PremiumBudget 2022 needed to do a lot more to revive consumption. To that end, it teases with a few meaningful initiatives, but big measures to drive consumption by low and lower-middle income households and by rural households, are missing
Listen to this article |
Slowdown in personal consumption is the single biggest problem facing our economy. Personal consumption has long been the main component of India’s GDP and a continued strong engine of GDP growth. Its contraction as a % of GDP by 300 basis points (bps) over the last 3 years (down from 60.5% in 19-20 to 57.5% in 21-22) was already known, and it is this problem that needed urgent and purposeful remediation. The impact of overall slowdown over last 3 years is made even more urgent by the sharp slowdown in rural consumption over last 6-9 months. All other components, except consumption, have seen a robust recovery post Covid-19 – exports, government expenditure, and fixed capital formation.
And importantly, it’s not you or people like us, dear reader, who drive India’s consumption story. Low and Lower-middle income households drive aggregate consumption in India– 66% of all consumption comes from them. Ergo, all income growth being concentrated in the top decile over the last many years has created further drag for the most important component of GDP growth. Inequality is not a social issue alone, but a huge economic problem.
The double whammy of lower employment and Covid-19 has meant a significant reduction in consumption for low and lower-middle income households (contracting essential spending, delaying discretionary spends, and down-trading across categories). This has meant a delayed recovery on many key sources of consumption – automotive, high value durables, OOH and discretionary spends like retail, restaurants and personal care.
Low-income households are mostly agri-dependent or casual wage laborers. The high unemployment rates mean a significant reduction in spending power. With a much smaller pool of savings to dip into, most of these households have eschewed any discretionary spending, and have down traded to cheaper options across key spends.
The budget had to focus on reviving consumption, specifically in lower-mid income households and rural areas. In our view, a host of factors could have helped achieve this, but not enough is apparent in the announcements yesterday.
Investment in creating rural jobs and driving rural income
No increase investment in the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) was announced, despite increasing rural unemployment. While it talks about skilling workers, we await concrete measures for creating jobs at scale: according to CMIE, the unemployment problem is significant (7.9% in Dec’21) and therefore half-hearted measures will not suffice. Minimum Support Price (MSP) support on wheat and rice is an important and welcome step - a good crop should ensure agricultural household incomes will improve. The longer-term fix, however, remains attacking unemployment.
Increasing disposable income through subsidies and revised taxation
No subsidies or cash transfers were announced in the budget. Even for the upper-middle income households, there is no personal tax relief. With lower incomes and an uncertain future, most low- and mid- income households have already dis-saved as much as they could. A combination of reduced income, lack of subsidies and transfers, and persistent retail inflation will continue to dampen consumption growth.
Financial inclusiveness and access to low interest credit
Core banking services at all 1.5L post offices will improve access to financial products for rural low-income households. This could mean the better earnings on savings and easier loans – which could transmit to increased discretionary consumption.
Continued investment in infrastructure and manufacturing
Import duties have been maintained and spending on Production Linked Incentives (PLIs) increased by INR 30L Cr over the next 5 years. This will create 60L jobs for semi-skilled and skilled workers in the medium term – certainly a welcome step, but this won’t really impact near-term consumption.
Rejuvenating small enterprises
In addition to the higher allocation to the Raising and Accelerating MSME Performance (RAMP) program, and extensive credit access, increasing the cover on the Emergency Credit Line Guarantee Scheme (ECLGS) by 50K Cr is a good move. Small businesses will be able to invest for growth and recover from the Covid-19 infused lull. We could see an expedited consumption recovery in some sectors like travel, retail, and OOH spending driven by MSME owners and employees.
The budget also has a few other initiatives on the supply side (adding 80L houses under the Pradhan Mantri Awas Yojana and investing in cheaper rural broadband access etc.) which will have a secondary positive impact on consumption demand, but the real story remains to be the immediate distress, that hasn’t been addressed directly. No doubt, the budget does well on outlining medium to long term initiatives, but equally, it falls short in providing immediate impetus to consumption. We expect essential category (F&B, health) spending to continue growing as seen in the last 2-3 quarters, but recovery in discretionary spends will be erratic and sluggish, based on relief from Covid-19. Importantly, we will see a ‘missing middle’ in the growth – across categories, premium and value segments will see higher growth than the mainstream SKUs and offerings as high-income households continue to spend, and also up-trade, while the majority of the population down trades within categories, or curtails spending on discretionary categories.
Reviving consumption through employment, income generation, or just plain cash transfers to rural and low and lower-middle income households was a critical need. The budget raises hope, but ultimately falls short on this count.
Nikhil Prasad Ojha and Karthik Ganesan are Partners at Bain & Company and are members of the firm’s Strategy and Consumer Products practice
