Private consumption, a key GDP component, may falter in Q3


The Q2 GDP growth numbers were greeted with relief as the contraction slowed perceptibly in the September quarter. However, private consumption, which accounts for 57.9 per cent of the GDP, holds the key to sustained revival of the economy.

GDP data revealed that private consumption expenditure remained in contraction at -11.3 per cent in Q2 FY21, although it improved from the previous quarter’s -26.7 per cent. This shows that demand was still tepid in the September quarter.

This component was the main factor dragging the economy down in FY20, as demand slowed following the IL&FS crisis and NBFCs halted lending amid tight liquidity. From a growth of 8.8 per cent in Q2 FY19, private consumption growth had slowed to 2.7 per cent by Q4 FY20.

While consumers have switched from an ‘essentials only’ approach and gone back to discretionary spending post unlock measures, they are still worried about income, inflation and slowing growth.

 

 

Experts think that unless the Centre supports demand with higher spending, private consumption will sag.

Already, there are signs that some of the festival cheer is fading. Auto sales have declined in November compared to October while indicators like the Purchasing Managers’ Index (PMI) are slowing down, too, after hitting a peak in October.

An RBI survey shows that consumer confidence remained very low in November 2020 year-on-year, though it showed a marginal improvement over the all-time low recorded in September.

“The weak confidence is attributable to consumer sentiments on the general economic situation, employment scenario, price levels and household incomes,” the RBI noted, but said households remain optimistic about the year-ahead situation.

The tepid demand has been a cause of concern even though it has improved quarter-on-quarter.

Need for govt support

“Unlike the second quarter, when private activity rebounded on its own after the lockdown was lifted, support from the government will have to come in the third and fourth quarters. Economic activity is expected to be better in the second half of the fiscal and revenue collections may pick up, which will create space for government expenditure,” said DK Joshi, Chief Economist at Crisil.

With Diwali happening in November this year, and the festival season demand expected to continue until the end of the year, the third quarter, too, could see some growth.

However, concerns about salary cuts, job losses as well as uncertainty about the pandemic and availability of a vaccine pose a challenge to a full recovery and the overall outlook. So, while there is surplus liquidity in the system, large-scale private investments may not happen immediately.

The RBI, however, expects real GDP growth to move to positive territory in the second half of this fiscal — at 0.1 per cent in the third quarter and 0.7 per cent in the fourth quarter.



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