Blog October 30, 2019 Rohan Narula

Diwali 2019: Are Indian Consumers Spending Like Before?

In India, festive seasons like Diwali usually witness a spurt in consumption by consumers, and the market thrives during these periods. However, the economic crisis during recent times has led economists to acknowledge that India might be facing one of its worst slumps. Abhijit Banerjee, Nobel Prize winner for Economics in 2019 conjoint with his spouse Esther Duflo and American economist Michael Kremer, stated that “the economy is doing very badly”[2].

The Distressing State

During the second quarter of 2019, the economic growth dropped to a 25-quarter low[1] and the consumption slowed down drastically. This consumption, which contributes to nearly 60% of GDP, across most sectors displayed worse numbers than those during the 2008-09 global financial crisis[1]. Demand in the market has become an issue.

The Reserve Bank of India (RBI), in its Monetary Policy Report for this year, noted that economic activity plunged in the first half of the year as compared to the April 2019 projections that it had made. The RBI also lowered the forecast of the country’s growth to 6.1% from 6.9%. Most of the economic segments are quite fragile. Some of the declining projections for the year 2019 are depicted below[1].

All Pain, No Gain?

TV Mohandas Pai, Chairman, Manipal Global Education, stated that the blows absorbed by the Indian economy — demonetisation, goods and service tax (GST), the Real Estate Regulatory Act, the bankruptcy code, the liquidity crisis in non-banking finance companies (NBFCs) and the non-performing asset (NPA) crisis — have crushed institutions’ ability to respond to any crisis [2].

We have examined the most important elements that make up the root cause for the current economic scenario, below.

  • Unemployment

Official data for 2017-18 pegs the unemployment rate at 6.1%, which stands at an astounding 45-year high. The overall economic slump translated to bonuses and salary increments being denied. This uncertainty in income earnings prompted consumers to cut down their spending drastically, which in turn resulted in reduced demand. This is a crucial point as private consumption is the prime driver of the country’s economic growth.

  • Lowered Savings

Data indicates that Indians are now saving much less today than they did before. The gross savings of the country dropped to 30.5% of GDP (2017-18) from 31.1% (2015-16). Parallelly, household savings dropped to 17.2% of the GDP (2017-18) from 23.6% (2015-16). Volatile stock markets, the NBFC crisis, battered trust in mutual funds and bank deposits offering low-interest rates, are all reasons that have forced consumers to adopt austere spending habits. This is another contributing factor to depressed demand in the market.

  • Corporate Strain

GST has been the major pain point for the corporate sector. Its implementation had a disruptive effect, and it has not eased the compliance burdens faced by companies[2]. This has added to the derailing effect caused by demonetisation on small and medium-sized companies. Raghuram Rajan, former RBI governor, stated that the timing of demonetisation and GST roll-out — when the Indian economy was already at a weak point — is the bullet that broke the backbone of the economy[2].

Also, with the sharp decline in consumer demand, the revenue growth in India’s corporate sector hit the lowest point in nearly three years.

Gloom or Boom?

During festive seasons, especially during Diwali, consumers tend to pull their wallets out with no holds barred. There is usually a spike in consumer spending during this season. Growth in consumer spending, being a major contributing factor to India’s GDP, during the festive season is imperative for the country’s economic revival, making this year’s Diwali crucial.

35-40 % of the annual sales of consumer durables is accounted for during Diwali, making the festival important for business communities as well. 5-6% annual sales growth will provide relief to consumer goods companies. A sales growth of more than 8-9% will prompt an economic turnaround[1].

The question remains as to whether the consumers who are enduring flat-line incomes and saturated job markets would increase their spends in response to any festive promotions. The next few quarters might continue in the gloom if this Diwali fails to shine some light on the consumer demand growth.

In September, the government, in an effort to revive the economy, announced corporate tax rate cut down to 25%. To further the effort of economic revival, the government also announced that those startups that register after October 1, 2019, were liable to pay just 15% tax.

The Wonderchef MD, Ravi Saxena commented that “The real strength in the economy would not come from short-term Government interventions but through a sustained cycle of investment, growth and job creation.”[3]

Liva’s AVP and Head— Digital Marketing, Rishi Sharma stated that “My sense is that traditional retail might take a hit but e-commerce will see a boom. People will make conscious purchases.”[3] He affirms that there will be a spending shift this Diwali.

Parle Products’ Senior Category Head — Marketing, BK Rao stated that the drag in demand might continue this Diwali[3], with the festive season having no real consequences on consumer spending.

Most economists, do not foresee any major uplift in the Indian economy till the year 2020[2]. Poor corporate governance, incohesive policies, crony capitalism and ill-timed interventions are some of the interlocking factors that are pulling the economy down. Experts like D.K. Joshi, Ajay Piramal who spoke to India Today offered a fivefold path to nurse the economy back to a healthy state.

  • They voiced out that the government could boost its spending by building infrastructure, which will positively impact economic sectors such as cement and steel. Giving consumers tax breaks and thereby allowing more funds in their pockets would also prove to be efficient.
  • Lowering interest rates could offer enormous relief in the short run. D.K. Joshi, the chief economist with Crisil stated that there are two levers to revive the economy in the short run – fiscal policy and monetary policy. On the monetary policy front, the interest rate cuts will continue for some time and the RBI is trying to improve its transmission to retail borrowers.[2]
  • Instilling belief in the financial sector that the government will support them in the event of an extreme situation will help boost confidence in the country.
  • The experts are of the opinion that giving way for fiscal slippage and multiplying spends in the short term will heave the economy to a much better state.
  • Ajay Piramal, chairman of Piramal Group, highlighted “liquidity is the major issue facing industries. The tax departments should stop terrorising taxpayers in the country. We have enough data available to examine financial transactions without harassing people. Agencies should make use of it.” Experts are also stating that the government needs to be more vigilant with the banking sector to prevent frauds in the future.
Disclaimer: This blog is published for educational purposes only and does not constitute investment, legal or tax advice or a recommendation or an offer for the purchase or sale of investments in any financial or alternate asset class or currency in any market, territory or country, or any other products, services, securities or financial instruments in any country irrespective of nationality or eligibility. Please consult a professionally certified tax or financial advisor for any investment or disinvestment related decisions. All views contained in this blog are the personal opinions of the author based on publicly available research and news.


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