Consumption tailwinds

A raft of factors can whet spending propensity

After hitting a low of 4 per cent last fiscal year, private consumption growth is set to strengthen this fiscal. Consumption growth has been slow to recover due to the incomplete recovery of incomes from the pandemic’s impact. However, this fiscal year is expected to see a reversal of the factors that had dragged consumption growth below trend, including high food inflation, a slowdown in agriculture, and slow government revenue spending. Additionally, the effect of a weak base will provide a statistical lift to consumption growth.

National accounts data from the past 13 years indicates that private consumption slows in fiscals when agricultural underperformance, high food inflation and sluggish government consumption expenditure coincide. Financial year  (FY) 2013 was one such year.  More recently, in FY24, agriculture gross value added (GVA) fell to 1.4 per cent (vs a decadal average of 4.1 per cent), food inflation soared to 7.5 per cent, and growth in real government consumption spending decelerated to 2.5 per cent (vs a decadal average of 5.3 per cent). That said, the hit to private consumption growth was more significant last year than it was in FY13.

Agriculture performance and food inflation are influenced by the vagaries of the weather and are outside the government’s control, so they can be treated as transitory. However, when they turn adverse, increased government spending, especially in rural areas, can cushion the impact on private consumption. For instance, in FY15, the adverse impact of agricultural contraction and high food inflation on private consumption was offset by above-trend growth in government consumption spending. The effects of these factors on private consumption provide interesting insights.

Weather and agriculture

Historical data shows a high correlation between southwest monsoon and agriculture GVA, given cultivation is largely rain-dependent in India. National Sample Survey Office (NSSO) data indicates that approximately 98 million, or 57 per cent, of rural households are engaged in agriculture — 40 per cent are self-employed in cultivation, 14 per cent work as casual labourers in agriculture, less than 2 per cent are in regular wage labour in agriculture, and the remainder are self-employed in other agricultural activities. These households could face a direct impact on incomes, thereby affecting demand in case of weather disruption. The slowdown in agriculture GVA growth to an eight-year low last financial year reflects the blow dealt by poorly-distributed rains. Though overall rainfall was deemed “normal”, the regional and spatial distribution hurt key crops such as rice, some pulses and coarse cereals. Meanwhile, other year-round weather disturbances, attributed to climate change, hurt the more sensitive vegetables category within food the most.

Food inflation and discretionary spending

Food has approximately 40 per cent weight in India’s consumption basket. Persistent high food inflation can eat into the discretionary spending of households — they may choose to postpone consumption or reduce it. Last financial year, both the rural and urban poor, i.e., the bottom 20 per cent income segment of the population, faced a higher inflation rate of 5.6 per cent due to the larger weight of food in their consumption. In contrast, the top 20 per cent faced lower inflation of 5.4 per cent in rural areas and 5.1 per cent in urban areas. Food inflation rose to 7.5 per cent last financial year from 6.6 per cent in FY23, with inflation in key items such as foodgrains, vegetables and spices jumping to 11.6 per cent, 14.9 per cent and 18.9 per cent, respectively.

The free foodgrains programme, Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), for poor households provided some relief from inflationary pressures. Back of the envelope calculations based on the NSSO’s survey results indicate that the spending burden of consumers reduced by almost Rs 1 trillion, or 0.4 per cent of gross domestic product, last fiscal due to the PMGKAY support. The savings were higher in rural areas. However, households not covered under the PMGKAY scheme and those purchasing other food items such as vegetables, spices and milk felt the brunt of soaring prices.

Government consumption spending

Government spending tends to have a reasonable short-term multiplier impact on the economy. Studies show the peak impact of revenue spending is generally lower than that of capex. But combining the two could give a bigger push to overall output. The Budget presented in July seems to be pursuing this by keeping the thrust on capex and leaning a little more on revenue spending than envisaged in the Interim Budget towards employment and asset-generating schemes. Over the past few years, government revenue spending on welfare schemes has generated employment and bolstered rural demand. Some softening of consumption demand, particularly in rural areas, in financial year 2024 could be linked to the tapering of spending on these schemes.

In addition to agriculture, many rural households are employed in non-agriculture and allied activities.  These include construction activities resulting from schemes such as Mahatma Gandhi National Rural Employment Guarantee Act, Pradhan Mantri Gram Sadak Yojana, and Pradhan Mantri Awas Yojana (PMAY). This year, a rebound in agricultural growth and lower food inflation are expected to support private consumption. Government spending on these employment-generating schemes can provide additional support to consumption growth, lifting it towards its long-term trend. The central allocation to these three schemes grew on average at 14 per cent in the pre-pandemic period (FY17 to FY20) and 35 per cent in FY21 and FY22. However, it was cut by about 11 per cent on average in FY23 and FY24 as the pandemic’s effect faded.

The Budget for 2024-25 increased the central allocation by almost 20 per cent. The government spending on these employment-generating schemes will also help push consumption up. Consumption slowdown in FY24 was largely rural-driven, as reflected in tepid demand for items of rural consumption. That is set to reverse this year, as suggested by the pick-up in the first quarter of rural-focused items such as fast-moving consumer goods and auto sales.

Urban consumer sentiment, however, is weakening a bit as the impact of rate hikes and softening growth in services — a dominant share of which is in urban parts — plays out. The Reserve Bank of India’s consumer survey reflects this trend. High interest rates impact urban demand more as these areas have the bulk of credit penetration. The increase in allocation to PMAY for urban areas for the current year will provide mild support to urban consumption.

For a self-sustaining push to private consumption over the medium run, employment opportunities and household permanent incomes need to increase durably. The recent budgetary announcements have attempted to do just that by encouraging the private sector to enhance training, employment and internship opportunities through specific fiscal incentives. There is no time to lose in implementing these initiatives and the proposed spending as a third of the financial year has already gone by.

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The writers are, respectively, chief economist and principal economist, CRISIL