Need urgent cut in oil prices through tax rationalisation: SBI Ecowrap report

The spend on oil in December 2020 crowding out the spend on other essential items such as health, grocery and utility services is a worrisome development and demands an urgent cut in oil prices through tax rationalisation, according to State Bank of India’s research report Ecowrap.

The report warned that if there is no cut in oil prices, consumers’ non-discretionary spending will continue to get distorted and crowd out discretionary expenses as has been the case in December. This will also impart an upward bias in inflation, it added.

In fact, the share of non-discretionary spend has jumped to 65 per cent in December, the same as before pandemic, but only because of fuel spend, according to an analysis by SBI’s economic research department.

Also read: SBI lowers FY21 GDP contraction forecast to 7.4 per cent

The report assessed that such trend is also deciphered from CSO (Central Statistical Organisation) inflation numbers that shows weighted contribution of spend on urban and rural education is down by around 20-30 basis points, which will only go up as educational institutions open up.

Credit card spending

As per the Department’s analysis, which is based on SBI credit card spends between April 2020 and November 2020, in principle, the share of discretionary spending of consumers that had reached as much as 35 per cent of total cards spending in February crashed to 15 per cent in April.

Since April, the share of discretionary spends has, however, fluctuated wildly between 15 per cent and 35 per cent.

But the most definitive conclusion during April and November 2020 is that when the Department re-estimated CPI (consumer price inflation) headline by using Paasche’s Index, the April and May inflation numbers on an average were 120 bps lower than NSO inflation numbers.

For April-November 2020, the Department’s computed CPI average is at 6.3 per cent, as compared with 6.9 per cent as per NSO estimates.

In December 2020, the Department’s CPI computed inflation is, however, higher at 5 per cent, a sharp 40 basis point higher than CSO estimate at 4.6 per cent.

Behavioural changes

“Since the beginning of pandemic, the whole world has undergone significant behavioural changes at all levels and India is also not an exception.

“We expect the Union Budget to encompass such behavioural changes of public. What are such behavioural changes? To begin with, spending habits of consumers changed significantly during pandemic within essential / non-discretionary and non-essential / discretionary items,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

Digital transactions

SBI’s transaction data shows that even much elderly men and women have been using the digital platform more frequently during and even long after the lockdown has ended and hence ideally it should be preserved.

“Clearly, the Budget must make announcements to continue to incentivise the move towards digital transaction...

“The Budget must also incentivise the jump in household financial savings. This could be done by incentivising the investments in PPF, Sukanya Samridhi Scheme and through new instruments like infrastructure bonds,” Ghosh said.

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