With real returns on savings only marginally rising, falling fuel prices and inflation, along with improving income growth should invoke the best spending spirit seen in India for a while, believes Crisil research
Household 'spending power will increase by Rs 1.4 trillion in fiscal 2016 because of low fuel prices, benign food inflation and steadily improving income growth' estimates CRISIL Research. Measured in nominal terms, the increase is close to 2% of the annual spending of households. These converging tailwinds, believes Crisil, will lend the Indian economy a reasonably good consumption kicker.
The fall in food inflation and lower fuel prices will together yield additional ‘savings’ (or increase in spending power) of Rs 1.4 trillion in fiscal 2016 compared with nearly Rs 509 billion in fiscal 2015. Savings on fuel expenses alone will be Rs 300 billion, while on food it will be more than thrice that at Rs 1.1 trillion. And where will these ‘savings’ go? “Our take is it is more likely to be spent on discretionary items than salted away in formal savings because the rise in real returns would be marginal given that nominal interest rates are on the decline” says Crisil in a just released report.
Other consumption boosters would be improving incomes and an increase in access to credit enabled by schemes such as Pradhan Mantri Jan Dhan Yojana.
So what throttled consumption? Private consumption growth (as per the old base year series) fell sharply in fiscals 2013 and 2014 to an average 4.9% per year compared with 8.4% in the 5 years preceding because consumer inflation was stickily high around 10% and income growth slower. During fiscals 2013 and 2014, average GDP per person in real terms (as per the old series) rose by just Rs 1,600 per year compared with Rs 3,100 in fiscals 2010 and 2011 when the Sixth Pay Commission recommendations were implemented.
The crunched spending reflected in corporate data. Sales growth in air-conditioners, washing machines and refrigerators nosedived from 18-20% in fiscal 2010 to 3-4% in fiscal 2014. Passenger vehicle sales plummeted to an average 6.2% in fiscals 2013 and 2014 compared with 29% in fiscal 2011.
The new GDP calculation method adopted recently notches up growth compared with the old series, and also shows a faster run-up in
private consumption. Per this data, private consumption growth averaged nearly 6% in fiscals 2013 and 2014. But the new calculus does not afford a comparison as past data are not available yet, but one can safely assume that private consumption had slowed down in those years.
So what’s helping resurrect spending? According to Crisil, “The key contributors to the decline in private consumption have all started to turn around. The new GDP series shows private consumption growth surging to 7.1% in fiscal 2015. And for fiscal 2016, CRISIL Research expects it to rise anew to 7.8%. Thus, an increase in purchasing power led by declining inflation and improvement in incomes will ensure a gradual but steady pick-up in consumption demand next fiscal. At the sectoral level, we expect passenger vehicles sales to grow by 9-11% in fiscal 2016, up from 3-5% growth in fiscal 2015. Similarly, household appliances sales are forecast higher – television sales at about 9% compared to a 0.3% decline in fiscal 2015, air conditioners at 15% compared to 9%, and refrigerator at 10% compared to 5%”.
All in all, the kick from ‘savings’ on lower food and fuel inflation will push discretionary spending and hence overall growth in 2015-16. But for the momentum to sustain, inflation conditions will have to remain benign. Similarly, the push to consumption via increasing credit penetration will also be gradual and will depend on stronger pick-up in incomes.
At the sectoral level, expect passenger vehicles sales to grow by 9-11% in fiscal 2016, up from 3-5% growth in fiscal 2015. Similarly, household appliances sales are forecast higher – television sales at about 9% compared to a 0.3% decline in fiscal 2015, air conditioners at 15% compared to 9%, and refrigerator at 10% compared to 5%”.