There are some initial signs of a modest slowdown in consumer spending. Sales of cars, trucks and two-wheelers have been dwindling this year. The growth in production of consumer durables such as television sets has been nothing to write home about. And bank data shows that lending to consumers to buy goodies is no longer racing ahead at breakneck speed. There are already informal reports of growing inventories in some parts of the Indian consumer economy.
It is typical of the government to try to rush into the fray at the mere hint of trouble, rather than allow companies to face genuine business risks. Last week, Union minister for heavy industry and public enterprises, Sontosh Mohan Dev, said that the government “will certainly intervene to support growth” in the automobile sector. Heavy industries secretary R.C. Panda reportedly said at a recent industry shindig that the Indian auto industry was suffering because of free trade agreements signed between India and some countries. There has been talk of tax cuts and export subsidies.
Thankfully, there hasn’t been any similar noxious and interventionist enthusiasm as far as other consumer sectors go. But one can never tell what will happen in the coming quarters, though consumer demand in India continues to grow at more than 6% a year—a pace that would be celebrated with champagne in more sluggish economies. But look what we have here: a few thousand unsold cars, and ministers and bureaucrats start rattling their statist sabres.
These recent statements show how fragile the commitment to a liberal, market-based economic order is in India. Modern economies and individual sectors within them have to face inevitable business cycles.
Providing fiscal and trade support looks good on paper and sounds good on industry podiums. But they inevitably create a hothouse of over-investment, as business risks are walled off. The most likely result is even more trouble down the line, as the gap between supply and demand widens. In other words, small shocks today are insurance against large shocks tomorrow. The government should stay clear of such populism and allow companies to adjust their production and investment to the ups and downs of a business cycle.
Anyway, how serious are the problems in consumerville? Total consumer spending has two main components—private and government final consumption expenditure. Macroeconomic data shows that both have decelerated in 2006-07, but only by a bit. Private consumer spending grew by 6.7% in 2005-06 and by (a lower) 6.2% in 2006-07. This does amount to a moderate slowdown. But is it serious enough to warrant hasty policy response? Let’s not forget that growth in private consumer demand is still far higher than the average 4.62% rate at which it grew between 2000 and 2005. The fall in the growth of consumer demand is actually a symptom of a structural change in the Indian economy—and a welcome change at that.
Economic growth has three drivers—consumer spending, investment spending and net exports. Consumer spending was the primary driver of economic growth ever since investments collapsed after the Asian crisis of 1997. But we have seen a splendid investment revival since 2003, as the economy recovered and many industries were close to full capacity.
In 2006-07, for the first time in many years, economic growth was led by investment activity. This is something that stock market investors have figured out many quarters ago, which is why consumer stocks have languished and capital goods stocks have soared in the markets.
Now if only ministers, bureaucrats and industry lobbies read the tea leaves better.
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