Pre-Covid consumption slide quite worrying

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 Pre-Covid consumption slide quite worrying

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• Latest RBI report: The household financial asset-liabilities report 2019-20 shows that Indian consumers were not only reducing their debt (deleveraging) but also cutting back on consumption (expenditures). Household borrowings contracted by 22%, and consumption grew very slowly. 2019-20 spending growth was lesser than even that in 2012-14.
• Demand as well as Supply: Till now, it was supply (of credit) that was responsible for low growth, but now it is demand as well. Pre-COVID demand slide is casting a long shadow on post-COVID recovery.
• By how much: Financial liabilities of households reduced by Rs.1.5 trillion in FY20 over FY19. That was 1% decline relative to aggregate output. Net financial savings increased by 0.5% (Rs.2 tr) which was faster than bank deposit growth. RBI speculated it may be due to income uncertainties.
• A long story of decline: The private consumption decline started from FY17 (2016-17) and plunged in 2019-20. Since most of it was fuelled by borrowings, which was more than actual income growth, the collapse had to come. The story was unsustainable.
• The signs were visible: Borrowings-fuelled consumption often does turn unsustainable. In March-July 2019, the income perceptions of Indian households dropped sharply. Already, delinquencies in consumer credit in many categories were visible (auto, home, personal loans, LAPs etc.).
• Three factors playing out together: When consumption demand drops, governments want that households should borrow more to consume more, and then stabilise as their incomes return to higher levels. An upturn takes care of everything. But we see that in 2019-20, households paid back their debts, spent lesser and lesser, and ignored the RBI rate cuts altogether! All efforts wasted - abundant liquidity, direct interventions to reduce long yields, targeted credit support, etc.
• The link: The link between RBI's monetary policy and demand management in economy is now broken! That is very disturbing. What are the reasons? Many - poor monetary policy transmission, presence of fear, financial system's broken reputation post IL&FS fiasco, illiquid NBFCs, etc. But all of these are clearly supply-side issues, and it was thought that resolving them will resolve everything. 
• Wrong analysis: The demand-side problem was overlooked. Households have deleveraged, and cut consumption as well. Without a COVID-19, perhaps the RBI would have waited in 2020 to see the impact of its policy (on household borrowings - they should have risen).
• COVID-19 happened: RBI suddenly cut policy rate by 115 bps, as it realised that things were bad from pre-COVID times. But with jobs threatened all around, what can RBI do now.
• Fourth straight year: The year 2020 will be the fourth straight year of demand compression in India! There will be one burst of demand (pent-up) and then households will permanently settle into a much lower consumption orbit.
• India's only hope: Reviving consumer demand is the only hope for India today. Households are shedding debt, experiencing a deep slowdown (since 2017), and now hit by a pandemic. The govt. and RBI must focus strongly on policies that push demand, because without that, business investment will not work out either. And that means the effectiveness of new structural reforms would be low too.

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