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Weakness in Private Consumption
Context:
India’s economic growth is currently constrained by weak private consumption. Addressing this weakness as the Union Budget 2025 approaches has become a priority. With private consumption being a significant driver of GDP, its slowdown poses challenges to sustainable growth.
Expectations from the Budget to Boost Consumer Demand:
Understanding GDP in the Expenditure Method
GDP under the expenditure method is calculated as the sum of:
- Private consumption expenditure.
- Government expenditure.
- Investments.
- Net exports (Exports – Imports).
Contribution of Private Consumption to GDP
- Private consumption has consistently been the largest component of GDP, contributing approximately 55-60% over the years.
- India Private Consumption accounted for 62.0 % of its Nominal GDP in Sep 2024, compared with a ratio of 60.4 % in the previous quarter.
- India Private Consumption contribution to Nominal GDP ratio is updated quarterly, available from Jun 1996 to Sep 2024, with an average share of 59.7 %.
- The data reached an all-time high of 71.1 % in Sep 1996 and a record low of 52.5 % in Mar 2011.
- Tax Relief: Reduce the net tax burden on households.
- Prioritise indirect tax cuts over personal income tax cuts for broader impact.
- Support for Rural and Poorer Households:
- Address cooking gas prices and fuel costs.
- Enhance disposable incomes in rural areas.
- Inflation Management:
- Tackle persistent food and fuel inflation to ease household expenses.
- Structural Reforms:
- Strengthen job creation and income growth through long-term policies.Steps to Boost Consumer Demand:
Tax Relief and the State of Tax Burden:
- Current Tax Burden: Personal income taxes, combined with net indirect taxes, exceed 20% of private consumption spending.
- Fuel Price Cuts:
- Directly supplement disposable incomes.
- Reduce transport inflation and input costs, thereby easing non-transport inflation.
- Help lower food prices, as fuel costs significantly influence retail trade margins in agriculture.
Differentiating Fiscal Stimulus from Job Creation and Income Growth
- Fiscal Stimulus:
- Short-term measure to boost demand by transferring resources from the government to households.
- Risks include inflationary pressures and unsustainable fiscal deficits.
- Job Creation and Income Growth:
- Sustainable approach to enhancing consumption by increasing household incomes.
- Focuses on long-term economic resilience and structural growth.
Household savings have diminished due to a post-pandemic spending surge, and household balance sheets are strained by increased personal loans. Additionally, inflationary pressures and high retail trade margins in food have exacerbated the issue, particularly in rural areas.
- Cooking Gas Price Cuts:
- Support rural households by making cooking fuels affordable.
- Increase disposable incomes, particularly for lower-income groups.
Why Indirect Tax Cuts Are More Effective Than Personal Income Tax Cuts:
- Broader Impact: Indirect tax cuts benefit all population segments, unlike personal income tax cuts, which help only a small fraction of taxpayers.
- Rural Demand Recovery: Rural households have a higher marginal propensity to consume compared to urban households.
- Example: A reduction in fuel prices lowers inflation and improves business profitability, leading to higher employment and income generation.
Rationalising Indirect Taxes: Steps and Benefits:
- Lower GST on Essential Goods:
- Ensure affordability for low- and middle-income households.
- Reduce indirect tax incidence on basic commodities.
- Simplify Tax Compliance: Make indirect tax structures less complex to promote compliance and reduce evasion.
- Pass-Through Global Price Declines: Reflect reductions in global oil prices in domestic fuel and LPG prices to benefit consumers directly.
Challenges in Boosting Consumer Demand:
- Balancing Fiscal Deficit and Fiscal Stimulus: The fiscal deficit remains high, limiting the government’s ability to implement large-scale stimulus measures.
- Risk of Inflationary Pressures: Excessive fiscal measures can lead to higher inflation, negating the intended benefits of stimulus.Implementation Delays: Large capital expenditure (capex) plans often face delays, reducing their immediate impact on demand.
Way Forward: Building Sustainable Consumption Growth
Tackling Inflation Alongside Demand Boost
- Focus on Price Stability: Address supply chain inefficiencies to manage inflation sustainably.
- Fuel and Food Price Management: Target reductions in food and fuel prices to directly benefit households and lower overall inflation.
Long-Term Strategy: Job Creation and Capital Development
- Strengthening Labour Market: Simplify labour laws to attract investments and create jobs.
- Human Capital Development: Invest in education and skill-building to enhance workforce productivity.
- Attracting Investments: Promote foreign direct investment (FDI) and support domestic businesses to drive growth.
