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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