Only half of Indias household consumption will come through post covid
OPINION I MINT
The so-called middle class, which is actually India's richest 20% of households, accounts for 36% of consumption expenditure.
- India's household consumer demand is vulnerable and skittish because of dismal occupation demographics, lowly paid and uncertain livelihoods for most
- Low food inflation and protection of urban salaried jobs may make it better, a spoilt agricultural season may make it worse
The ongoing discussion on the prognosis for consumer demand is currently based on extrapolations from supply-side data and macroeconomic variables. This column aims to supplement it by providing household-level data on consumption, a "people-view" of those who cause this demand to happen.
India's household consumer demand, the jewel in its gross domestic product (GDP) crown, is vulnerable and skittish because of dismal occupation demographics, lowly paid and uncertain livelihoods for most; and because most Indian households have very little "surplus income", money remaining after covering their routine expenditure, leave alone their non-routine requirements and emergencies. Consumer demand commentators have been generally reluctant to link the dismal occupation demographics to consumer demand, beyond monsoon-dependent agriculture and, after demonetization, small business owners and their employees.
The covid-19 pandemic has forced us to acknowledge the universe of migrant—daily-wage workers—individual service providers who hunt for their daily bread, 32% of Indian households who contribute about 24% to India's household expenditure. By contrast, the so-called middle class, which is actually India's richest 20% of households, accounts for 36% of consumption expenditure.
The accompanying tables provide a map of consumption expenditure based on the share of household consumption expenditure contributed by different occupation groups further divided into the income level they belong to. Some occupation categories with similar earning vulnerabilities due to the present problems have been clubbed. The income levels have been so defined because our data shows that the bottom 40% of households have virtually no surplus income, the top 20% of households are discontinuously better earners and spenders (actually they are the so-called middle class that dominates our discourse on consumption) and the 40% in the middle are what we call the aspirational Indians in terms of consumption behaviour—spending more in good times and hunkering down in bad.
The data comes from pan-Indian ICE 360° India household surveys (2014, 2016) and thin samples of 2018, on how Indian households earn, spend, save, live, think and access public goods, done by our think tank and fact tank People Research on India's Consumer Economy. Our aim here is to provide a people-based frame by which to construct reasonable risk maps for consumer demand, adjusted as policy initiatives unfold and depending on a business's consumer profile. First, a look at rural India's consumer demand risk map. Rural households account for 57% of all India household consumption expenditure (and 54% of India's household income).
Table 1 shows the share of rural household expenditure (number in each square) contributed by households in each occupation x income category, and our reading of risk levels of each one's expenditure holding in this environment.
Since our hopes are riding on a good harvest, a bit more detail on the agriculture dependence of rural households: 22% of rural households are dependent entirely on agricultural business income, another 5% on agricultural labour income; 28% are dependent mainly on agricultural business income (all those in Row 1, Table 1) and 9% on agricultural labour. We have combined the last one with all casual labour (Row 5, Table 1). Another 30 %of rural households (some parts of those in Row 2,3,5, Table 1) have some dependence on farm income but since it is a minor component of their income and of total farm income, we have not segregated them.
A good harvest safeguards 30% of rural expenditure (Row 1, Table 1). Given lockdowns and their after-effects on the large spending segment of casual labour and on the micro-businesses, and the drying up of remittance from urban Indian migrants, about 34% of rural expenditure will be severely stressed (Row 4,5, Table 1). The salaried in rural India (Row 3, Table 1) are safer than the salaried in urban India because they are relatively more formally employed, so another 18% of rural expenditure is 'safe'. Overall, we believe about 62% of rural spending will come through if agricultural activity can get done on time ('safe' expenditure plus half of the partially at-risk expenditure). The hope also is that some part of the 29% of expenditure contributed by casual labour may be salvaged as it also gets used for agriculture.
Turning now to urban consumption, which accounts for 43% of total consumption, and is more lucrative because of higher income salaried households, but very geographically scattered. We expect that for the largest chunk of urban consumption—the salaried class—job security will be an issue, especially since urban salaried occupations unlike rural tend to be of all kinds, and less formal. Twenty per cent of urban expenditure accounted for by the high-income salaried group is totally safe (Row 1, Table 2). This segment has surplus income, is also the darling of banks, and is not only earning during the lockdown but has also been abstaining from consumption this last month—no beauty parlour visits, no eating out, no conveyance expenditure, no shopping sprees, a condition that is likely to last for quite some time. They can and will spend if suppliers who can address them make an effort at persuasion. For the rest of the salaried class (we expect job losses and restructuring and we expect only 8-9% of the 23% of consumption they account for to remain,
Of the small businessmen, micro-entrepreneurs and solo service providers (Row 2, Table 2), we expect half of their consumption worth to materialize —15% of urban consumption lost or at high risk. Even if they do have surplus income from the past, the present jerk on their revenues will make them very cautious spenders; besides, all of them carry debt.
Another 9% of safe consumption is from agriculture-income-dependent families and those who live off investments, pensions, rent and remittances (Row 4,5 Table 2). So totally, we expect about 52% of urban consumption to hold (safe expenditure plus half of partially stressed expenditure).
Taken together, we assess that 58% of household consumption will come through, contributed 61% by rural and 39% by urban India. Low food inflation and protection of urban salaried jobs may make it better, a spoilt agricultural season may make it worse. We would also like to point out that the salvaged potential expenditure, even after removing half of it, is still by far larger than the top lines of most large consumer companies—so this is not the time to give up and say the tide has gone out, but to continue to grow with targeted strategies to grab a share of the wallet.