India’s Consumption Slowdown: A Sum Of Parts

What’s happening in the Indian economy? Why is growth falling? And consumption? Is India’s consumption story at risk? What can the government do? Why isn’t it doing what it can?

If you are an active participant in the Indian economy—a buyer or a seller, an employee or an employer, a borrower or a lender—chances are that you have asked or been asked these questions.

This column is an attempt to provide not one answer to these questions but many answers, which, when put together, offer some clarity. A sum of parts, if you may.

Rural ‘Self-Reinforcing’ Spiral

The story of the slowdown in the Indian economy didn’t begin in the April-June 2019 quarter. It probably began many quarters before that.

Think back to the middle of 2016. It was a year of a strong monsoon. The government had also decided to adopt policies to keep food inflation in check, including a policy of smaller increase in minimum support prices. Supply was ample, price support was low. And, so, food inflation was on the decline.

This decline only steepened after demonetisation was announced. There were reports of cash-shortage induced fire-sales, which appeared to have worsened the slump in food prices. Food price inflation revived starting middle of 2017, only to slump again.

Lower food price increases meant lower income for farm owners and lower wages for farm workers. While government focus on aspects like rural housing helped to some extent, even non-agricultural wage growth fell.

As the Reserve Bank of India pointed out in its latest annual report, lower food prices, which led to lower wages and reduced spending power created a self-reinforcing spiral in the agricultural economy. This spiral impacted nearly half the total labour force, engaged in agriculture.

The dilemma now, as the central bank pointed out, is to restore food inflation to a level which is not debilitating to the farm economy, but without sparking wide-spread inflation in the economy.

Manufacturing Slump

If nearly one half of the Indian labour force, dependent on agriculture, is seeing far weaker income growth than earlier years, then another large section of workers, who depend on the manufacturing sector, have been facing their own set of troubles.

According to the latest Periodic Labour Force Survey, about 24.5 percent of the urban male workers were engaged in the manufacturing sector. A similar proportion of urban women workers are employed with manufacturing units as well.

But the manufacturing sector has been hit by both sluggish exports and, in some cases, weak domestic demand. The unorganised parts of the sector have had the added burden of GST to deal with.

This, too, has consequences on income and eventually demand.

“In India, the deceleration in industrial output and its main component—manufacturing—to below 4 percent during 2012-19 has larger consequences in terms of employment and income generation in both rural and urban areas,” the central bank pointed out.

Low-Wage Pressures In The Economy

Put together, one part of the problem appears to be that wage growth has moderated across most key segments.

As detailed above, for almost two years now, rural wage growth has been between 2-4 percent. When adjusted for rural inflation, there are months when wage growth has been negative.

For government workers, another large segment of the economy, the impact of the latest round of pay commission, which added up to about 1 percent of GDP, has started to fade, Neelkanth Mishra of Credit Suisse has pointed out.

Among the organised private sector, too, wage growth has been declining.

Data on staff cost per employee in the manufacturing and services sectors, analysed by the Reserve Bank of India in its April Monetary Policy Report, shows a decline since hitting a peak in 2015-16. To be sure, inflation has fallen over this period and employees may still be better off today than they were earlier. But in the real world, few people think or act in inflation-adjusted terms.

The study threw up another finding. Despite the decline, staff costs per unit of production have been rising. That given, unless production picks up, will there be much incentive for employers to either hire aggressively or push up compensation?

Consumption, Savings And Cash

Now, it can be argued that many of these factors have been at play for some time now and don’t explain the slowdown in growth from 8 percent to 5 percent in a five quarter period.

One possible explanation, as Sajeev Prasad of Kotak Institutional Equities has argued, could be that the debt-driven consumption binge of the last few years is slowing and consumers are choosing to replenish their savings.

Another interesting aspect, highlighted by Niranjan Rajadhyaksha of IDFC Institute, is that monetary ratios suggest that people may once again be holding on to more cash.

A third explanation could simply be sentiment. Bigger-ticket purchases, like cars, may be be impacted by the negative wealth effect of a falling stock market, said Saugata Bhattacharya of Axis Bank in a recent report.

The latest round of the RBI’s Consumer Confidence Survey conducted in August had also shown a dip in confidence levels. Perception of employment and income were both down.

Sum Of Parts

A sum of parts of all of these factors, and then some, appear to be coming together to subdue the consumption economy. When added together with an already moribund private investment, where corporations are still recovering from a debt binge, and a government constrained by targets, you get an economy struggling for direction.

And that is where where we appear to be right now.

Just like the problem, the solution, too, may need to be a sum of parts. Relief to some stressed sectors, targeted government spending and some measures to break the negative feedback loop currently playing out due to weak sentiment.

While devising these solutions, policymakers must recognise that short term boosters can only do so much when confronting a problem that is more structural in nature. If they don’t, the solutions may end up being problems down the line.

Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.