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The survey shows that consumers don’t expect an increase in their discretionary spending for the next year. (Mint)
The survey shows that consumers don’t expect an increase in their discretionary spending for the next year. (Mint)

Demand story is still dark as the recent upticks are just fireflies

  • Analysts have already begun discounting upticks where demand is concerned
  • More Indians believe that their employment prospects may improve in the next one year and, therefore, incomes, too

The demand collapse that the coronavirus pandemic brought on has pulled down both business and consumer sentiment. Cooped up in their homes and unable to spend, it was expected that Indians wouldn’t be upbeat about anything. It is not surprising that a survey of the Reserve Bank of India (RBI) found consumer sentiment at its historic low in July. But what is unusual is the optimism the future expectations index showed. This index rose to 105.8 in the July round of the survey, from 97.9 in the previous one, a sizeable jump.

But Indian businessmen and even policymakers need to be very careful and take this uptick with a huge dollop of salt. One has to only dig into the RBI survey to find that the signs of demand uptick are fragile.

The survey shows that consumers don’t expect an increase in their discretionary spending for the next year.

Take it with a pinch of salt
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Take it with a pinch of salt

Analysts have already begun discounting upticks where demand is concerned. “I don’t think demand will pick up quickly. When the economy unlocked, we saw an initial pickup. The boost from pent-up demand has already happened," said D.K. Joshi, chief economist at Crisil Ltd. He added that it would take a long time for demand to reach pre-pandemic levels.

Note that the consumption growth that has been fuelling the economy over the past few years was largely led by discretionary spending. If consumers stick to their pandemic purchase pattern of just essentials, demand is going to be only a fraction of what it was before the pandemic.

Saugata Bhattacharya, chief economist at Axis Bank Ltd, believes that demand may not reach pre-pandemic levels until the fag end of FY22.

Among discretionary spends, services such as travel and hospitality formed a significant portion. These are the worst-affected sectors and are expected to remain moribund.

Joshi at Crisil points out that even in countries where the lockdowns have lifted entirely, people are reluctant to spend on eating out or travel.

Indeed, the British government said last month that it would bear 50% of the bill for those eating out during the month of August, to alter consumption patterns after months of lockdowns.

In India, regional lockdowns continue. Metro cities and urban centres are witnessing intermittent lockdowns as a stubborn infection curve is challenging local governments.

“Rising cases are leading to intermittent local lockdowns and increased consumer risk aversion is resulting in a bumpy recovery path," warned analysts at Nomura Financial Advisory and Securities (India) Private Ltd.

So what were consumers hopeful about?

More Indians believe that their employment prospects may improve in the next one year and, therefore, incomes, too.

This could be a direct outcome of the national lockdown being lifted in June.

The unlocking of the economy meant that employment opportunities that evaporated in cities due to the pandemic have come back slowly with the opening up of small businesses, construction activity and even services in some cases.

But companies need spenders. Analysts hope that the villages generate spending faster than urban centres, given the upbeat outlook on agriculture.

“While agriculture’s share in GDP (gross domestic product) is not large, it has a wealth effect and the dependence is higher in terms of employment," said Joshi.

But this, too, is under threat as the pandemic travels into the hinterlands already having a weak health network.

While the rural sector may provide a much-needed boost to demand, the driving force of urban discretionary demand would be largely absent.

Abheek Barua, chief economist at HDFC Bank Ltd, puts it in a pithy comment: “Things may get worse for the economy as the pandemic is not under control."

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