Private consumption, which is one of the strongest propellers of India’s GDP, declined by 26.7% year-on-year in Q1 FY 2020-21. India became one of the world’s worst- performing major economies on the back of one of the strictest lockdowns imposed in the country. Q1 FY 2020-21 GDP declined by 23.9%, its worst ever, as per figures released recently.
Private consumption contributed 57.2% to India’s GDP, in FY 2019-20. It is the bedrock of domestic demand, but has been under pressure much before the pandemic hit us. Growth in private consumption expenditure declined from 7.2% in FY 2018-19 to 5.3% in FY 2019-20, a sharp fall of nearly 2%, recording its lowest growth in a decade.
High frequency indicators of consumption demand either contracted or grew at a rate far below their long-run averages in FY 2019-20 as per the RBI report. Consumption of petroleum products remained flat, growing by a meagre 0.2%. Imports of non-oil/non-gold remained in contraction all through the year.
Rising insurance costs, tighter emission norms, change in lifestyle pattern of millennials affected sales of passenger cars as well as two-wheelers. Sales of consumer durables and air passenger traffic also remained depressed.
Consumption, which was already under contraction, received a jolt when the government declared a nationwide lockdown to control the spread of pandemic on March 25, bringing the entire nation to a halt. Retail loans are not picking up despite rate cuts, having contracted by 0.9% during the end of March and July..
It restricted people-to-people contact and adversely affected labour supply and consumption demand. Millions of people lost their jobs impacting incomes and livelihoods. Production of non-essential items were impacted for almost 2.5 months.
The discretionary consumer spend declined significantly impacting industries, namely travel and tourism, transportation, hotels and restaurants, gyms and cinema halls. Due to this, urban consumption demand suffered a big blow in Q1 FY 2020-21. Passenger vehicle sales and supply of consumer durables dropped to a fifth and one third as per the report.
We started unlocking gradually from June 8, many states continued with the restrictions because of the high number of cases. Consumption demand picked up from July, especially rural demand. Sale of tractors jumped by 38.5% in July, thanks to good kharif sowing. The contraction in motorcycle sales eased in July, from -35.2% in June to -4.9%.
The festive season has already kicked in with a muted Ganeshotsava festivities impacting the unorganised sector, including idol makers and dhol-walas.
Dussehra and Diwali are approaching, with the corporate sector and MSMEs pinning a lot of hopes for revival of demand during the festive season. In the last 10 years 30% of two wheeler sales has come in the festive months as per a CRISIL report.
However, significant challenges remain, as highlighted by the RBI: “An assessment of aggregate demand during the year so far suggests that the shock to consumption is severe, and it will take quite some time to mend and regain the pre-COVID-19 momentum.”
Consumer confidence has fallen to an all time low in July as per RBI survey. Majority of respondents reported pessimism relating to the general economic situation, employment, inflation and income.
As per the CMIE, 1.89 crore salaried Indians lost their jobs since April, around 50 lakh in July itself. The unemployment rate for August is at 8.35%, higher than pre-covid levels. People who have been lucky to keep their jobs have witnessed pay cuts across the board. Even Reliance Industries, India’s most valuable company, announced pay cuts.
Diwali is bonus time in India. Given the situation, corporates are unlikely to dole out bonuses this time around impacting consumption demand. Purchase of gold which is considered auspicious during festivals could nose dive as prices of yellow metal have skyrocketed during the pandemic, crossing Rs 50,000 per 10 grams.
Coronavirus cases in India are still rising on an average by 80-90,000 per day and we haven’t peaked yet. India has surpassed Brazil as the number two globally in terms of cases.
According to ICMR, we would reach peak by mid-November. India could unseat the United States and occupy the top slot during this time at current rates of growth. Social distancing norms may likely prevent people from venturing out and enjoying the festivals thus impacting sales.
The upticks in demand that were visible in May and June after the lockdown was eased, appear to have lost strength in July and August as per the report, mainly due to reimposition / stricter imposition of lockdowns.
As per a Nomura report, the slowing pace of economic recovery suggests that the recovery in some sectors may plateau much before pre-pandemic levels are reached.
“The recent pick-up in sectors like auto is not evidence of the much awaited V-shaped recovery. It reflects pent-up demand and will fade as we go down to the true level of demand in the damaged, partially-functioning economy,” wrote Raghuram Rajan in a LinkedIn post.
Due to uncertainty regarding the timing of arrival of the vaccine people as a precautionary measure are saving more which is likely to impact the demand for discretionary goods and services like passenger cars, consumer durables, travel etc. The fixed deposits with banks between March 27 and August 14 jumped by a huge Rs 6.7 trillion.
The arrival of the COVID vaccine is likely to end this uncertainty and bring back discretionary consumption to pre-COVID levels, but this could take time.
A fuller recovery in rural demand is also being held back due to muted wage growth exacerbated by the migrant crisis and employment losses for daily wage workers.
It thus appears that this Diwali may lack regular sparkle!