Sluggish wage growth, low savings behind tepid consumption: Economists

Amid tepid rural demand and high price pressures, the private consumption growth in the country is expected to slow down to mere 1% in Q4 FY24, according to the National Statistical Office’s (NSO) second advance estimates (SAE).

Normalisation of pent-up demand, sluggish wage growth, and low household savings are some of the reasons being quoted by economists as the reason for lacklustre private consumption conditions.

Barring the first two-quarters of the pandemic year FY21 – where private final consumption expenditure (PFCE) growth had contracted year-on-year – the projected 1% growth would be the lowest in 46 quarters. In Q3, the PFCE had grown 3.5%, about 5 percentage points (pps) lower than the GDP growth rate for the quarter.

Earlier this month, Pronob Sen, former chief statistician of India, had told FE that historically, consumption growth has nearly been at the same level as GDP growth, or slightly lower. “However, the current gap is much wider, at nearly 5 pps. This has never happened before, and is completely inexplicable,” he said.

In FY23, net financial savings of households had fallen to a nearly five-decade low of 5.1% of GDP in FY23, as against 7.2% in FY22, according to the Reserve Bank of India (RBI).

“There is definitely inertia in private consumption and this is something which comes from most company presentations on results. Rural demand is down and even urban demand is uneven,” said Madan Sabnavis, chief economist, Bank of Baroda.

“The main reason is that we do not have sustainable jobs being generated which creates demand through higher incomes, and second, inflation has come in the way of consumption,” Sabnavis added.

In the first 10 months of FY24, rural retail inflation has averaged 5.6%, while the urban has averaged 5.3%. CPI inflation during April-January has averaged 5.4%.

Also, the real rural wage growth, of both agriculture and non-agriculture, has been negative in the first half of the current fiscal, reflecting the lack of sustainable and low income jobs being generated.

Interestingly, this holds significance at a time when unemployment conditions in both rural and urban areas have improved significantly. According to the statistics ministry, rural unemployment, as per current weekly status, eased to 4.3% in 2023 from 5% in 2022; and urban unemployment dropped to 6.7% from 7.6%.

For the entire financial year 2023-24, PFCE is expected to grow just 3% as compared to 6.8% in 2022-23, the lowest rate since 2012-13. This excludes the (-)5.3% growth in 2020-21.

Garima Kapoor, Sr Vice President and Economist, Elara Securities, said: “The lingering impact of Covid-19 pandemic on income and savings leading to pull back in consumption especially in low income groups.”

Economists say the gradual moderation in inflation is likely to aid pick-up in PFCE growth from the second half of the upcoming financial year, FY25.

“We expect FY25 CPI to average 4.5%, allowing for real incomes to gradually recover,” said Kapoor. “Moreover, a good Kharif season with minimal crop damages will also augur well for recovery in rural demand.” Elara Securities expects PFCE growth to rise to 5-6% in FY25 and Bank of Baroda expects it to expand 6-7%.

Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership, said that the meagre 1% growth in private consumption when overall GDP is implied to growth close to 6% in Q4 is “confusing”.

“But it is likely that softness in consumption demand is exaggerated, and the true growth is higher looking at how services growth on the more accurately measured GVA side is evolving,” he added. According to NSO, the January-March quarter will register a GDP growth of 5.9% and GVA growth of 5.4%.