Indians set to splurge with Rs 1.4 trillion

New Delhi: A consumption boom is set to take off with Indians having a surplus amount of Rs 1.4 trillion to splurge.

The household spending power will increase in fiscal 2016 because of low fuel prices, benign food inflation and steadily improving income growth, according to an estimate by the rating agency Crisil.

With real returns on savings only marginally rising, falling fuel prices and inflation, along with improving income growth could usher in liberal spending that India hasn’t seen for a while, the company claimed.

“Measured in nominal terms, the increase is close to two per cent of the annual spending of households. These converging tailwinds, we believe, will lend the Indian economy a reasonably good consumption kicker,” said Crisil. The fall in food inflation and lower fuel prices will together yield additional ‘savings’ (or increase in spending power) of Rs 1.4 trillion in fiscal 2016 compared with nearly Rs 509 billion in fiscal 2015. Savings on fuel expenses alone will be Rs 300 billion, while on food it will be more than thrice that at Rs 1.1 trillion, said Crisil.

“And where will these ‘savings’ go? Our take is that it is more likely to be spent on discretionary items than salted away in formal savings because the rise in real returns would be marginal given that nominal interest rates are on the decline,” said the rating agency.

Other consumption boosters would be improving incomes and an increase in access to credit enabled by schemes such as Pradhan Mantri Jan Dhan Yojana.

Private consumption growth fell sharply in fiscals 2013 and 2014 to an average 4.9 per cent per year compared with 8.4 per cent in the five years preceding.

This is because consumer inflation was stickily high around 10 per cent and income growth slower.

During fiscals 2013 and 2014, average GDP per person in real terms rose by just Rs 1,600 per year compared with Rs 3,100 in fiscals 2010 and 2011 when the Sixth Pay Commission recommendations were implemented.

“The key contributors to the decline in private consumption have all started to turn around,” said the rating agency. It said that improving growth prospects bode well for personal incomes and will also improve the ability of households to borrow.

Crisil noted that household sector in India is under-leveraged, with the household debt (from bank and formal non-bank sources) to GDP ratio at just 12 per cent compared with close to 80 per cent in United States.

“At moderate levels, debt improves welfare and enhances growth. Banks have been sharpening their focus on the retail segment where the chances of loans turning bad are lower,” it added.