The Indian consumer has been the first line of defence against a total economic collapse. It is now increasingly clear that several years of high inflation are taking their toll on private consumer spending. That is not good news at a time when the other drivers of effective demand are fragile. Investment spending is down. Global demand continues to stutter. And consumption spending by the government is likely to weaken if the fiscal deficit is to be contained.
There are early signs that private consumer demand is under pressure. Car sales slumped in November, and the Society of Indian Automobile Manufacturers, an industry group, has slashed its forecast for sales this fiscal. Hindustan Unilever reported weak volume growth in the third quarter as the company has had to raise product prices to protect its profit margins. The latest consumer confidence survey by the Reserve Bank of India conducted in December shows a deterioration in popular perceptions on current economic conditions, current household circumstances and current spending.
Macroeconomic data also tells us that while private consumer demand is still the main driver of Indian economic growth, it is significantly slowing. Look at the chart below.
India has been growing below potential for several quarters now. Such a negative output gap is bound to be disinflationary in the long run. There are already clear signs that wholesale price inflation and core inflation are retreating. However, consumer price inflation is still close to double digits. Inflation expectations have drifted upwards. So the battle against inflation is not yet won.
The crux of the challenge then is in taming the inflation dragon. More than three years of high inflation had damaged consumer confidence—at a time when robust consumer confidence is needed to support economic activity till the investment cycle turns.