Linked to rising disposable income, other investments

Does an increase in disposable income tend to reduce the share of food in total consumption? Yes, says the Economic Survey, pointing out clear evidence of the downward trend in the share of food in the total consumption basket.

This clearly has a bearing on total private consumption expenditure. The growth rate of expenditure on the food, beverages and tobacco group is lower than that of total private final consumption expenditure, resulting in a slide in its share from 40 per cent in 2004-05 to 31.2 per cent in 2011-12.

Private final consumption expenditure accounts for about three-fifth of GDP at market. In the current year, private final consumption expenditure has slowed considerably, from 8 per cent in 2011-12 to 4.1 per cent in 2012-13.

What does this mean? Industry-watchers and economists say consumption could have taken because of weak economic sentiment.

Rise in incomes

Arpita Mukerjee, Professor, ICRIER, says that, typically, Indians spend 45-48 per cent on food, which still accounts for a chunk of GDP growth. However, it is a standard economic phenomenon that as disposable incomes rise, expenditure on food comes down. Inflation may or may not be a part of it.

The rate of growth of production of a large number of consumer durables declined significantly, e.g. private vehicles from 23.2 per cent in April-November 2011 to - 5.6 per cent in April-November 2012. Similarly, the growth rate of production of consumer durables for mass consumption declined from 12.2 per cent in April-November 2011 to 3.3 per cent in April-November 2012.

The Survey also finds that part of the reason for the general slowdown in consumption could be that higher inflation tends to reduce real disposable incomes of households.

The growth of durable goods consumption may have slowed even further recently, because high interest rates and resulting high monthly instalments restrained purchases.

At the same time, the seasonally adjusted consumer non-durable index of industrial production (IIP), which is typically a smoother series than durable goods production, has been picking up since August last year.

Shantanu Dasgupta, VP-Corporate Affairs and Strategy-Asia South, Whirlpool Corporation, echoes similar sentiments. “The consumer durables industry thrives on disposable income. High inflationary pressures lead to less disposable income and tightened wallets. We have been seeing slow growth since the last several quarters” Dasgupta said.

Other investments

The Survey also notes that investment in the form of valuables increased by nearly Rs 80,000 crore in 2011-12 vis-à-vis that in 2010-11. Valuables include works of art, precious metals, and jewellery.

At current prices, investment in the form of valuables registered a nearly 4.5-fold increase between 2007-08 and 2011-12 and their share in total investment increased from 2.8 per cent in 2007-08 to 7.6 per cent in 2011-12.

The Survey says household savings will also have to be raised. The financial savings of the household sector are likely to improve with lower inflation, especially as the real rate of return on financial savings rises.

(This article was published on February 27, 2013)
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