Indian Economy is undergoing through a peculiar situation right now, influenced by covid related disruptions and actions by the Government. Currently, on one hand we are seeing the Government incomes increasing to all-time high because of higher taxes and on the other hand, it is cutting down on both revenue as well as capital expenditures (except for Health related expenses particularly covid vaccinations). While economies across the World are trying to drum up consumption doling out direct benefits to citizens as well as focus on infrastructure projects, all ultimately targeted to drive employment & growth and results are visible across Western countries; as a country we are taking a strange course leading to higher unemployment, decreased incomes, higher taxes and lower spending leading to contracted growth. I am trying to cover the situation in 3 parts with this first discussion on reduced consumption expenditure.
As per CMIE data, India’s private final consumption expenditure (PFCE) declined by 6% to Rs.115.7 trillion in 2020-21 from Rs.123.1 trillion in 2019-20. Consumption expenditure growth has been slowing through the last decade. Growth in PFCE that averaged at 16.2% per annum during 2010-14, fell to 12.1% per annum during 2014-17 and further down to 10.5% per annum during 2017-20. Thereafter, as the Covid-19 struck India, PFCE shrank drastically.
Covid-19 pandemic and resultant nation-wide lockdowns have impacted consumption demand in a big way. It has taken India’s consumer market back by 3 years. PFCE in 2020-21 was not only 9.1% lower than it was in 2019-20, but also 4.1% lower than it was in 2018-19. The per capita PFCE measured Rs.55,783 during the year, levelling with its value of Rs.55,789 in 2017-18. The PFCE was also a predominant source of fall in India’s GDP in 2020-21. It declined faster than the fall in overall GDP. Contribution of PFCE to GDP fell to 55.95% in 2020-21 from 57.1% in 2019-20.
Purchasing power of households got eroded severely during 2020-21 due to a fall in income and high inflation. The year witnessed large-scale job and income losses. The average number of people employed reduced from 408.9 million in 2020-19 to 387.7 million in 2020-21 according to CMIE’s Consumer Pyramids Household Survey. Similarly, household incomes shrank by 29.4% in the first quarter of 2019-20, by 11.6% in the second quarter and by 8.2% in the third quarter. The cumulative fall in aggregate household income was 16.3%. Inflation was 6.9% in the first quarter, 6.4% in the second quarter and 4.9% in the third quarter. The real fall in household incomes was correspondingly steeper than implied.
Private final consumption expenditure was also hit because there were fewer avenues to spend on; even for those households whose ability to spend did not get hit and were willing to spend could not do so because of pandemic related restrictions. This includes expenditure on transportation, hotels & restaurants, recreation, education, etc.
This shrinking of consumption expenditure has a direct impact on the intermediate industries that feed India’s consumption engine. It also has an impact on final consumption industries impacting markets all across.
A sharp fall in Consumption Expenditure also indicates a fall in the standard of living of people of India in general and, may be rise in poverty. A return to earlier Consumption Expenditure levels would require growth to accelerate and employment and household incomes to rise. But this is a significant challenge. The recent fall in per capita Consumption Expenditure is so steep that India needs to catch-up from its levels three years ago.
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