Private-consumption slowdown: Is there a contrarian story in state-level GST data? Crisil's DK Joshi explains

Crisil's Dharmakirti Joshi says that any sustained increase in oil price can be a worry and have a ripple effect across inflation, current-account deficit and growth.

While India’s gross domestic product (GDP) has been growing at an envious pace, there have been concerns around private consumption slowing down. While GDP grew 7.6 percent in FY24, private final consumption expenditure (PFCE) grew only at 3 percent over the same period. Even as the GDP’s pace improved compared to last year’s (7 percent in FY23), that of the PFCE fell sharply compared to the last year (6.8 percent in FY23). This affects business sentiment and their capex expenditure.

Against this context, a recent report by Crisil indicated that the private consumption slowdown may not be a pan-India phenomenon. The researchers used state-level goods and services tax (GST) data to capture state-level consumption and found wide variances in consumption patterns. For instance, while Odisha saw GST collections going up by 28.8 percent in FY24, the rise was only 11.5 percent for West Bengal.

Also read: How to give a demand boost to the Indian economy that it so badly needs

Moneycontrol spoke to CRISIL’s Chief Economist Dharmakirti Joshi to understand this private-consumption data. He shared the data points he would be closely tracking following the Iran-Israel tensions.

Could you explain how GDP figures show that private-consumption growth is slowing down but the CRISIL report, which uses GST figures, shows that the slowdown isn’t pan India? 
The GST is a destination-based tax, so GST collections reflect consumption within the boundaries of a state. One should remember, while interpreting the GST data that collections go up for two reasons. One could be that consumption itself is going up. The second reason could be that you are capturing consumption itself much better because of GST implementation and increased formalisation of the economy.  Therefore, even if the actual consumption might not have changed much, the GST collections could go up because you are capturing that consumption much better. Right now, both effects are playing out and it is not very easy to disentangle the effects of consumption increase per se and GST compliance improvement. But we did find that the GST collections per person relate quite well to the consumption per person in that state. So, it (GST per capita) could be used as a broad proxy (for the consumption trend in the state).

Also, the rankings of the states based on GST collections vary when we look at GST per capita…

Yes, GST per capita reflects the intensity of consumption in a state. For example, the total GST collections of Uttar Pradesh (ranked second in total collections) could be high because it is large and the most populous state, but collections per person of the state (ranked 16 in GST per capita) are not as high. I think the intensity of consumption will be better reflected in GST per capita figures.

Why do you think private-consumption growth has slowed down in India? Is it inflation or weak real-wage growth?
One reason is that the rural economy wasn’t doing well because the agricultural economy grew at an anaemic 0.7 percent in fiscal 2024. That has impacted rural consumption and, secondly, there has been the impact of inflation, particularly high food inflation. When food inflation is high, which was the case last year, the discretionary spending capability of the lower-income deciles reduces as food has a higher share in their consumption basket. That has a bearing on consumption also. Going ahead, private consumption should improve if monsoons turn out to be normal in the current fiscal. So far, the poor agricultural performance and high food inflation eating into the purchasing power of people, which played out last year, could contributed to the private-consumption slowdown. That said urban consumption has fared better than rural consumption last year.

How do you think this will affect private-capex revival?

I think private capex is in a better position for a pick up and there are several reasons for that. One is that capacity utilisation in manufacturing is improving and therefore they have the capacity to invest. The banking sector’s health is very good and therefore they will be able to lend. That is, in all, the borrower and the lender have good balance sheets. Added to that industrial policies such as the Production-linked Incentive Schemes (PLI) are also helping to some extent, though not to a great extent. The scheme has triggered investments in pharmaceuticals and electronics (sophisticated, yet largely assembly-type operations). Next in line are ACC batteries, electric vehicles and solar panels/PVs. Also, when the government invests in infrastructure (with the capex push) and when real estate is picking up, private investment in sectors such as steel and cement also picks up. That is already happening. Overall, it is a mixed bag when it comes to private-capex revival but the environment for its revival is definitely improving. We do see private-capex revival becoming more broad-based and it is already happening at a gradual pace.

You have written about private-consumption patterns changing such as consumption growth seen more in non-food items and, within food, higher growth seen in processed foods. What do these changing patterns indicate?

Once you move from lower-income categories and into higher-income categories, you spend more on discretionary items. The higher your income level, the denser is the consumption of non-food items. We have seen this happening over many years. Secondly, people are becoming more comfortable with borrowing money to spend. This is seen in the credit card and unsecured loan numbers. People of younger ages (than before) are willing to borrow and consume. Therefore, there are two new changes in the consumption pattern, one is related to rising income and the other is a behavioural shift. We also have anecdotal evidence of consumption of premium products doing much better than level products.

The May release of GDP data may throw a better light on overall private consumption. Right now, what we have are advanced estimates.

How do you think the current geopolitical tensions, which seem to be on the verge of escalating, could affect private-capex plans?

The stress of uncertainty does not help anyone, whether it is an investor or a consumer. But these are early days. However, we have seen that India has remained quite resilient to earlier shocks, whether it is the Russia-Ukraine conflict or the Middle East crisis. India’s external position is quite good right now with healthy forex reserves and low current account deficit.

That said, oil prices remain a worry. Any sustained increase in oil price has a ripple effect on the economy. It affects inflation, impacts fiscal deficit and current account deficit, and it affects growth. If oil prices rise and fall quickly, then the impact won’t be that worrying. But if they rise and stay elevated, then it would be a concern.

Also read: Moneycontrol Pro Panorama | Is the rural consumption slowdown a mirage?

What would you be monitoring following the escalation of tensions between Iran and Israel?

One would be oil and the second would be transport costs due to the disruption of supply chains because the Strait of Hormuz and the Red Sea shipping route are crucial for the movement of sea cargo. If these choke points are affected, then the movement of sea cargo could be affected and cargo rates would go up. This would work to the detriment of global trade. These are the two data points I would be closely monitoring.

What about the effect on the Indian rupee and the country’s current account deficit?

It's too early to comment on that and there are multiple factors at play.