BackWill rate cuts spur consumer demand?
The production of consumer durables fell by 33% in March, accompanied by a 16% decline in the output of non-durables. Similar indications are reflected in surveys of the FMCG space, said RBI
PremiumThe Reserve Bank of India’s off-cycle benchmark rate cut by 40 basis points is expected to boost economic activity, generate more jobs and revive the consumption engine as the covid lockdown is lifted in phases.
“The biggest blow from covid has been to private consumption, which accounts for about 60% of domestic demand. The production of consumer durables fell by 33% in March, accompanied by a 16% decline in the output of non-durables. Similar indications are reflected in surveys of the FMCG space," said RBI governor Shaktikanta Das.
Das said over the past two months, electricity and fuel consumption—indicators of day-to-day demand—have plunged, and the loss of both demand and production has taken a toll on fiscal revenues.
While India’s merchandise exports and imports have seen their worst slump in the past 30 years, demand compression and supply disruption will depress economic activity in the first half of the year, according to the RBI.
“Assuming that economic activity gets restored in a phased manner, especially in the second half of this year, and taking into consideration favourable base effects, it is expected that the combination of fiscal, monetary and administrative measures being currently undertaken would create conditions for a gradual revival in activity in the second half of 2020-21," Das added.
Though consumer demand had started slowing down even before the virus outbreak, the covid lockdown brought along challenges on the supply side.
Consumer goods firms and analysts said covid-19 may have triggered a change in household behaviour, and with the highly uncertain economic environment, people may be more thoughtful about consumption and savings.
According to a Motilal Oswal report, over the past several years, private consumption expenditure (PCE) had been the key driver of GDP growth in India, with PCE’s share rising from 56% of GDP in FY12 to 60% in FY20.
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