Will RBI's move spur consumer demand?3 min read . Updated: 22 May 2020, 03:46 PM IST
- With economic environment becoming highly uncertain, not only would households be more thoughtful about their consumption but also more conscious of their savings
MUMBAI: The off-cycle, 40 basis-point cut in policy rates by the Reserve Bank of India (RBI) is expected to revive the consumption engine after the huge demand destruction brought about by the pandemic-induced lockdown.
The repo rate reduction for the second time in 60 days is expected to boost economic activity and generate more jobs.
"The biggest blow from covid-19 has been to private consumption, which accounts for about 60% of domestic demand. The production of consumer durables fell 33% in March 2020, accompanied by a 16% decline in output of non-durables. Similar indications are reflected in surveys of the fast moving consumer goods space," said Shaktikanta Das, RBI governor, in his speech today.
The governor added that over the past two months, electricity and petroleum products consumption – indicators of day-to-day demand – have seen steep declines and the loss of both demand and production has taken a toll on fiscal revenues. While India’s merchandise exports and imports saw 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 said.
Although consumer demand had started slowing down even before the coronavirus outbreak, it was largely confined to rural areas. The lockdown saw demand taking a hit in urban centres and led to supply-side challenges as well.
Consumer goods firms and analysts believe that covid-19 may have triggered a change in household behavior already. And with economic environment becoming uncertain, not only would households be more thoughtful about their consumption but also more conscious of their savings.
"The demand patterns are changing, and there could be an upswing in categories such as health, hygiene and nutrition. We cannot estimate the time of recovery, but we are ramping up capacity for hygiene products and more product launches in the health and hygiene space will be there from us," Srinivas Phatak, chief financial officer, HUL, had said post the company's fourth quarter earnings.
According to a research report by Motilal Oswal, over the past several years, private consumption expenditure (PCE) has been the key driver of GDP growth in India, with the share of PCE rising to 60% in FY20 from 56% of GDP in FY12.
Higher borrowings have, over the past few years, funded consumption spending, such as credit card purchases, vehicles, education, and foreign travel but covid-19 could keep consumers away from this massive discretionary spending.
Consider this: over the past five years, while banks’ lending to the industrial sector has grown at a muted 2%, the personal loans category has grown rapidly at a CAGR (compunded annual growth rate) of 17%. Consequently, the share of personal loans has risen to 28% of bank loans in FY20 from 18% in FY14. On the other hand, it has fallen to 32% from 46% for the industrial sector and remains broadly stable at 19% for the services sector.
Covid-19 could change that.
"One of the long-run effects of covid-19 could be to help consumers stay away from massive discretionary spending, which has been the key driver of private consumption expenditure (PCE) for the past few years. It may be several years before consumer spending patterns alter enough to result in faster growth in the discretionary/partdiscretionary categories, currently 30–40% of the PCE basket," said the research firm in its report dated 19 May.