Will Consumption Revive? Understanding its Slowdown and Potential for Restoration

Executive Summary

This paper investigates the persistent slowdown in India’s private consumption expenditure, examining the underlying factors and exploring prospects for revival. The core question is whether the recent post-pandemic consumption rebound is sustainable, given the pre-existing downward trend and emerging challenges like rising debt, inflation, and subdued consumer sentiment.

The study analyses trends in private consumer expenditure and its composition to understand the breadth of the slowdown over the period leading up to the pandemic, the pandemic years, and the subsequent recovery period. The probable factors underlying the longstanding consumption decline are examined for deeper insights. The research extends this focus to more formal analysis that incorporates the role of consumer sentiments to exploit their informational value if any, and the overall impact upon actual consumer expenditures.

Summarily, the paper identifies the decline in private final consumption spending pre-dates the pandemic, has been broad-based, evolving in line with slower real per capita income growth after 2016–2017. The slowdown affects all consumption categories, with a particularly sharp contraction in durables expenditure before the pandemic. While the post-pandemic recovery has been robust in some areas, notably durables, overall consumption remains below the pre-pandemic trend.

The role of debt in boosting private consumption expenditure was substantial in the recovery in 2017–2018, but short-lived and followed by a growth collapse in 2019–2020. A similar pattern appears to be playing out in the post-pandemic resurgence of private consumption expenditure, with debt-fuelled consumption reinforced by a significant wealth effect driven by equity gains. Some of these drivers may be unsustainable. Additionally, resurgent inflation, particularly in food prices, coupled with rising interest rates, strains household budgets and dampens consumption.

Consumer confidence has been persistently low since 2019, reflecting pessimism about the economic situation and employment prospects. Consumer sentiments are found to play an important role in influencing consumption, accentuating the effects of standard determinants like real income and interest rates. The paper presents novel insights from a deeper analysis of consumer sentiment surveys, pointing to the importance of psychological influences upon spending behaviours. Consumer sentiment indices correlate with actual economic variables and appear to contain predictive information about future consumption expenditure, particularly in the pre-pandemic period. Econometric analysis suggests that consumer sentiment amplifies the impact of income and interest rate changes on consumption.

The paper concludes that restoring India’s consumption to its former strength requires a multi-pronged approach. Policy interventions should focus on:

• Supplementing public capital expenditure: Boosting public investment may help stimulate demand and offset the slowdown in private consumption.
• Containing inflation: Controlling food price growth is crucial for supporting real incomes and encouraging consumption.
• Addressing debt risks: The reliance on debt to fuel consumption raises concerns about longterm sustainability. Prudent policy measures are needed to mitigate these risks.
• Turning around consumer sentiment: Addressing the pessimism about the economic outlook is critical for a sustained consumption recovery. This requires a deeper understanding of how households perceive economic signals and how policy interventions can foster optimistic expectations. The persistent negativity in consumer sentiment, despite various policy responses to economic shocks, suggests a need to re-evaluate the effectiveness of these policies.

The paper highlights the critical link between consumption revival and medium-term growth prospects. Without a robust and sustained increase in private consumption, India’s growth momentum could be significantly hampered.