Opinion
Mint Quick Edit | Stock slide: Will the wealth effect dampen consumption?
Summary
- Including Tuesday’s equity market fall, investors have jointly lost ₹18 trillion in five days. If asset deflation goes on, its impact could act against India’s policy stimulus for consumer spending.
Policymakers have given consumption a push. Income taxpayers in India will be left with more money, while loans taken to buy stuff will burden consumers less. The cheer yielded by this policy stimulus, however, should be viewed in the context of the ‘wealth effect’.
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When asset values rise, investors at large feel richer and spend more freely. And when they drop, not only do they feel financially deflated, ‘loss aversion’ could leave them feeling worse than a rational lens would justify, making them extra cautious about spending.
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Sadly, India’s stock market has been on a long slide that doesn’t seem to end. Including Tuesday’s fall, investors have jointly lost ₹18 trillion in five days. The impact of asset deflation on consumer sentiment was easier to shrug off five years ago. But India’s base of retail investors has multiplied since then. Many of them, having never suffered such a market slump before, may well be more loss-averse than veteran investors.
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All this makes a case for us to temper expectations of exuberant bouts of shopping. Should Indian equity indices start looking up again, the mood would change. But that should happen on the back of corporate earnings, not just investor money coming in.
