The anaemic growth in private consumption last fiscal has stirred a debate among economists about changing patterns of consumer behaviour in the wake of fast-paced economic growth over the last few years.
Consumption growth has to accelerate this fiscal if the economy is to expand by 8.5%, the rate forecast by finance minister Pranab Mukherjee.
Private consumption is critical to boosting economic growth as it makes up as much as 57.6% of India’s real gross domestic product (GDP).
“For 8.5%, private consumption has to grow at 6.5%,” said Pronab Sen, the government’s chief statistician.
In 2009-10, private consumption grew 4.3% and underperformed GDP growth of 7.4%. This low growth is puzzling because micro-indicators such as sales of automobiles and consumer durables have been robust.
“It is against intuition; it doesn’t gel with the overall story,” D.K. Joshi, principal economist at Crisil Ltd, said of private consumption’s performance. “It is a big puzzle that needs to be sorted out.”
Economists have varying explanations for the phenomenon. According to Sen, micro-indicators such as auto sales tend to have an urban bias, which might give misleading signals about the larger economy. What is more critical is demand in the rural areas that account for two-thirds of India’s population.
Rural demand is growing, but at a slower pace than urban demand. Rural consumers do not seem to have regained confidence in the wake of last year’s drought.
Sen said the growth rate of the consumer non-durables sector, which includes products such as toothpastes and soaps, compared with durables, including TV sets and motorcycles, is a key indicator of consumer confidence. Consumption, in turn, is driven by the confidence people have in future incomes, he said.
“Consumer non-durables is driven by expectations about the future,” Sen said. “That is where the weakness is.”
Data on the Index of Industrial Production showed consumer non-durables in 2009-10 grew 1.5% compared with 26.1% growth in durables and 7.4% growth for all categories of consumer goods. The data was influenced by the release of a part of the Sixth Pay Commission arrears to Union government employees, economists had told Mint earlier.
There is unanimity among economists that rural consumers have not experienced the kind of distress that was observed in droughts prior to 2009 as the rural employment guarantee scheme, which assures at least one member of every rural family 100 days of work a year, has acted as a social safety net.
“Look at history. In every drought year, we have seen distress sale of land,” Sen said. “This time it didn’t happen.”
Sen’s explanation of the likely cause of weakness in private consumption was not shared by other economists Mint spoke to.
Other explanations ranged from the after-effects of the gradual withdrawal of the fiscal stimulus package to weaknesses in India’s statistical system, which result in key numbers being revised at a later date when more reliable information is collated.
Joshi and N.R. Bhanumurthy of the National Institute of Public Finance and Policy said consumer durables’ growth is a good proxy for consumption. Slower growth in non-durables should not have a more significant impact on aggregate consumption, they said.
“Consumer durables is a strong leading indicator,” Bhanumurthy said. “It is a proxy for buoyancy.”
According to Joshi, the level of consumer confidence shows up in the decisions on consumer durables. In uncertain times, consumers tend to postpone purchase of durables, he said.
The decision to roll back the stimulus featured as a likely cause for poor private consumption. “It is the lagged impact of drought and the waning impact of fiscal stimulus,” said Samiran Chakraborty, regional head of research, India, at Standard Chartered Bank.