The coronavirus pandemic and the subsequent lockdown to curb the spread of infections hit consumer sentiment in India and led to an increase in household savings, and these two factors will drive the economic recovery after the pandemic, think tank CMIE has said.
Citing data from the Reserve Bank of India, the Centre for Monitoring Indian Economy (CMIE) said household financial savings in India shot up to 21 per cent of GDP in the first quarter of fiscal year 2020-21 after averaging 7.2 per cent in 2018-19 and 8.2 per cent in 2019-20. The household savings declined to 10.4 per cent of GDP in the second quarter of 2020-21 with relaxations in lockdown. However, it was quite elevated in the first half of 2020-21 as compared to earlier levels.
"The expectation is that when mobility restrictions are removed, households of these economies will be in a strong position to spend. With vaccination underway, such a scenario is not too far," CMIE Managing Director Mahesh Vyas said in an article.
Vyas cited a recent report by the McKinsey Global Institute, which said a strong rebound in consumer demand can be expected once the pandemic ends. While the report's findings were based on study of US, UK, Germany, France and China, Vyas examined it with respect to India.
"India's savings rate doubled during the lockdown, much like USA's and UK's savings rate. This gives India a good chance to recover like them. But, like the US, India also has a large lower-income base that has lost jobs and incomes. This could hurt the recovery process," he said.
Besides, consumer sentiment will also play an important role in recovery, the article said, adding that US seems to be better poised than India in this aspect.
The Index of Consumer Sentiments in India fell by 7.9 per cent in March 2020 and a massive 52.8 per cent in April 2020 as compared with 11.8 per cent fall in March 2020 and 19.4 per cent decline in April 2020 in US. "The lockdown was far more severe in India and this shows in consumer sentiments."
CMIE said the Index of Consumer Sentiments in India was 46.8 per cent lower in March 2021 than its average level during April 2019-March 2020 as compared with US where it was 12 per cent lower. It argued that while US and Indian households saw doubling of savings rate, the sentiments recovery is not the same.
It said the fiscal transfers by the Indian government to households during the lockdown were mostly in rural India, in the form of MGNREGA and PM-KISAN, and the impact of this can be seen on distribution of consumer sentiments which is skewed in favour of rural households.
"Compared to 2019-20, urban consumer sentiments were down by 51.4 per cent while rural consumer sentiments were down by a lower 44.3 per cent. The distribution is also skewed in favour of richer households," CMIE said.
It can be assumed that most of the spike in household savings is in richer households, the article said, adding that the recovery in consumer spending in India is likely to be concentrated in the richer households if their sentiments are not too bad.
Citing its Consumer Pyramids Household Survey, CMIE said consumer sentiments in households with an annual income of over Rs 10 lakh were the least affected as of March 2021. "India's revival in consumer spending is therefore likely to be driven by households that earn more than a million rupees a year when the lockdown is lifted," it said.