The Indian economy has entered a difficult phase of tepid income growth coupled with a high inflation rate, resulting in rising inequality in the country. The phenomenon has affected consumption in the economy and will require intervention by the government according to the latest report by the credit-rating agency CRISIL. Consumption—expenditure by consumer households and private non-profit institutions-- accounts for 55 per cent of India’s GDP.
According to the report, on a per capita basis, consumption growth slipped from 6.8 per cent in fiscal 2017 to 4.4 per cent in fiscal 2020. It further contracted sharply by 10.1 per cent in fiscal 2021, due to the Covid-19 pandemic. Similarly, the household income growth declined sharply by 8.2 per cent in 2021, compared to 6.9 per cent in 2017.
The report points out lower budgetary allocations for the rural economy in the current fiscal, which has affected income levels in the hinterlands. “With reduced budgetary allocation to rural employment schemes in fiscal 2022, and weakness in economic activity, wage growth has slowed of late, in the farm and non-farm sectors,” said CRISIL.
The Reserve Bank of India data shows, farm wage growth in nominal terms slowed to 5.7% in fiscal 2022 (April-November average), from an average of 6.6% in fiscal 2021. Non-farm wage growth halved to 3.2% from 6.4%. In fact, discounting for the high inflation, non-farm wages in real terms show negative growth (or decline) on-year, CRISIL pointed out.
Rising Unemployment And Increasing Medical Expenditure
Notably, job losses, lower earnings over recurrent waves and pressure of medical expenditure during the Covid-19 pandemic have burdened the household savings, which in turn has lowered consumption. The household financial savings which averaged 13 per cent of GDP for nearly a decade through 2015, have slipped to 11 per cent in the fiscal year 2020. Amid the Covid-19 pandemic, it shot up to 21 per cent in the June quarter of FY20 and later dropped to 8.2 per cent in the December quarter of the same year. This gradual change in the household savings pattern has weakened consumer sentiment.
Meanwhile, the rising inflation over the last three years has eroded the consumers purchasing power. For the three years, including this fiscal, while the special category inflation was higher by 180 basis points, inflation in the discretionary category was only higher by 30 basis points.
According to the report, a decreased consumption is further weighed down by the rising income inequality induced by the Covid-19 pandemic. This has further affected the purchasing power across all economic segments. Out of all the economic segments, lower-income segments, especially those who are employed in the small and medium enterprises, unorganised sectors and contact-based services have been most affected in terms of purchasing power.
What can be done to boost the Consumption Rate in India?
The report suggests some reforms that would help in advancing the consumption rate in India. Generating more employment opportunities, increased infrastructure spending, and easing pressure on inflation would boost Indian consumption to an extent.
On this front, a higher allocation of funds in MGNREGS in rural areas, as well as the introduction of similar employment generation schemes in urban areas, would be beneficial.
Similarly, reducing the excise duty on fuel prices, and easing the fuel tax burden, will not only supplement the disposable income but will also trim the input cost burden for producers.
