With low jobs growth, investment and consumption story set to end: Ambit

The ongoing consumption demand that began in the fiscal year 2012 is unsustainable, given the poor employment growth as private sector investments still remains a far cry, and this growth story may get a “hard stop” sooner than later, warned a brokerage in a report.

According to Ambit Capital, despite the slowdown in income and employment growth between FY12 and FY17, private consumption continued to grow at a rapid pace, especially in categories like fast-moving consumer goods and passenger vehicles “showing resilience”.

According to the brokerage, the rise of consumption growth over FY12 to FY17 has been driven by higher retail credit.

“As corporate credit demand waned over 2011-12 to 2106-17, both non-banking financial companies and banks pushed retail credit aggressively. The retail credit-gross domestic product (GDP) ratio rose from 13 per cent to 16 per cent in 2016-17,” Ambit said.

However, it noted the “current bout of consumption growth appears unsustainable, mainly because consumption boom has uniquely been accompanied by a contraction in the investment-GDP ratio” to 7 per cent during FY12 to FY17, while the ratio for consumption-GDP is 3 per cent.

“Cross-country evidence suggests that only consumption booms that are accompanied by an increase in investments tend to be sustainable as this is a tangible proof of jobs being created and/or efficiency improving,” it said, where the averages of these have been 4 per cent each.

The report also noted that the current retail credit-funded consumption binge is likely to experience a “hard stop” sooner than later on basis of various trends, including a plunge in consumer confidence to a four-year low during the first quarter of the current fiscal year.

Besides, households’ savings ratio at an 18-year low and retail non-performing asset problems have begun to emerge particularly in the housing finance segment, are also factors which could affect retail credit-funded consumption, Ambit said.