Why a US-like consumer-led recovery looks unlikely

Consumers in the world’s largest economies look set to splurge a portion of their combined $5.4 trillion in excess savings to make discretionary purchases they had put off during the coronavirus pandemic and ensuing lockdowns.

But nervous households in India, Asia’s third biggest economy, aren’t likely to join the shopping spree. Scarred by the second wave of the pandemic that has taken a heavy toll both on human life and economic health, Indian consumers are more likely to conserve cash than spend.

India’s economy shrank by 7.3% in the financial year ended March 31, recovering from a contraction of 24.4% in the quarter to June 31, 2020, at the height of the first wave of the outbreak and lockdown, but still a record for the full year.

New York-based Moody’s Investors Service, the world’s largest credit assessor, recently estimated that the global economy would get a two percentage point boost in 2021 and 2022 if consumers spend even a third of the $5.4 trillion—or $1.8 trillion—excess savings this year.

The United States has the largest share of surplus savings, estimated at $2.6 trillion or 12% of the nation’s gross domestic product (GDP), without including the $1.9 trillion stimulus package announced by the administration of President Joe Biden.

In India, the mood in the aftermath of the second wave of the pandemic contrasts sharply with what followed the first last year.

Economists describe the current pattern of savings by households in India as precautionary and voluntary.

Households are saving more now because their sense of pessimism about the future has deepened. The nature of savings last year was forced – spending was difficult when the nation was under a hard lockdown that confined residents indoors, put in place restrictions on physical contact in public places, shut factories and commercial establishments, including restaurants and entertainment complexes, closed air and train traffic and took transport off the roads.

Households may have good reason to remain conservative about spending given the virulent second wave and the backdrop of a discouraging jobs scenario.

Yet, increased savings can be a cause of worry. Muted domestic spending by households will prolong the process of economic recovery although rising global demand can stimulate exports.

Consumer confidence, jobless rate 

Consumer sentiment hit an all-time low in April-May, according to the bi-monthly consumer confidence survey by the Reserve Bank of India (RBI). The perception is that the overall economy and the employment scenario deteriorated more as localised lockdowns bruised businesses and eroded the incomes of the self-employed and those working in contact-intensive services. Households participating in the survey did not expect growth and employment conditions to improve dramatically in a year from now either.

The unemployment rate deteriorated with the onset of the second wave and climbed to 12% by the end of May, according to the Centre for Monitoring the Indian Economy (CMIE), a think tank and business information provider. It has estimated that 3.2 million salaried jobs were lost and 5.7 million business people lost their livelihoods in April and May.

Even so, household savings are estimated to have risen. Data on household savings are made available with a lag of nearly two quarters, and so the extent of increase in savings will be known only later this year.

What is known is that aggregate deposits with scheduled banks have been climbing despite low interest rates, lower household incomes and higher out-of-pocket medical expenses. Aggregate deposits include savings of businesses and other entities, in addition to those made by households, and they had risen by Rs 1.03 lakh crore between 26 March and 7 May. Of the two major components, demand deposits dropped by Rs 1.41 lakh crore and time deposits climbed by Rs 2.45 lakh crore, RBI’s weekly statistical supplement show.

Incidentally, deposits expanded and contracted alternately in the first three fortnights of 2021-22, which State Bank of India’s chief economic adviser Soumya Kanti Ghosh said was an indication of household stress.

In a research note in early June, he said the data suggested that people getting salaries credits in the first fortnight are withdrawing it in the second fortnight for health expenses/stocking up currency for precautionary motive and an uncertain scenario. As a caveat, he noted that the trend needs to be validated with more data.

Upbeat Reserve Bank 

The RBI is more optimistic about a demand rebound than professional economists. The central bank expects demand to resume during the second quarter of the current financial year although it has pared its growth projection for the July-September period.

The monetary policy committee (MPC) of the RBI has estimated stronger growth in the second half of the year, for which it has upgraded its growth forecast. Growth in the third and fourth quarter is now forecast at 7.2% and 6.6%, year-on-year, up from the earlier projection of 5.4% and 6.2%. To be sure, a fresh resurgence of coronavirus disease cases in the second half could be a dampener.

Economist Pronab Sen,  former chief statistician, has a bleak view on consumer demand rebounding and matching the speed at which it grew when restrictions were eased in 2020.

The two situations are completely different, he explained. First, people are fearful after the second wave, which was not the case after the first. Second, there is no pent-up demand of the kind that had been visible after the national lockdown last year.

So any scramble to spend on durables, passenger vehicles and other high-value goods looked unlikely this year. Households had about 3-4 months of forced savings last year, which they wanted to spend, he added.

Third, a shortage of goods will also apply the brakes on demand bouncing back. Unlike last year, businesses do not have a large inventory of goods to sell.

Manufacturers have been confronting disruption in the supply of critical parts and other inputs, particularly semiconductor chips that are used in almost all modern machinery and consumer goods.

The shortages have slowed production. Demand for semiconductor chips had shot up last year, together with supplies and manufacturing capacities. Fresh lockdowns in some supplier nations such as Malaysia, where the viral infection is spreading, will  keep supplies tight.

Rural demand 

Shubhada Rao, founder of QuantEco Research, agreed with Dr Sen. She does not expect demand of the kind that was seen in the third quarter of 2020-21 to emerge in the coming months. People have already invested in personal vehicles, consumer electronics and durables and so additional spending on these goods is unlikely, she said.

Rural demand too could be a problem, but that can be addressed with government intervention, Dr. Rao said. In a research note in mid-May, QuantEco has raised concerns about increased caseload in some states adversely impacting agriculture in those states.

A normal monsoon, record level of foodgrain procurement and frontloading of spending on the Mahatama Gandhi National Rural Employment Guarantee Scheme (MGNREGS) supported rural consumption last year.

Dr Rao recommended stepping up spending on MGNREGS, which guarantees at least 100 days of employment to at least one member of every rural household in a year, during the monsoon months to create employment for those who would not be involved in sowing and related farm activities to ensure transfer of incomes to rural households in the short term.

Dr Sen is also worried that the economy will suffer for want of investment-led growth in the coming years. Ongoing capacity expansions that had been delayed by the national lockdown are still in the process of being completed, he pointed out, adding that in a few months the total installed capacity will far outstrip demand.

This will lead to lower capacity utilisation and prove to be a disincentive for planning fresh investments. India then would be looking at a situation wherein the pipeline of new projects would be near empty. The only hope is that the Centre steps up spending to revive demand. That responsibility cannot be of the state governments because they have spent most of their resources on the war against Covid-19.