Indian households went on a spending spree after the pandemic, driving a broad-based recovery in consumer demand. This surge encompassed a wide range of goods and services, from automobiles to crockery, signifying a robust recovery across various sectors. However, recent data suggests that this growth has begun to moderate, prompting experts to call for government stimulus to maintain the momentum.
The pandemic had led to a sharp decline in demand for various sectors, including education, transportation, dining, recreation, automobiles, and household appliances. However, these sectors witnessed a remarkable rebound in the post-pandemic period. According to data from the statistics ministry, each of these sectors reported more than 10% expansion in FY23.
The rebound was particularly evident in transport, with spending on this category surging by over 24% in FY22 after a contraction of over 18% during the pandemic year. This trend continued in FY23, with a further growth of close to 12%. Similarly, education, which had experienced a 5.6% contraction in FY21, rebounded by 11.7% in FY22 and grew by nearly 13% in FY23.
The sector of restaurants and hotels, heavily impacted by lockdowns, also saw a significant recovery, rebounding by 38% in FY22 after a 52% contraction in FY21. This sector continued to expand, witnessing a further 55% growth in FY23 as people resumed dining out and traveling.
The consumption of durable and non-durable goods, which had also contracted during the pandemic, later recovered. Spending on durable goods like automobiles, which had seen a near 5% contraction in FY21, witnessed a 31% growth in FY22 and over 14% growth in FY23.
While the recovery has been impressive, experts are cautious about the sustainability of this pace. Overall, household consumption expenditure grew by 11.7% in FY22 and 6.8% in FY23, following a 5.2% contraction in FY21. However, the Ministry’s projection for FY24 is more moderate at 4%, even as economic growth is projected at 8.2%.
Experts attribute the initial recovery to pent-up demand, and a favorable monsoon this year could provide further momentum. However, they emphasize the critical role of government measures in sustaining this growth.
“Higher agricultural production and downward trending inflation provide tailwinds to urban demand and resurgent rural demand. Government consumption is also likely to rise though the pace, sequence and composition of government consumption is a matter of some debate,” said Manoranjan Sharma, chief economist – Infomerics Ratings and former chief economist at Canara Bank.
Sharma highlighted the concern of high unemployment, stating that “Creating jobs is critical to recovery, together with boosting demand.” He advocated for tailored growth strategies to steer the four drivers of economic growth: domestic consumption, government expenditure, private investment, and exports.
D K Srivastava, EY’s chief policy advisor, echoed the need for stimulating household consumption expenditure. He suggested that “Private final consumption expenditure should grow at least in line with real GDP growth or marginally below it. If real GDP growth is 7% and PFCE growth is something below that level, then there is some space for household savings to increase and which will allow the overall growth rate to be sustained.” He highlighted that growth in the savings rate could fuel private investments in the economy.
Srivastava further noted that government final consumption expenditure (GFCE) is projected to have grown at a subdued rate of 2.5% in FY24 and recommended that the government should push its revenue expenditure growth. “Most of that increase can be directed towards rural areas where consumption expenditure is to be stimulated,” he suggested.
Experts see the current trend as a normalization of consumption expenditure growth after the sharp post-pandemic recovery. “Given the GDP growth rate has given a surprise, we should expect a surprise in consumption going ahead,” said Prof N R Bhanumurthy of the National Institute of Public Finance and Policy, referencing the unexpected GDP growth of 8.2% in FY24.
