Home / Economy / Private consumption is where it was four years back

The devil, as they say, is always in the detail. India’s gross domestic product (GDP) grew by 20.1% for the period April to June 2021 in comparison to a year earlier.

The trouble is that the GDP of 32.38 trillion from April to June this year was lower than even the GDP during April to June 2018, when it had stood at 33.84 trillion. In that sense, the GDP is not even where it was three years back. And there is a reason for this.

Before we go into the reason, it is important to understand that there are different ways of calculating the GDP. One method is the expenditure method, in which the GDP is obtained by adding private consumption expenditure, investment, government expenditure and net exports (exports minus imports) or what economists like to refer to as Y = C + I + G + NX.

In the case of India, of the four components that go into calculating the GDP using the expenditure method, the private consumption expenditure, or the money you and I spend on buying stuff, makes up for the bulk. In the last few years, the size of private consumption expenditure in the overall GDP has been around 55-60%. During April to June 2021, it had stood at around 55.1% of the GDP.

Take a look at the accompanying chart which plots the private consumption expenditure for the period April to June, over the last few years.

What does the chart tell us? It tells us that the private consumption expenditure from April to June had stood at 17.84 trillion. This was more or less similar to the private consumption expenditure of 17.63 trillion between April to June 2017. Hence, the private consumption expenditure has been pulled back by four years, due to the spread of the covid-19 pandemic and the economic slowdown before it. This is the major reason behind why the overall GDP is where it was three years back.

On a separate note, the private consumption expenditure between January and March 2021 had stood at 21.60 trillion. Clearly, private consumption has taken a significant beating since then.

Typically, the private consumption expenditure from January to March tends to be higher than from April to June. Nevertheless, the difference in the last decade has never been greater than 0.6 trillion (ignoring 2020 when the difference was much more). The difference this year is 3.77 trillion, telling us that the second wave of the pandemic has also hit people hard. This is something not being talked about enough.

Nevertheless, this is something that is visible across other data points as well. Centre for Monitoring Indian Economy’s consumer sentiment index is at half the level it was two years back and considerably lower to where it was three years back and even four years back.

Over and above this, the net sales of fast-moving consumer goods companies have been flat for the last three years. These companies sell items of daily use, everything from toothpaste to washing powder to biscuits.

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Loans against gold jewellery given by banks have risen by 66.7% from April to July this year, in comparison to last year. A similar trend is being seen with non-banking finance companies which give out loans against gold jewellery. It is worth remembering that money is borrowed against gold only once all other options run out. This seems to be the case with many households currently. Along with this, defaults on these loans have also gone up.

As a recent piece in Mint pointed out: “Both the quickening growth in gold loans and the auctions of gold for recovery are symptoms of an increase in household distress." There has also been an increase in auto debit bounces from pre-covid levels.

To conclude, all is not well with the Indian consumer, which basically means that the incomes of the average Indians are either stagnating or have come down. This in the background of the large listed companies declaring their highest ever profits. Clearly, there is a problem.

Vivek Kaul is the author of Bad Money.