New Delhi: Demonetisation, goods and services tax (GST) implementation, and the COVID-19 pandemic have led to a slowdown in consumption expenditure growth in the previous decade as compared to the preceding decade.
These shocks have affected both rural and urban consumption patterns, Business Standard reported, citing Nomura’s report, on Friday (March 8).
Lower compound annual growth rate
The Nomura analysis, based on the latest Household Consumption Expenditure Survey, shows a lower compound annual growth rate (CAGR) for rural and urban consumption compared to previous decades.
“Real rural consumption grew at a CAGR of 3.1% during 2012-23 (compared to 6.6% in 2010-12), while urban consumption slid to 2.6% from 5.2%,” Business Standard quoted the report as saying.
“During 2005-10, rural and urban consumption in real terms grew at 4% and 4.4%, respectively,” it said.
“Even if we deflate expenditure by using suitable measures of inflation, we find a similar CAGR drop in real consumption expenditure, indicating that the fall is not an inflationary phenomenon. This is not surprising, with the last decade witnessing shocks such as demonetisation, GST implementation and the pandemic,” it said.
Divergence in urban-rural consumption growth
The report also noted that the nominal growth over the last decade (2012-2023) has been relatively more superlative for rural consumers.
Rural consumption has gone up by 164% during 2012-23 period in comparison with around 146% for urban consumption, suggesting convergence in consumption levels. Earlier, between 2000-12 period, rural consumption grew by 194% compared with 207% in urban areas.
The report highlighted that inequality reduction in both rural and urban households has been driven by reductions in consumption among top spenders rather than increases among the bottom-most spenders.
However, the situation is relatively better for urban India. “Rural India seems to be experiencing a ‘middle-class bulge’, which has seen maximum consumption growth among the consumer fractile classes, while growth has been much lower for the top spenders. The pattern is different for urban households, where the bottom consumption brackets have seen maximum consumption growth, which has progressively declined as we move into the higher brackets. This may be because the middle class in rural India seems to have benefited more from handouts than their urban counterparts,” the report noted.
Changing consumer trends
Further, the report highlighted the changing consumer tastes. The data on consumption patterns shows that over the past decade, Indian consumers are spending less on food and more on ‘core’ (non-food and fuel) categories — more so in rural India.
“Within the food categories, there has been an increase in the share of spending on beverages and processed food and fruits. These are typically indicative of more expensive and discerning consumer tastes. Within the core basket, consumers are mainly spending on conveyance and durable goods. The former suggests that consumers are increasingly becoming more mobile and also possibly that transportation costs have disproportionately picked up. The rise in durable goods consumption suggests that aspirational consumption has picked up,” the report added.
On the flip side, the report also noted an increase in the share of spending on intoxicants and toiletries, other household consumables and entertainment.
“Consumers are ‘curiously’ spending a lower share of their income on clothing, footwear and education,” it said.
Economic shocks impact consumption
Several reports highlighted how demonetisation had a significant impact on small- and medium-sized businesses.
While demonetisation accelerated digitalisation for many small industries, micro industries faced instability, Rajiv Chawla, president of Faridabad Small Industries Association, had told the Economic Times in 2017. He said they lacked preparation and weren’t involved in the black economy. “Workers like dholwalas, dhaba owners, plumbers, and daily wage earners primarily dealt in cash and were unfamiliar with digital transactions.”
Separately, while GST improved economic efficiency, critics say the complexities of the new regime have driven many small enterprises out of business and forced hundreds of thousands out of jobs, The Wire reported.
A survey by the All India Trade Union Congress (AITUC) in July 2018 found that a fifth of India’s 63 million small businesses – contributing 32% to the economy and employing 111 million people – faced a 20% fall in profits since the GST rollout, and had to sack hundreds of thousands of workers.
Readymade garments, gems and jewellery, leather, handicraft and basic machinery manufacturing are hit the most, industry bodies from across the country said.
In April 2020, just after the nationwide lockdown was announced, over 122 million people in India lost their jobs in a single month, the Hindu reported citing estimates from Centre for Monitoring Indian Economy. Around 75% of them were small traders and wage-labourers, it said.
