consumption spending, either by the private sector or the government. Such spending has accounted for 94% of the extra economic output in India since April.
It is not hard to see why. The two other major sources of demand—investment spending and net exports—have been tepid because of the domestic policy mess and the fragile global economy, respectively. But now another engine could begin to stall, as the government tries to cut its revenue spending to get its finances in order. So a lot depends on consumer spending in bazaars and malls in the coming months. Will it hold firm despite economic uncertainty?
It is against this backdrop that the latest data on car sales is worrisome, because it could be an advance warning that consumer demand could be weakening as well. The Society of Indian Automobile Manufacturers said on Monday that car sales in November were 8.3% lower than a year ago. The industry body has also slashed its forecast for growth in car sales in the entire year, to 1-3% compared with an initial 10-12%.
There are a few other straws in the wind. Retailers have said that buying of consumer durables this Diwali has been lukewarm, with most of the interest in high-end gizmos like LCD televisions and upmarket mobile phones. The demand for more regular household appliances has been nothing to write home about. The replacement cycle has also lengthened, as consumers are taking more time than before to buy new stuff to replace old stuff.
Also, there are some warning signs as far as buying of personal and homecare products goes. Volume growth has moderated, but continues to be impressive. There are no clear signs of down-trading in items of mass consumption, which is perhaps because rural wages have been growing faster than inflation. However, there is some pressure on items of discretionary spending, or non-essentials.
The overall picture is thus complicated, but being sanguine about the perseverance of the Indian consumer is not a good idea. Consumer demand may not crack, because families do use their savings pool to smoothen consumption. But it is likely that they will become more careful, as the inflationary economic slowdown persists.
Consumer inertia will be very bad news in an economy in which the government has no room to spend more, companies are too worried to invest and foreign demand is weak.