Pandemic woes and behavioural shift: Need to boost private consumption

India’s downward growth trajectory is now a reality that is well accepted with the recent Monetary Policy Committee (MPC) minutes officially admitting it. The MPC raised concerns over the extent of economic damage by the coronavirus pandemic which pushed down the potential output of the country.

The weakening of private consumption and investment demand following the nationwide lockdown. The consequent loss of livelihood, health and economic insecurity as well as the changing behavioural pattern of consumption pinpointing to a worst-case scenario than any of the conventional economic indicators can quantify or capture.

This is precisely because the revival of aggregate demand in the economy at the current state is likely to take more time than restoring supply disruptions. Delving deeper, the reason is partly due to the persisting structural issues which have been evident even before the pandemic hit while non-economic factors like the new normal lifestyles and changing consumer behaviour are at play.

The pattern of public mobility, a new gauge to assess the shift in behaviour, has a strong correlation with economic activities in the days to come. With the surging cases of virus spread and easing of restrictions, the trends in public mobility gets altered.

The selective relaxations improve the mobility but the pace of economic activity is expected to remain slow. A 10-day moving average of google mobility data clearly shows that during several phases of lockdown, mobility towards retail and entertainment remained low while consumers move around the place mainly for essential commodities.

While limited mobility stands as a clear indication of weakening consumption spree, the dwindling purchasing power of people stands as a significant concern. It can be ascribed to job loss, cut in salary and perks as well as other economic insecurities. However, it is quite intriguing that deterioration in Private Consumption Expenditure (PCE) is a not a sudden fallout from the new normal lifestyle and it has been evident even before the pandemic since the first quarter of financial year 2020 (Q1FY20).

There has been a notable decline in growth of PCE to 2.7% in Q4FY20 as well which dragged the growth rate to 3.1%. India’s growth path has been predominated by consumption expenditure encompassing private and government expenditure.

According to a Motilal Oswal report, PCE’s share rose from 56% of GDP in FY12 to 60% in FY20 and turned out to be the key driver of economic growth in India. The country’s economic growth has been on a declining trend even before the COVID-19 pandemic unfolded and nationwide lockdown has further aggravated this, leaving less room for further increase in PCE.

In 2019 when the full-year growth rate was reported at 6.8% (now revised lower to 6.1%), that was the third instance of an economic slowdown since 2008 and 2011. During the previous episodes, the deceleration was mainly on account of exogenous factors while the recent one could be ascribed to domestic and structural factors too.

By the mid of FY20, the discussions on decelerating growth centred at the ripple effects of US-China trade war tensions, uncertainty over Brexit and geo-political tensions in West Asia impacting India’s trade volumes, nosediving auto sales as well as bleak corporate earnings in H1 FY20.

However, the domestic factors were more pronounced with prolonged rural distress on account of poor monsoon for consecutive years, slower pace of Minimum Support Price (MSP) increase, benign food inflation and lower budgetary allocation to MGNREGA, leading to a continuous contraction in the rural economy.

Non-food inflation surpassing food inflation during the first half of FY20 highlighted the fact that income transfers happened from rural to urban area. Besides, the structural events such as demonetisation and roll out of Goods and Service Tax (GST) had considerable disruptions in the economy. All these factors led to a decrease in private consumption and one could perceive the problems of the economy was structural more than cyclical.

Fiscal consolidation

Why fuelling consumption, a pre-requisite for the path of recovery? Even before the pandemic, the government’s path of fiscal consolidation aggravated the concerns as there were nil multiplier effects due to contractionary fiscal policies, leaving less room for government spending.

Since the recent Rs 20 lakh crores-plus stimulus package focused more on supply-side and ruled out direct entitlements boosting the demand side, the road to a swift recovery looks still bleak.

No doubt, the pandemic unveiled the utmost concerns on thinning PCE. A report appearing in Hindustan Times, titled ‘Boosting demand for key economic revival’, clearly pointed out that India’s consumption demand is skewed towards the rich and cut back in the same will definitely hurt the economy to a greater extent.

Given the economic uncertainty, even the rich household postpones the consumption drive and opt saving for the future. Giving an impetus to private consumption stands the only way out for improving the aggregate demand in the economy.

While discussing PCE, it is indeed a double whammy for the Indian economy which is hit by the pandemic wave as well as the persisting structural issues that led to slowing consumption demand. Giving an extra push for revival of consumption demand becomes imperative as other components of domestic demand such as exports and investments cannot be relied upon in the current situation.

The ripple effects of global shock waves have already taken a toll on exports, which plunged by 60.3% in April. A 6.5% contraction in investment in Q4FY20 also testifies the slowing trend in investments. Fuelling consumption demand needs to be viewed in light of these facts and figures. With the pandemic lifestyles and economic circumstances refraining people from current consumption, specific measures to boost private consumption becomes crucial and a prerequisite for taking the economy back on track in the near to medium-term.

(The writer is Economist-Manager, Canara Bank, Bengaluru and Part-time Research Scholar, Institute for Social and Economic Change)