Column: Addressing the consumption crunch

Jan 03 2014, 09:37 IST
Comments 0
SummaryThere is no catch-all solution to the current problem of tepid growth in consumer goods and services.

The consumption growth story seems to have swung from being one of all round exuberance to one of despondency over the last two years. Yet the basic themes propelling itburgeoning middle class, rural growth based on higher agricultural prices and wage escalation due to the MGNREGA, urbanisation and aspirations of a young populationseem to have remained unchanged. To this mix, one should also add the low penetration and low intensity in most categories of consumer goods. Per capita income in current prices rising by more than two times between FY06 and FY12 took business expectations and consumer aspirations to an elevated level. During this period private consumption expenditure was growing at 15.2% in current prices. However, the emergence of strong headwinds in the last two years has forced businesses and policymakers to whittle down the projections of consumption growth made earlier.

So far as private consumption expenditure is concerned, empirical studies in the Indian context would indicate that post-reforms, between 1991-92 and FY05, the growth trend was 4.96% in constant prices. However, there has been a sharp jump since then, and it touched 8.23% in constant prices between FY06 to FY12. Interestingly, private consumption expenditure did not go down in the meltdown period (2008 to 2011) as it had the support of a loose fiscal policy in terms of tax cuts, additional spending and subsidies. However, since 2012, the scenario has started changing with the growth rate down to about 4%.

The question that arises is: What is happening to the variables behind private consumption expenditure? Our empirical estimation indicates that the key drivers that have a positive impact are consumption in the previous period, which provides some kind of a benchmark lifestyle to the consumer, and disposable income of the current period; in the long run, one unit increase in income leads to 0.65 unit increase in private consumption. On the other hand, increase in interest rate affects consumption negatively. The previous periods consumption habit provides some kind of a buffer, even when disposable income growth is inadequate and interest rates are high. This is valid for both food and non-food consumer expenditure. Another interesting aspect since 1992-93 has been a steady decline in the tariff rates of imported consumption items. Importers often leverage the advantage of a free trade agreement (FTA) which creates an inverted duty structure for domestic manufacturers. On other occasions, domestic industry has to

Single Page Format
Ads by Google
Reader´s Comments
| Post a Comment
Please Wait while comments are loading...