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Private consumption continued to shrink in Q3, projected to rebound in Q4

In a sign of recovery, demand for loans picked up in January based on Reserve Bank of India data.

February 26, 2021 / 09:16 PM IST

Despite the festival season and pent-up demand, private consumption expenditure contracted in the third quarter of the fiscal year 2021.

In real terms, private final consumption expenditure (PFCE) shrunk 2.3 percent from a year ago. Although that was better than the 11.3 percent contraction seen in the July-September quarter, the continued decline shows that consumer confidence still hasn’t returned fully.

However, the second advance estimates released by the NSO show a rebound in the fourth quarter with private consumption expected to grow at 3.2 percent from a year ago.

PFCE is a vital indicator to gauge household spending in the country. This includes all the items that a private individual consume, whether it is toothpaste or a car. This is the largest component of gross domestic product (GDP) accounting for at least 50 percent.

"The sharp V-shaped recovery has been driven by rebounds in both Private Final Consumption Expenditure (PFCE) and Gross Fixed Capital Formation (GFCF) as a combination of astute handling of the lockdown and a calibrated fiscal stimulus has allowed strong economic fundamentals to trigger a quick resumption of high activity levels in the economy. While GFCF has improved from a contraction of 46.4 per cent in Q1 to positive growth of 2.6 per cent in Q3, PFCE has recovered from a contraction of 26.2 per cent in Q1 to a much smaller contraction of 2.4 per cent in Q3," the finance ministry said in a statement on February 26. 

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In the October to December quarter, PFCE was 58.6 percent of GDP compared to 54.3 percent during July- September period and 60.2 per cent a year ago. Massive job cuts and salary cuts that happened during the current financial year due to the pandemic led to a shrinking of private consumption. Consumer confidence was also hit and people preferred to save more given the uncertainty.

"The private consumption data and an 8 per cent contraction in GDP for FY21 are a cause of concern. The high government spending and the reform measures unleashed by the government are showing its effect. The private players' participation in the vaccination drive is expected to speed up the number of people vaccinated," said Nish Bhatt, Founder and chief executive officer, Millwood Kane International - an investment consulting firm.

Private consumption has been projected to drop 9 per cent in 2020-21, the second advance estimates show. After adjusting for the performance in the first three quarters of this fiscal year, growth for the fourth quarter is derived to be 3.2 percent.

This is supported by a pick-up in loan demand and sales of passenger vehicles which rose 11.4 percent in January. Data that will be released next week such as vehicle sales for February and purchasing managers’s indices will give a better idea on where private consumption is headed.
Shine Jacob
first published: Feb 26, 2021 05:56 pm
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