Demand remained muted despite the largely Covid-free festival season in Q3

Growth in private final consumption expenditure was down 7 percentage points from Q2

The numbers are telling. The festival season that came as the Covid shadow receded, too, could not bring cheer to the economy this financial year.

Growth in private final consumption expenditure (PFCE), denoting demand in the economy, declined to just two per cent in the third quarter (October-December). This was a sharp dip from the nine per cent in the second quarter and 20 per cent in the first.

This played a significant part in pulling economic growth down to 4.4 per cent in the third quarter against 6.3 per cent in the second and 13.2 per cent in the first.

Although comparison of the year-on-year growth on sequential basis might not be correct because of the base effect of the previous year, which was affected by the second wave of Covid in May and June, the fact remains that demand was muted in the festival season this time around.

This was despite the fact that the headline retail price inflation fell below the Reserve Bank of India (RBI)-mandated upper tolerance level of six per cent for the first time in November and December in 2022. It fell from 6.77 per cent in October to 5.88 per cent in November and then further to 5.72 per cent in December. Food inflation, too, decelerated to 4.67 per cent in November and 4.19 per cent in December from 7.01 per cent in October.

Most economists attributed the subdued demand in the third quarter to high inflation. For instance, Bank of Baroda Chief Economist Madan Sabnavis said the low growth in consumption at two per cent in real terms was mainly due to high inflation.

One has to go deeper into inflation to assess its impact on different income groups of the society, said India Ratings Principal Economist Sunil Sinha. He quoted a study by India Ratings that the effective inflation faced by the bottom 50 per cent of the population (both in rural and urban areas) during April-December 2022 was 40 basis points higher than the headline retail inflation.

While shopping malls in urban areas are choc-a-bloc with consumers, the demand in rural areas has not recovered, he added.

This was substantiated by a 3.4 per cent increase in the production of consumer durable goods during the first nine months of the current financial year and 1.2 per cent contraction in consumer non-durables in the index of industrial production (IIP), Sinha said.

While part of the durables was bought by the affluent section, non-durables are repeat items and bought by everyone, he said.

A note by QuantEco Research said it is possible that a gradually improving consumer sentiment could have offset the impact of elevated inflation, accelerated monetary tightening and subdued the pace of rural spending after the initial phase of Covid support.

Earlier, Unilever Global CEO Alan Jope had said, "Market growth in India remains stronger in urban areas than in rural areas, and that reflects the impact of high food inflation on low income consumers. We are seeing rural markets broadly flat in value terms with lower volumes."

Some economists found the numbers on demand confusing. For instance, ICRA Chief Economist Aditi Nayar said the low growth in PFCE, in spite of the recovery in services, consumption and a reasonably buoyant festive season, is confounding.

“It is possible that a reworking of discrepancies may lead to a subsequent upward revision in consumption growth,” she said.

Discrepancies at Rs 61,316 crore constituted 1.5 per cent of GDP (at constant prices) in Q3 of FY’23, the same as in Q2 of the year. Discrepancies are a gap between figures from the production side and the demand side of the economy.

 Growth in private final consumption expenditure

Q1, FY'23	20.03
Q2	8.8
Q3	2.1
Source:MoSPI