India’s private final consumption expenditure (PFCE) declined by six per cent in nominal terms to Rs.115.7 trillion in 2020-21 from Rs.123.1 trillion in 2019-20. Consumption expenditure growth has been slowing through the last decade. Growth in PFCE that averaged at 16.2 per cent per annum during 2010-14, fell to 12.1 per cent per annum during 2014-17 and further down to 10.5 per cent per annum during 2017-20. Then, suddenly as the Covid-19 struck India this declining but still double-digit growth in PFCE shrank spectacularly.
The blow Covid-19 pandemic and the nation-wide lockdown rendered to consumption demand is exceptional. It has regressed India’s consumer market back into the time machine. Real PFCE in 2020-21 was not only 9.1 per cent lower than it was in 2019-20, but also 4.1 per cent lower than it was in 2018-19.
The PFCE was also a predominant source of fall in India’s real GDP in 2020-21. It declined faster than the fall in overall GDP. Contribution of PFCE to real GDP fell to 55.95 per cent in 2020-21 from 57.1 per cent in 2019-20.
This shrinking of consumption expenditure has a direct impact on the intermediate industries that feed India’s consumption engine. Industries like steel, fibres, chemicals and services such as transport, trade and finance will face headwinds as the PFCE shrinks.
A sharp fall in PFCE also indicates a fall in the standard of living of people of India in general and, a possible rise in poverty. A return to earlier PFCE levels would require growth to accelerate and employment and household incomes to rise. But this is a significant challenge. The recent fall in per capita real PFCE is so steep that India needs to catch-up from its levels three years ago.
India’s per capita real private final consumption in 2020-21 regressed to its level of three years ago. The per capita real PFCE measured Rs.55,783 during the year, levelling with its value of Rs.55,789 in 2017-18.
Purchasing power of households got eroded severely during 2020-21 due to a fall in income and high inflation. The year witnessed large-scale job and income losses. The average number of people employed reduced from 408.9 million in 2020-19 to 387.7 million in 2020-21 according to CMIE’s Consumer Pyramids Household Survey. But, the average for 2020-21 glosses over big losses and gains as the informal workers moved in and out of the labour market in response to the lockdowns and their relaxations during the year. The impact of these movements was severe on household incomes.
Household incomes data available from CMIE’s Consumer Pyramids Household Survey (CPHS) indicates that compared to a year ago, nominal household incomes shrank by 29.4 per cent in the first quarter of 2019-20, by 11.6 per cent in the second quarter and by 8.2 per cent in the third quarter. The cumulative fall in nominal aggregate household income was 16.3 per cent. Data for the fourth quarter is not available yet. Inflation was 6.9 per cent in the first quarter, 6.4 per cent in the second quarter and 4.9 per cent in the third quarter. The real fall in household incomes was correspondingly steeper than implied by the nominal falls indicated earlier.
As a result, the tendency of households was towards saving more than using the money for current consumption. Data from the Reserve Bank of India (RBI) shows that net financial assets of households, that is after adjusting for their financial liabilities, increased by Rs.13.3 trillion during the first half of 2020-21. This is 90.4 per cent higher than the increase in their net financial assets seen during the corresponding period of 2019-20 and 172.5 per cent higher than during the corresponding period of 2018-19.
Private final consumption expenditure was also hit because there were fewer avenues to spend on even for those households whose ability to spend did not get hit and were willing to spend too. Nearly a fifth of the Indian consumer basket was not available for consumption in a better part of 2021-22 due to government restrictions. This includes expenditure on transportation that accounts for around 15 per cent of PFCE, expenditure on hotels & restaurants that accounts for 2 to 2.5 per cent of PFCE and that on recreation that accounts for nearly one per cent of PFCE. Expenditure on education, that accounts for four per cent of PFCE, also fell as most government schools and colleges remained closed during 2020-21.
Private consumption was worst hit during the June 2020 quarter when the country was under a nation-wide lockdown. PFCE contracted y-o-y by a sharp 26.2 per cent in real terms during this quarter. The fall got mitigated to 11.2 per cent in the September 2020 quarter and 2.8 per cent in the December 2020 quarter as the economy started reopening. PFCE grew y-o-y for the first time in the March 2021 quarter, by 2.7 per cent.
In this nascent stage of recovery, consumption demand has received yet another blow in the form of second wave of Covid-19. While curbs imposed by the government this time around are more localised and less stringent, unemployment has started raising its ugly head again. Consumer confidence has also started shaking, which does not bode well for the continuation of recovery in private consumption expenditure.