The decline in the sale of passenger cars (6.7 per cent) and a modest increase (2.9 per cent) in two-wheelers during 2012-13 are clear pointers to how entrenched the ongoing economic slowdown has become. What began as a drying-up of investments has spread enough to impact consumption demand as well. It doesn’t require an economist to explain this process. Consumers, after all, spend out of their incomes, which can be sustained only with continuous job creation. This, in turn, depends on new factories, commercial complexes, roads or power plants getting built. When investment in the economy turns sluggish — evident in the output of capital goods, which has fallen by more than a quarter in the last two years — it is bound, at some point of time, to affect consumption too. Early signs of such a negative impact on consumption were visible from July-September 2012, but have up shown up more conspicuously in the last 3-4 months.
The above trend is disturbing; more so when one compares it with what happened during 2008-09. The Indian economy was hit badly by the global economic crisis that year, with investment — gross capital formation — falling by 5.2 per cent in real terms. But consumption wasn’t impacted much. Private final consumption expenditure in constant prices grew by 7.2 per cent in 2008-09, only a marginal drop over the 9.4 per cent increase for the previous year. Overall, the country experienced a temporary investment slump that did not last long enough to spill over into consumption. On the contrary, private consumption not only held its own, but was also instrumental — alongside a step-up in Government spending as well — in paving the way for the economic rebound that was underway within a year after the collapse of Lehman Brothers in September 2008.
The current slump, in contrast, is almost approaching two years — long enough to manifest itself in consumer spending. Coupled with the Government’s own limited fiscal headroom for spending (unlike in 2008-09) and continued recessionary conditions in western economies (constraining the ability to create relatively high-paying jobs in sectors such as IT-BPO here), one can safely rule out the Indian consumer playing saviour this time round. The fact that even two-wheeler makers are struggling — sales in March were seven per cent lower on an annual basis — shows diminishing job opportunities and accumulated price rise have taken a toll on purchasing power and consumer confidence. A recovery from here onwards can take place only with a revival in investment. Although the latest official industrial production data for February points to a 9.5 per cent growth in capital goods output, there is little to suggest that new projects will get off the ground. The Government has a huge role to play here, especially in sorting out procedural hurdles in environmental and forest clearances and mediating in disputes over land acquisition that investors cannot effectively address on their own.