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5 things to know about private consumption
In 2008, the financial crisis in the US caused a recession in their economy. The effects of this were felt across the world. India was one of the few countries to be relatively less affected. This is because the Indian economy depends predominantly on private consumption for growth.
Here is a look at what this means and why it matters:
What is private consumption:
This is a measure of all the money spent by consumers in the country to buy goods and services. It is often called as consumer expenditure. It even includes the rent you pay your landlord.
Why it matters:
Private consumption is a major part of the GDP or Gross Domestic Product - a measure of the economy. Today, it accounts for nearly 60% of the India's GDP. Thus, it is a major driver of economic growth in India. The equation is simple: Unless you are willing to buy, the sellers and companies profit. Unless they profit, employees would not be given salaries and governments would not get taxes. This is the important cycle that drives growth. It is India's rich consumption story that attracts foreign companies to set up shop here. As consumption grows, corporate sales rise at faster rates. This translates to higher profits. Consumption spending grew 7-8% every year, even when India's GDP grew at slower rates. This is despite the fact that a big portion of India's market is still untapped. This means there is a great scope for growth in the future.
High private consumption also reduces India's dependence on income from exports, thus shielding it from economic developments worldwide. This is why India was able to withstand the severe recession that affected US and other countries worldwide.
Why consumption fell:
Private consumption is the reason why inflation matters much more in India than many other countries. If inflation is really high, people would tighten their belts and spend less money. This would lead to a fall in sales and demand for company goods and services, in turn, leading to a fall in profits. All this leads to a slowdown in the economy, which is what happened in India. "Private consumption growth (as per the old base year series) fell sharply in fiscals 2013 and 2014 to an average 4.9% per year compared with 8.4% in the 5 years preceding because consumer inflation was stickily high around 10% and income growth slower," a report by CRISIL, a credit ratings agency. This was reflected in corporate data too. For example, growth sales of passenger vehicles fell to 6.2% levels in FY13 and FY14, down from 29% in FY11.
Low inflation, higher income:
Helping the rise in private consumption is the fall in inflation. Consumer Price Inflation (CPI), which measures the rise in retail prices of goods and services, is down to 5.1% in January from 8.6% in April last year - the highest in this fiscal year. For the whole fiscal, it is expected to average at 6.5%. This is significantly lower than the 9.5% in FY14. The lower inflation is mainly because of a fall in food inflation and global crude prices. Food inflation has slowed to 7% levels from 12% in fiscal year 2013. It is expected to fall further to 5% levels in the coming fiscal. If this happens, it could roughly translate to savings of Rs 1.1 lakh crore on food alone, according to CRISIL. Indian consumers can save Rs 30,000 crore more if global crude prices continue to remain low. This amounts to a total saving of Rs 1.4 lakh crore in one single fiscal year alone, the report states.
Higher disposable income:
For the last two Budgets, the government has consistently given more tax allowances and freebies despite its aim to lower fiscal deficit - the amount by which government spends more than it earns. The government increased the tax exemptions under Section 80C of the Income Tax Act and even raised the tax threshold. This is to ensure people have more money in their pockets to spend. This is called disposable income. As a result, private consumption is expected to grow 7.8% in fiscal year ending March 2016, higher than the 7.1% in the current fiscal, according to the CRISIL report.
An improvement in private consumption means corporate sales will grow at faster rates. This is good news for companies. Passenger vehicle sales, which were one of the worst affected because of the slowdown, is expected to grow at a faster rate of 9-11% in the next fiscal year, according to CRISIL. This is up from the 3-5% growth in the current fiscal ending March 2015.