Household survey: Fresh light on India’s consumption conundrum

Patchy rainfall has had a deep impact on rural demand, which took a big knock from very poor spatial and temporal monsoon distribution.
Patchy rainfall has had a deep impact on rural demand, which took a big knock from very poor spatial and temporal monsoon distribution.

Summary

  • The broad picture indicates that consumption is recovering but will continue to play second fiddle to capex in 2024-25 too.

There has been a huge divergence in India among observers on the state of consumption in general and the health of rural demand in particular. Not surprisingly, there is also a squabble over the appropriate letter of the alphabet to denote the shape of consumption demand. There has also been a discernible cleft between rural and urban areas, as also between goods and services, when it comes to the rates and patterns of private consumption demand growth.

Let us look at the latest top-down data first. The country’s latest Household Consumption Expenditure Survey reveals that between 2011-12 and 2022-23, nominal average monthly per capita expenditure (MPCE) increased at a compounded annual growth rate (CAGR) of 9.2% and 8.5% in rural and urban India, respectively. The numbers stand at 9.4% and 8.6% if the imputed impact of social welfare schemes (excluding education and health) are considered. But in real terms, average MPCE increased by 3.1% and 3.3%, respectively, and only at 2.7% each if welfare benefits are included. In both nominal and real terms, these growth rates are lower than in the period between the two earlier surveys. Importantly, while a rural-urban per capita consumption chasm is reducing, the rural share in overall spending is declining.

Of the two Reserve Bank of India surveys on consumption, one focuses on consumers’ perceptions of current conditions and the other on their outlook for the future. The latest survey shows that consumer confidence continued on its recovery path to a level of 95.1 in January 2024 from 92.2 in November 2023 (on this scale, 100 marks neutrality between optimism and pessimism). But what about their future outlook? As per the survey, households expect an improvement in general economic and employment conditions through the next one year. However, their confidence in future income conditions was a tad lower than in the previous round, following four successive rounds of improvement. Note that consumers being optimistic or pessimistic about the future is a matter of prediction and not of interpreting the current economic situation.

India’s general trade channel (of kirana stores) recorded single-digit volume growth in the third quarter of 2023-24 in the FMCG space. But modern trade continued to outstrip it with double-digit growth. As per Nielsen IQ, the sector is expected to grow at 4.5- 6.5%, indicating a significant deceleration from a robust 9.3% in 2023. The industry reported 6% value growth year-on-year, driven by a 6.4% increase in volume. Note, these rates are all below the country’s nominal GDP growth rate.

Yet, several large global and domestic consumer goods companies have reportedly announced a line-up of big investments in India to step up capacity and offer more premium products.

A distinct pattern of high-ticket consumption and premiumization is visible across sectors even within rural zones. Demand for higher-horsepower tractors (i.e. above 40HP) has reportedly grown three times the demand for small ones (sub-30HP) over the last three years. Interestingly enough, the demand for 4-wheel-drive in tractors is on the rise. Similar trends, data and anecdotes abound for categories such as personal vehicles, real estate and household durables across India, despite continued price hikes by companies.

A combination of the following would help discern the widely divergent readings we’ve had lately:

First, there has been a notable change in the orientation of government expenditure that has buttressed its supply-side credentials through a scorching capex-spending programme with a CAGR of 31% over the years 2020-21 to 2023-24 and an interim budget allocation for 2024-25 that’s 17% higher than the previous year’s expenditure.

Second, in a changed global context of muscular industrial policies, India’s policy toolkit too favours specific but sizeable sectoral interventions such as production-linked incentives, direct subsidies for semiconductors, etc, as part of the ‘Make in India’ and Atmanirbhar Bharat themes. One can argue that budget interventions have been sector-specific in the past too. However, they leaned more towards consumption earlier.

Third, there has been a massive consumption stimulus already by way of autonomous private spending. If one adds up all spending on account of the festive season, wedding season and a couple of one-offs in the cricket world cup and series of state polls, the country’s cumulative spending roughly amounts to a conservative ~$120 billion worth of additional consumption spending in 2023-24, which is over 3% of GDP and about 22% of the 2023-24 budget’s revenue expenditure estimate.

Fourth, a busy electoral calendar with nine state elections in the last 12-odd months also created expenditure-pattern differences, as pre-electoral cycles typically see higher government spending by respective states, a phenomenon which shows up in divergent consumption patterns and accentuates skews across states and categories.

Lastly, patchy rainfall has had a deep impact on rural demand, which took a big knock from very poor spatial and temporal monsoon distribution. This created huge distortions in income and consumption patterns. The north and east, where rainfall was satisfactory, did support demand to an extent. But weather-related supply disruptions created jagged pockets even within states. Unsurprisingly, food inflation has been close to ~7% in 2023-24 thus far, after averaging 6.7% in 2022-23 and lower than 6% between 2020-21 and 2021-22, impacting real incomes and consumption.

Looking ahead, with weather agencies hinting at a normal monsoon in 2024, hopes of rural-demand normalcy have risen. However, the combination of an abating sugar rush from poll-spending, a squeeze on revenue-expenditure growth to contain the fiscal deficit and the lagged effect of higher-for-longer interest rates will ensure that Indian consumption, while recovering, continues to play second fiddle to capex even in 2024-25.

These are the author’s personal views.

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