Household consumption demand, according to the latest National Statistical Office estimates on India’s gross domestic product (GDP) for this fiscal, is lagging fiscal 2020 levels by 3%. That makes it the worst performer among the expenditure-side components of GDP post-pandemic.

This note looks at reasons why consumption, which makes up ~55% of the GDP, has gone missing, and recommends ways in which the Budget could bring some of it back.

The consumption cycle badly needs a lift

Private consumption was slowing even before the pandemic. On a per capita basis, consumption growth slipped from 6.8% in fiscal 2017 to 4.4% in fiscal 2020. It contracted sharply by 10.1% in fiscal 2021. Beyond that, the catch-up has been slower than for other demand components of GDP. By the end of this fiscal, it would not even have sighted fiscal 2019 levels.

Income growth slows: It’s a similar story with household incomes. Per capita GDP growth — a proxy for household income growth — was 6.9% in fiscal 2017. It slowed to 3% in fiscal 2020 before contracting 8.2% in fiscal 2021. Beyond that, the catch-up has been so slow that by this fiscal-end, it would not even have caught up with fiscal 2020 levels.

Rural wage growth remains tepid. With reduced budgetary allocation to rural employment schemes in fiscal 2022, and weakness in economic activity, wage growth has slowed of late, in the farm and non-farm sectors. The Reserve Bank of India data shows, farm wage growth in nominal terms slowed to 5.7% in fiscal 2022 (April-November average), from an average of 6.6% in fiscal 2021. Non-farm wage growth halved to 3.2% from 6.4%. In fact, discounting for the high inflation, non-farm wages in real terms show negative growth (or decline) on-year.

Consumer sentiment weakening due to a lower savings cushion: Household financial savings in India averaged 13% of GDP for nearly a decade through fiscal 2015. This ratio gradually slipped to 11% by fiscal 2020, as income growth slowed and households dipped into their savings. As the pandemic hit, it shot up to 21% of GDP in the June 2020 quarter, led by a forced reduction in consumption on account of the lockdowns. But savings dropped to a low of 8.2% in the December 2020 quarter. Job losses and lower earnings over recurrent waves, and the pressure on medical expenditure during the pandemic, have taken a toll on household savings, which might have shrivelled further since. Those suffering income loss are clearly consuming less and those who used up their savings are prioritising rebuilding buffers.