Consumption de-growth

That the ongoing economic slowdown has its roots in a collapse of investments is well established now. The best indicator of this is production of capital goods, which has registered a negative year-on-year growth in 23 of the 30 months between July 2011 and December 2013. But no less striking is the way consumption has been affected. The index of industrial production (IIP) figures for December reveals a negative growth in consumer durables — TVs, mobiles, cars, bikes, fans, ACs, refrigerators, ceramic tiles and carpets — for the thirteenth successive month in a row. The IIP numbers show a weakening of consumer durables output growth taking place from July 2012. Since the average growth for consumer non-durables from July 2012 to December 2013 also works out to just 4.7 per cent, we can conclude that the overall slowdown in consumption spending is more than one-and-a-half years old.

The most obvious cause of weak consumption is inflation, which undermines the ability of people to save and consume. National income statistics bear this out: household savings, both financial and in physical assets, have fallen from 25.2 to 21.9 per cent of GDP between 2009-10 and 2012-13. Once savings are eroded in the face of persistent inflation, the effects are bound to be felt on consumption. Within consumption goods, durables are the immediate casualty because in many cases their purchases can be put off — which is not so with toilet soaps or cooking oil, where the only option is to go for cheaper brands. The story of the last three years or so largely fits this pattern. If inflation is indeed the main villain, then it may appear on the face of it that the main task is to fix it in order to get people to consume and save more and, in turn, pave the way for growth.

What this argument ignores, however, is the link between collapse of investments and slowing consumption via drying up of job and employment opportunities. Data for the companies constituting the NSE’s broad-based CNX-500 index shows employee expenses registering over 17 per cent growth in the last four quarters. This, along with increasing rural wages in real terms, does not suggest that inflation is eating into incomes to the extent that is commonly presumed. Instead, it is incomes themselves that seem to be under threat as a result of less jobs being generated from a drying up of investments. The crisis today is really about firms experiencing a shrinking of margins due to the increased outgo on wages, interest and fuel, on the one hand, and poor demand conditions, on the other. Many of them have responded by cutting down on hiring and putting off capacity augmentations. With job opportunities shrinking, so has consumer spending as well.

COMMENT NOW