Sunday, November 4, 2018

Are we saving enough?? India’s consumption driven growth story



I recently attended this 3-days shopping bonanza popularly termed as the “Lil Flea Market” organised at Bandra Kurla Complex, Mumbai’s most prominent and planned business hub. A riveting conception of assembling shopping kiosks of different categories ranging from clothing to decorative items to healthy snacks made my experience similar to a buffet lunch which is filled with a myriad of cuisines to be savoured. A sparsely dense crowd in the scorching and humid heat of Mumbai gathered pace and made the venue jam-packed as the early winter sunset came in. This enchanting experience aided me in comprehending how the different stalls in the market were reaping agglomeration benefits. Walking across different aisle’s and watching shoppers experimenting with items on different stalls made me ask myself: what proportion of the window shopping will actual turn into actual sales? To lure the customers, almost each stall had either the desirable boards of “Sale” or had re-worked and discounted price tags. More than the shopping stalls, the highest demand-driven outlets were those of food with people delightfully enjoying a drink or a pizza-slice amidst the music in the background.

 As I walked out following my window shopping, looking at the surrounding atmosphere brought out a pertinent and apposite thought in my mind: How much does India’s total gross domestic product (GDP), which measures the total annual value of goods and services in the economy, comes from the consumption spending by individuals. To simplify, the total GDP of an economy is bifurcated into expenditure on consumables (C), expenditure incurred by the private sector entities and government of green-field, brown field investments and financial security investments (I), government spending- (G)  (apart from investment nature) and net position of exports (X-M) i.e difference between exports (X) and imports (M). Mathematically, we represent the above details in the most lucid manner which every commerce/arts student will relate to from one’s 11th standard textbook of economics:

GDP = C + I + G + (X-M)

By making certain adjustments to the above equation, we arrive at one of the most imperative macroeconomic equation which is denoted as the “Savings – Investment balance”. This theory explains that the difference between the total savings and investment of the nation is equal to the difference in the foreign account balance (in economic terms known as the current account balance). To put this down from an individuals’ perspective, try taking your own example. If you save Rs. 100/- and need Rs. 150/- for an abroad trip or to buy the latest released One Plus 6T costing around Rs. 200/-, you will have to resort to a lender (in this case being your parents) to fund the difference. This funding from the external side is the current account balance which is required on the macro level to fund any difference between the savings and investment numbers.

Given this backdrop, I tried to analyse India’s consumption expenditure as a percentage of GDP across the time period from 1951 to 2017. India’s consumption expenditure as a % of GDP has declined from a peak of 94.8% in 1953 to 59.1% in 2018, having dropped to a low of 56% in 2011. Post declining to its low in 2011, the proportion has reversed its direction moving upwards and stands at 59% in 2018. To simply put, the share of consumption expenditure on an overall macro-level has witnessed an increase in the last 7 years. If the consumption has increased, the other aspect of from a household perspective which is “the savings” must have dwindled down. Data shows that during the period 2011 to 2017 (latest data available), the savings rate has declined. What could be the reasoning behind the 3% increase in the share of the consumption expenditure in the last 7 years?

Apart from the rise in incomes of individuals which could be one factor of paramount importance, 3 things flashed in my mind which surely everyone will easily relate to.

Firstly, either at home or on your office desk, there is one phone call which may initially irritate you, but over time would be of utmost interest: “Do you want a home loan/car loan?? Do you want to avail credit cards services with low or no charges?” As you can clearly relate to these loan offers from the banking institutions, I look at the bank credit growth in personal loans during this period. RBI’s data on personal loans on home, consumer durable, education, vehicles and credit cards has witnessed double digit growths since 2011 with a compounded annual growth of 15% since 2011. No wonder the low EMI cost loans are turning out to be a positive for beguiling individuals towards the opulent commodities.

Secondly, there will be a delivery truck of Amazon or Flipkart stationed below large corporate offices and more than one Swiggy or Zomato delivery boys awaiting the order outside a restaurant to be prepared at the earliest to zoom out to hand over to the hungry soul. Despite one’s reading in the newspapers about these companies (Indian subsidiary) making losses, what matters to the individual consuming is the hefty discounts, launching big billion dollar sales and a plethora of innovative schemes which will entice one towards filling up the cart and dishing out the payment. This new kind of separate economy, popularly termed as the “Gig economy” would in Joseph Schumpeter's words be a creative destruction which is driving the consumption driven growth in the economy.

Thirdly, the world of technology, artificial intelligence and machine learning in which we live in has made it feasible for individuals to see the image of the items they wish to buy the moment they have it picturized in their brain. The ease of transactions and minimum transaction costs to purchase the item further makes all individuals to fill the shopping cart and complete the entire transactions within no time.

Surely, this is not an exhaustive list of reasoning behind what is fuelling India’s consumption driven story during the last few years.  However, the larger question remains whether savings are enough to propel future economic growth? Savings is an important constituent not only from an individuals’ exigency point, but savings being channelled into the right nature of investment will drive India’s growth story forward and would have less reliance on external sector funding. Since independence, the decline in share of consumption expenditure has been compensated by the growth in share of investment (both private and government). However, a recent reversal in trend towards consumption led growth could slacken future overall growth if it entails growing imbalances by limiting capacity creation and rising debt burden of households. Imbibing a saving’s culture among the millennial's and Z-generation and directing it towards investment amidst stable exports will augur well for a sustainable growth for the economy!!

Sushant Hede
4th November, 2018

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