Home / Economy / India’s economy hampered by weak consumer spending

NEW DELHI : India’s economy is rebounding after a brutal pandemic-induced recession, but job losses related to Covid-19 are weighing on consumer spending and the country’s economic recovery.

The South Asian nation’s gross domestic product grew 8.4% in the three months ended September, compared with a year earlier. The quarter reflected the aftermath of India’s devastating spring Covid-19 surge, which set global records for daily cases and deaths in a single country.

The surge slowed an economic recovery that began in late 2020, after the country sank into a deep recession triggered in part by a nationwide lockdown. India’s GDP growth benefited from a comparison to a quarter last year that saw a 7.4% contraction.

The economy is now benefiting from reopening following localized lockdowns in April and May. After months cooped up inside, India’s festival season, which began in September, helped get people out shopping again. But economists say that consumer spending, which makes up more than half of the country’s GDP, has been slow to bounce back as people are still reeling from losing jobs or seeing their salaries slashed during successive Covid-19 surges.

“It’s a weak recovery," said Kunal Kundu, an India economist at Société Générale Corporate & Investment Bank. “Consumer confidence continues to hover around its all-time lows."

The country’s unemployment rate fell to 7.75% in October from 11.84% in May, according to the Centre for Monitoring Indian Economy, an independent think tank in Mumbai. The improvement in the rate masks deep issues still plaguing the country’s labor market, Mr. Kundu said. Many people who had formal jobs have been forced to cobble together informal jobs that pay far less. Some have returned to their home villages to work on farms, and others have given up on looking for work altogether.

“There’s a huge amount of disguised unemployment," he said. “Everything is not well with the middle class."

Manoj Kumar, who owns two small clothing stores, says he sees the effect of that income crunch on his businesses every day. One of his shops is nestled among the narrow lanes in New Delhi’s neighborhood of Lajpat Nagar, which was once regularly crammed with shoppers. There have been fewer shoppers recently, he said. On a recent weekday, the market was nearly deserted.

Mr. Kumar, 55, said sales are still at 60% of pre-pandemic levels, with no signs of recovery. The customers who do make purchases are often forgoing expensive outfits in favor of necessities.

“They are spending less," he said. “Most have cut down their consumption."

Mr. Kumar said he is struggling to pay back a loan he took out in 2019 to open a second store in Noida, a suburb of New Delhi. That new location brings in only a quarter of the sales it once did before the pandemic. He has already let go of half his employees.

“I’m very worried how I will pay the bank loan and rent," he said. “I’m thinking of emptying my new shop and closing it."

Consumer sentiment remained pessimistic in September at 57.7, up from 48.6 in July, according to a bimonthly survey from the Reserve Bank of India. Anything under 100 shows pessimism, while anything above 100 indicates optimism. Economists pointed to the deterioration of sentiment in several categories in September compared with two months earlier—including employment, income and the overall economic situation—as possible warning signs for the labor market and spending.

India’s bigger companies and wealthiest people are benefiting the most from the country’s economic recovery, economists said. Exports are growing and manufacturing is picking up. Data firm IHS Markit’s purchasing managers index for manufacturing in India—a measure of activity in the private sector—rose to 55.9 in October, the fourth straight month of growth. A reading above 50 indicates that activity is increasing, while a reading below points to a decline in activity.

India’s economy should continue to improve in the third quarter of 2021, said Aurodeep Nandi, an economist with Nomura in Mumbai. However, many economists said it is too soon to predict how robust or quickly the economic recovery will be in the long term.

“The growth outlook beyond looks a bit murky," Mr. Nandi said.

The new Omicron variant, first detected in South Africa, adds an element of uncertainty. The emergence of Omicron, which the World Health Organization has classified as a variant of concern, has already roiled global markets and prompted news travel restrictions. Scientists say they haven’t yet determined whether Omicron is more transmissible or better at evading vaccines and immune responses than previous variants.

India remains vulnerable to another surge of the virus. Only about 31.5% of its nearly 1.4 billion people are fully vaccinated, according to Our World in Data. Epidemiologists say immunity from those previously infected during the spring surge has waned.

Inflation is also nudging up food prices for consumers and the costs of raw materials for businesses in India. The wholesale price index climbed 12.54% in October, up from 10.66% in September, according to the Ministry of Commerce and Industry. The ministry blamed the high rate of inflation on a jump in prices on food, metals, petroleum and natural gas.

Uddeshya Goel said his family’s four factories in Uttar Pradesh are enjoying a surge of demand for its textiles, carpets and home furnishings. But the prices on goods such as cotton and other goods imported from China and Vietnam have sometimes doubled. Even if they are willing to pay, supply chain snags mean they can’t get their hands on enough raw materials, he said.

“Profit margins have gone down," said Mr. Goel. “It’s hitting us right now, and we can’t shift the entire cost to the consumers."

Mr. Kundu, the economist, said he is expecting India to take four years before its economy gets back to pre-pandemic levels. “Growth next year, it will drop off a bit," he said.

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