The great consumer scare

The great consumer scare

Have Indian consumers gone on a buyers’ strike?

It’s too early to say, but this is an issue that has the potential to cause headaches for firms and policymakers. There is likely to be a battle in the mind of the Indian consumer—between spending extra money the government is putting into the economy right now and the growing fears of a severe slowdown that will threaten future earnings.

India is not as thoroughly dependent on consumers as the US is. But private consumption spending accounts for a hefty 60% of India’s economy, in terms of expenditure. The experience during the slowdown of late 1990s suggests that consumers can stabilize the economy when investments and net exports run into trouble, as they are expected to this time around. So, a problem with consumer spending right now has broader economic implications.

Are consumers running scared because of all the bad news that is swirling around them? Psychology does play a role in the decision to spend, but it is hard to imagine that the fears about salary cuts and job losses that have grabbed attention since the middle of September could have had an effect on consumer behaviour within a few weeks.

What about high interest rates? That factor may explain the drop in car sales. But cars and other such durables that are bought on credit are a relatively minor part of the overall index of industrial production, or even its consumer-goods components. Stuff such as sugar, vitamin A, milk powder and tea are more important; and they are rarely bought with a bank loan.

The October drop in the production of consumer goods is perhaps a harbinger of a sharp slowdown in consumer spending, and thus a matter of worry. But the cut in value-added taxes, the farm loan waiver, higher procurement prices, the civil service pay hike and lower fuel prices can combine to keep consumer demand chugging along.

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