Why Aren’t We Spending?

Optimism in the minds of the consumer and spending by it is where the remedy lies, for stabilising the economy and its durable revival.

A monthly report of the Finance Ministry, on the present state of the Indian economy states that economic activity has picked up so good, that the performance of the Indian economy will beat the earlier estimates for FY 2020-21 itself. The latest earlier estimates are that the Indian economy will contract by 8% in FY 2021. It says that economic activities have gathered rapid pace, including a healthy pick up in the construction activity and in the services sector, both of which are major growth levers. If further says that with agriculture continuing to show robust growth, rural demand remains strong. The report does warn that any resurge of the pandemic will be a major downside and that rapid production and deployment of vaccination is critical to support and stabilise growth. In an unusual caution, the FM says that inflation, both global and domestic presents a downside risk to growth in the Indian economy, due to which growth estimates can go awry.

Yet another optimistic note comes from the Niti Ayog member Bibek Debroy, who says that the worst is over for the covid induced economic crisis. He says that there is a fairly robust economic revival story across the board in India and that the budget has painted a pessimistic picture, by understating the prospects of nominal GDP for FY 21-22. He is very optimistic about growth of the Indian economy in the next few years, despite the current uncertainty surrounding the pandemic.

While a sense of optimism is welcome, at a time when uncertainty prevails over growth prospects in the Indian economy, it yet cannot be cut off from the ground reality about consumption and private investment, whose revival will lay the foundation of a durable revival of growth in the economy. The consumption story is not encouraging and fails to support the sense of optimism in the Finance Ministry’s report and in the statement of Bibek Debroy. A report says that while India’s Rs. 4.5 lakh crore FMCG market bounced back in the September-December 2020 quarter, to record a growth of 7.3% and so did the smart phones market by 21% and consumer durables too, due to the festival shopping and the impact of the pent up demand, yet the overall consumption declined by 2.4% in Q3 ended 31/12/20. The consumption of essential goods may have seen a revival, but all non essential spending, whether on transport, travel, tourism, leisure, fashion, apparels, shoes etc., continue to shrink. Real estate sales went up by 12%, in the December 20 quarter, but on a YOY basis, they declined by 29%. In the same quarter air passenger traffic fall by 45% and 80% of the theatre business, which recorded sales of Rs. 11500 cr. in FY 20, was wiped out. The Rs. 14 lakh crore travel/tourism industry has contracted by 30%, for want of consumer spending. While on one hand consumer spending has fallen, on the other hand, private investment shows no signs of revival, both of which are needed to see stabilisation of growth in the economy.

The reasons that the private spending continues to contract and the consumer remains cautious are many and are stated below.

• Receding jobs and livelihood.
• The fiscal stimulus was a farce, showing reluctance/inability of the government to support those in distress.
• Rising inflation.
• A state of denial showing unwillingness of the system to recognise the real state of the economy.
• Compulsion to save, to be prepared to single handedly face rainy days.
• Uncertainty about a covid resurge and lockdown.
• All of which leads to lack of confidence in the minds of the consumer, thus withholding consumption.

It is good to see a sense of optimism, but when it is disconnected with the ground reality, it serves little purpose. Optimism in the minds of the consumer and spending by it is where the remedy lies, for stabilising the economy and its durable revival.