Circuit breaker . What’s behind the consumption slowdown

A problem well-understood, they say, is half-solved. On this count, we seem to be a good way away from finding a solution to India’s recent consumption slowdown.

After recent GDP numbers showed that India’s Private Final Consumption Expenditure (PFCE) grew by just 3.1 per cent in April-June and 5 per cent in July-September 2019, the debate on why consumers are cutting back has relied more on anecdotal evidence than on facts. The alarmist camp, drawing inferences from slowing sales of glucose biscuits and branded innerwear, believes that the consumer’s income has shrunk so much that he can no longer afford bare essentials. The sanguine camp, taking comfort from roaring business for Uber, Ola and Swiggy, is happy to attribute it all to the strange spending habits of millennials.

Given that India’s PFCE growth has averaged 6.8 per cent over a decade and held at 7-8 per cent even in the note ban and GST years, the numbers in the current fiscal are certainly cause for worry. So, what could have put consumers in this funk? Here’s an attempt to understand the reasons from available macro data.

The food price effect

Aspirational rural consumers have been a big driver of demand for large categories such as two-wheelers, cars, FMCGs and appliances in recent years, catalysing a shift from unorganised to branded players.

Until 2013, agricultural incomes derived support from firm global prices of food crops, shortages in domestic output and rising minimum support prices. But with all these factors coming unstuck since 2014, agricultural income growth has been hit. While we have no direct means of measuring agricultural income, one indicator that provides a close proxy is the ‘food’ component of the Wholesale Price Index (WPI). From 2008 to 2013, the WPI Food index had shot up at an annual rate of 12 per cent. But from 2013 to 2018, the index inched up at just a 3 per cent annual rate. Low prices alone may not have been debilitating, but the two consecutive years of poor monsoons in 2017 and 2018 compounded the impact.

In 2019 though, agri-commodity prices have charted a tentative come-back helped by shortages and global cues; we’ve also seen a bountiful monsoon. The WPI Food index for October 2019 was up 9.8 per cent over last year. If the MPC can desist from playing inflation warrior and allow farmers to reap some benefits from this long-delayed spike, the agri component of rural incomes can witness a turnaround.

Slowing rural wages

Non-farm activities such as manufacturing, construction and services make up over 60 per cent of the rural GDP. Labour Bureau data on rural wage trends show that from October 2008 to 2013, average daily wage rates for non-agri occupations in rural India grew at 17 per cent a year. But in the six years to September 2019, they’ve slowed to a 5 per cent rate. This slowdown has worsened in the last two years. In 2019, wage growth for non-agri activities moderated to sub-4 per cent from 5-6 per cent.

Rural wages on non-farm activities have held steadier than those from agriculture. This suggests that efforts to resuscitate rural income ought to focus more on creating non-farm employment, rather than agri market interventions like MSP or PM-KISAN payouts.

White collar woes

Given low income levels in India, the demand for large-ticket consumer goods and services relies heavily on the creamy layer of the population. But given the yawning gaps in employment statistics, there’s no aggregate data to judge how the white-collar population is faring. We used data from the Nifty-500 listed companies as a proxy.

Until FY12, with revenues racing at 20-25 per cent, wage bills of these large firms saw a 15-20 per cent annual expansion. But as revenue growth skidded to 7 per cent between FY13 and FY18, employee expenses expanded by only 11 per cent. FY19 saw a revival of sorts, but the first six months of the current fiscal have seen it peter out. In the June 2019 quarter, the firms reported a wage growth of 11 per cent on revenue expansion of 8 per cent. In the September quarter, revenue growth dwindled to 2 per cent, with employee expenses growing at 9 per cent. That includes both new hires and pay hikes to existing staff.

Policymakers have already done their bit to revive prospects for these firms by effecting sharp interest rate and corporate tax cuts. The ball is now in India Inc’s court to restart the capex cycle.

Pay Commission revisions

India’s Central Pay Commissions, which review and peg up the pay structures of Central government employees about once in every decade, have always delivered a steroid shot to consumption.

When approved in end-2015, the Seventh Pay Commission recommendations meant a 23.5 per cent increase in the pay, allowances and pensions for one crore government employees, pensioners and the armed forces, totalling to ₹1.2 lakh crore. State governments, following with their own pay hikes and the One Rank One Pension scheme for armed forces, have added to this stimulus.

The salary and pension payouts of the Centre, which totalled to ₹1.8 lakh crore in FY16, jumped 30 per cent to ₹2.5 lakh crore in FY17 and 21 per cent to ₹2.9 lakh crore in FY18. But as the payouts wound down in FY19, they grew just 10 per cent. In the current fiscal, the increase is expected to be at 5-6 per cent. Clearly, as the Pay Commission effect wears off, Central government staff are likely to temper their one-off purchases of consumer goods.

Having bloated its expenses through these payouts, the Centre now has limited elbow room to announce further stimulus measures, as it is being urged to. To hand out personal tax cuts that can put more money in the hands of non-government folk, it will have to set aside its fiscal deficit obsession.

NBFC step-back

Between FY16 and FY18, as domestic banks laboured under a mountain of bad loans, non-banking finance companies (NBFCs) enthusiastically wooed retail customers. RBI data show that by September 2018, through focussed lending, NBFCs had grabbed a 77 per cent share in consumer durable loans, a near 50 per cent share in vehicle loans and a 20 per cent share in credit card loans.

However, as the IL&FS collapse led to a cutback in funding to the NBFCs, they’ve been forced to go slow on disbursements.

TransUnion CIBIL notes a significant deceleration in the consumer credit market in Q2 2019, after the NBFC funds crunch. Though new loans grew by 37 per cent in number, their value inched up by just 2.5 per cent. While banks upped their new retail loans, NBFCs reduced their originations by 6.6 per cent. NBFCs going slow on financing of vehicles and white goods has been a big factor impacting their demand. While sound NBFCs are able to source funds, overall financing available to the sector has shrunk, suggesting that NBFCs may not go back to their scorching growth rates anytime soon.

So far, government efforts to revive the sector have revolved around nudging banks to buy out the loan portfolios of NBFCs. But given the heightened risk perception of the sector, it is doubtful if banks will rush in to bail out the distressed NBFCs. A shakeout in the sector may have to play out before NBFCs can be expected to regain their mojo in retail lending.

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