Noting that household consumption, which forms as much as 55% of the GDP, has contracted by 10.1% in FY21, a report has called for some radical measures in the forthcoming Budget to undo the damages by adopting a loose fiscal policy and focusing on near-term income and job-generating measures.
Citing the latest National Statistical Office’s estimate on GDP for this fiscal, a report by CRISIL on Tuesday said household consumption is lagging fiscal 2020 levels by three percentage points this fiscal, making it the worst performer among the expenditure-side components of the GDP since the pandemic.
Stating that the consumption cycle badly needs a lift in the Budget, the report noted that private consumption was slowing even before the pandemic.
On a per-capita basis, consumption growth slipped from 6.8% in fiscal 2017 to 4.4% in fiscal 2020 and in the financial year 2020-21, it contracted sharply by 10.1%.
Beyond that, the catch-up has been slower than for other demand components of the gross domestic product (GDP). By the end of this financial year, it would not even have sighted fiscal 2019 levels, CRISIL Chief Economist D K Joshi said in a report.
Joshi called upon the government to ensure the Budget announces some key measures to arrest the fall by making provisions for job creation and income-supporting measures.
The government can create an additional ₹35 lakh crore fiscal space over fiscals 2022-26 by postponing the fiscal deficit milestone of three per cent, said the report.
It added that even a fall in nominal GDP growth from 17.6% in the financial year 2021-22 to 12-13 per cent in the financial year 2022-23, can support a wider government balance sheet, given rising tax collection.
This, together with a gradual path of deficit reduction, can provide room for higher spending to support rural and urban employment generation, which will in the near term support consumption and fund capex (capital expenditure) over the next four financial years, according to the report.
Specifically, the report said the Budget should announce measures to generate jobs that create assets till growth becomes broad-based and demand conditions show sustained improvement.
Riled by inflation and lower budgetary support to the rural employment scheme in fiscal 2022, wage growth has slowed in farm and non-farm sectors.
According to data from the Reserve Bank of India, farm wage growth in nominal terms slowed to 5.7% in the financial year 2021-22 from an average of 6.6% in the financial year 2020-21, while non-farm wage growth just halved to 3.2%.
Discounting for high inflation, non-farm wages in real terms have been negative.
Noting that consumer sentiment is weakening due to a lower savings cushion, the report said household financial savings averaged 13% of GDP for nearly a decade to fiscal 2015. But, this slipped to 11% in the financial year 2019-20, as income growth slowed and households dipped into their savings.
As the pandemic hit, it shot up to 21 per cent of GDP in the June 2020 quarter, due to a forced reduction in consumption but savings dropped to a low 8.2% in the December 2020 quarter, due to job losses and lower earnings over the recurrent pandemic waves, coupled with medical expenditure during the pandemic.
Further complicating the matter is higher inflation, which has eroded purchasing power across essential inflation categories — food, fuel, rent, clothing and health. For the three years through this fiscal, it was on an average 180 basis points (bps) higher than for the previous three years.
In contrast, inflation in the discretionary categories was only 30 bps higher. This has led to higher income inequalities.
Support to rural employment schemes fell, impacting consumption in rural areas. For the financial year 2020-21, the government announced a higher allocation under the national rural job guarantee scheme, providing succour to rural workers. But, that was short-lived.
In the Budget 2022, these allocations were downsized as COVID-19 cases came down and data suggests that in the absence of employment opportunities in urban areas, demand for rural works stayed high even this fiscal, a large part of which remained unmet.
The fact is that the rural jobs scheme remains the only lifeline for the vast section of the landless, informal sector and migrant workers, who have borne the brunt of the pandemic and lack of employment opportunities in urban areas. A higher allocation for this must be prioritised this fiscal.
There is also merit in introducing similar employment generation schemes in urban areas, given how swathes of workers in urban construction and contact-based services remain un/underemployed, even if lockdowns have become less restrictive.
And, the time is ripe for a national urban employment guarantee scheme, repeatedly put forth by experts as well as the Parliamentary standing committee on labour in its August 2021 report. Such spending could be frontloaded towards the first half of the next fiscal.
But, this does not mean a steroidal lift is advocated. Any support measures will have to be designed carefully after weighing their impact on consumer price inflation. And, the fiscal policy can help control inflation by bringing down excise duty on fuel which will simultaneously trim input cost burden.