The consumption-driven story of India’s economic growth is expected to face a slowdown as wide concerns emerge about the weakening rural demand.
At a time when public expenditure is likely to be curtailed by the obligation to meet fiscal deficit targets, a slackening of consumption demand presents a bleak outlook, especially with respect to the rural sector.
Rural retail inflation reflected the slowdown by slipping below the urban retail inflation since July this year, after remaining higher than the urban inflation over last several years.
Farmers getting lower prices for their produce, much lower than the minimum support prices announced by the government for the kharif crops this year, has hit the rural consumption demand story.
The depressed wholesale prices is reflected in the average annual wholesale price index-based inflation being (-)0.33 per cent for food articles and 1.66 per cent for non-food agricultural articles during January-November 2018.
Pronab Sen, Country Director for the India Programme of the International Growth Centre and former chief statistician of India that even though agriculture is holding up in terms of physical volumes, the consumption breakdown is mainly originating from the non-agricultural segment in rural areas.
“Non-agricultural activities have slowed down, agriculture at least from the physical side is keeping up, we are at least growing 3-3.5 per cent in terms of physical volumes. In the non-agricultural rural activities, nothing is happening. That’s where the real consumption breakdown is coming from. Consumption is weakening,” the Country Director for the India Programme of the International Growth Centre said.
In a situation of rural distress, he says that farm loan waiver could turn out to be a lifesaver, if not the cure, by keeping open access to bank finance. The Reserve Bank of India’s data for gross bank credit shows it staying over 10 per cent since April, the first month of this financial year.
Credit to industry has remained subdued, slipping below 1 per cent mark in June-July and now gradually having risen to 3.7 per cent in October, this year.
Credit offtake in personal loans category—an indicator for consumption demand—has recorded a slowdown from over 20 per cent level in January this year to 15.1 per cent in September and 16.8 per cent in October. Another sector where the impact of slowdown in consumption demand has been witnessed is the automobiles sector.
Data released by the Society of Indian Automobile Manufacturers (Siam) earlier this month showed a drop of 11 per cent in sales of medium and heavy commercial vehicles (M&HCV) to 25,363 units in November compared with the previous year.
Arvind Singhal, Chairman and Managing Director of Technopak, however, is of the view that any indication of a slowdown in private consumption is largely statistical and arises from an inability to capture the dwindling share of merchandise in the overall consumption basket.
Of the total consumer spending, the share of merchandise used to be much higher… as much as as 70 per cent in the early 2000s. It has now come down to less than 50 per cent”. He said the data is still overtly focused on capturing the merchandise consumption data.
The RBI, in its latest review, though, has specifically pointed to the slowing down of the GDP growth — to 7.1 per cent year-on-year (y-o-y) in the second quarter of the current fiscal after four consecutive quarters of acceleration — being “weighed down by moderation in private consumption and a large drag from net exports”.
Private consumption, it said, had slowed down possibly on account of moderation in rural demand, subdued growth in kharif output, depressed prices of agricultural commodities and sluggish growth in rural wages.
On the positive side, while growth in government final consumption expenditure or GFCE strengthened, buoyed by higher spending by the central government, there are concerns that the mounting pressure on the Centre to slam the brakes on government expenditure due to the looming deficit targets could impact government spending.
Also, investment — measured by way of gross fixed capital formation or GFCF — expanded by double-digits for the third consecutive quarter, driven mainly by the public sector’s thrust on national highways and rural infrastructure, reflected in robust growth in cement production and steel consumption.
Growth of imports accelerated at a much faster pace than that of exports, resulting in net exports pulling down aggregate demand.