Will consumer be the economy’s white knight?

Lokeshwarri S K | Updated on November 04, 2020

No pandemic blues: The verve shown by shoppers this year has taken everyone by surprise   -  PTI

Household wealth in India has not been hurt much by the pandemic, leaving people with enough surplus to spend

Step into any prime shopping area in any city and you will be greeted by milling crowds, out shopping for clothes, jewellery, home accessories et al.

Numbers put out by companies and industry associations, too, show that pent-up demand, combined with the traditional buying around festival time, is driving sales across categories. Maruti Sizuki, Hyundai Motor, Hero MotoCorp and Tata Motors grew their October sales in double-digits compared with those in the same month last year.

Consumer durables makers such as Godrej appliances, Blue Star and Panasonic India are reported to be producing at 100 per cent capacity to cater to the rising demand. Mobile phones and home appliances sold like hot cakes in the festival sales of e-commerce players this year as the number of online shoppers increased by a massive 85 per cent.

The verve shown by the shoppers this year has taken everyone by surprise and the great Indian consumer may be the one to lend a helping hand to the government in reviving the economy.

But how did this come about?

In fine fettle

Contrary to popular belief, the pandemic has not affected the wealth of households much. This has been highlighted in Credit Suisse’s global wealth report, which states that total global wealth towards the end of June 2020 was 0.3 per cent higher than it was at end-December 2019. The report states that household wealth in India increased 1.1 per cent in the first six months of 2020, mainly led by non-financial assets.

This situation could not have been foreseen in the first quarter of 2020 when the pandemic was beginning to unfold and financial markets began to sell-off sharply. But thanks to the huge stimulus running into trillions of dollars rolled out by all the countries to fight the pandemic, financial markets stabilised and property prices revived.

The extra liquidity and the sharp cut in interest rates helped revive demand. Also, the savings of households moved higher due to movement restrictions, curtailment in travel and entertainment and social activities during the pandemic. Due to these factors, the notional loss in wealth suffered in the March quarter was mostly recouped in the following months.

Indian consumable surplus

In India, the unique method of household investment pattern may have further helped mitigate the impact of the pandemic. According to the RBI, the average Indian household holds 84 per cent of its wealth in real estate and other physical goods, 11 per cent in gold, and the residual 5 per cent in financial assets.

Property prices in India have not been affected too much by the pandemic, despite muted demand. Most Indian metros have, in fact, recorded a slight increase in real estate prices since August.

Gold prices have also recovered strongly since March due to safe-haven demand reviving investment demand for gold ETFs and gold bars and coins. With gold prices up 27 per cent since March lows, Indian household wealth would have appreciated to that extent.

As far as financial assets go, over 56 per cent of Indian household savings is invested in bank deposits. While most banks have cut their savings and fixed deposit rates this year, the deposits of most banks recorded a healthy increase in the September quarter. The rebound in stock markets from the March lows has helped protect the money invested in other stock-related instruments such as mutual funds, pension products, insurance, and so on.

Government bond yields have been largely stable, thanks mainly to the RBI intervention. The 13 per cent of financial assets in currency would, of course, have been completely insulated by any pandemic-related volatility.

Buttressing growth?

With their savings largely unaffected, it is not surprising that household consumption is picking up fast. Easy liquidity conditions are also favourable to consumers now. If we rewind one year to November 2019, the Centre faced a severe slowdown in private consumption that accounts for 57 per cent of the GDP.

Growth in consumption expenditure had collapsed below 4 per cent in FY20, in the aftermath of the IL&FS crisis that made NBFCs nearly halt their lending. The Centre had come out with slew of measures to boost consumption, then.

Unlike last year, there is plenty of liquidity available with banks and NBFCs to lend to consumers this year. The strong revival in housing and personal loans after August 2020 corroborates this fact. The sharp rate cuts by the RBI also make loans more attractive compared to last year.

The distribution of wealth in India is also a factor helping consumption. The Credit Suisse report shows that 72.8 per cent of Indians have wealth less than $10,000, 24.9 per cent between $10,000 and $100,000, 2.2 per cent between $100,000 and $1,000,000 and 0.1 per cent have wealth above $1,000,000.

The vast majority with wealth under $10,000 are likely to be hurt the most by the pandemic-related job losses and pay-cuts as they could be workers in the unorganised sectors, running micro enterprises, and so on. However, consumable surplus has always been low in this segment, so overall consumption may not decline due to the people in this segment reducing their spends.

The top 2.3 per cent of the population, who would be buying mainly super-luxury goods, do not affect overall consumption much. It is the 24.9 per cent, forming the middle class, that appears to be driving consumption now, thanks to their wealth being largely unaffected by the pandemic and the loans being provided by financial institutions.

So, despite the stringent lockdown in the country in the second quarter of 2020, the Indian consumer may well ensure that the hit to growth is not as bad as originally expected.

Published on November 04, 2020

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