Poll on poll indicates that the Narendra Modi government still remains the most popular government of the day, yet poised to win a Lok Sabha election if it may come. However, in the same breath they point out to many agreeing that this could be India at its economic nadir.
In December and January, VMR conducted a nationwide stratified survey of about 5,000 citizens to understand what the purported economic slowdown meant to them. Or did they feel at all there was one? It also tried to estimate, if there would be an uptick due to an economic stimulus—basically, where would the rupee go. This was done to estimate a potential new normal for the economy as well as potential sectoral growth. Our sister concern M76 Analytics analysed the data in the light of the economic events of the last year to project future trends in the economy.
More than a third—35.5 percent, said that in their opinion their economic condition was the same as before. An equal number—28.5 percent, each felt that their condition had either improved or deteriorated. A smaller number— about 7 percent felt that their economic condition was extremely hurt. The verdict also conveys a certain split mandate.
File image of Prime Minister Narendra Modi. PTI
Amongst those who say better, are the upper-most strata of the middle class and the lower-most strata of the society. Those in between, especially the middle class, and the lower middle class do not feel as positive about the economy. Clearly, the expansion of the welfare state has created a fair deal of hope amongst the lower classes. So, where is the money? However, the dispensation to make an expenditure is quite unlike a growing or aspiring economy, and that is where concerns emerge about the future of the economy. A hypothetical question was asked to the respondents about what they would do if they were given an extra lakh rupees to spend—akin to an economic stimulus percolating to the ground.
A staggering huge number—about 62 percent of them, said that they would simply save the money rather than spend it. So while the economy may not stagnate like many doomsday prophecies, a huge phoenix-like recovery is also not expected. And the quantum of quantitative easing does not matter, as it is simply the directional choice that the consumers would have made.
What should still add another level of discomfort for the economy is the fact that another 17 percent said that their priority would be simple to clear debts. So only about 21 percent of the respondents said that they would push the money directly into things that move consumption. It is only such expenditure that is likely to have a multiplier effect on the cash flow.
Of all those who said that they would like to spend more on goods and services, most said that the largest expenditure would be on buying more groceries and other days to day consumables. Clearly, roti and other roti-related consumables, hold the priority for the poorest. The next set of spends would be on makaan. After the consumables, they said that they would spend more on real estate/housing. The priorities do not change across different classes, just that their priorities change—for the Uber-rich the proportions are in more equal measure, about 40 percent each. This means that a house of one’s own or real estate as investment still matters a lot to the country’s denizens.
A key indicator of the downbeat mood in the economy is the perceived unaffordability of day-to-day goods, an indicator of the growing aspirational lifestyle of individuals. Remember the last time there was excessive inflation in India, they blamed it on the greater purchasing power in rural India. So a revival along those lines, would also mean a rise in inflation.
Now we take a look at the other sector which is likely to see a revival—Housing. As per a report in Business Today on 4 October 2019), a record of 13 lakh houses worth Rs 9.38 lakh crore or about 5% of India’s GDP lie unsold. So the aspirational purchase of houses is also likely to only exhaust the excess supply rather than trigger any new activity or produce another multiplier effect in the economy. Thus, Prime Minister Awas Yojana (PMAY) would be a clear winner as far as aligning with the aspirational needs of the lower classes is concerned. However, it is unlikely to generate the huge monetary velocity that could provide the proverbial Midas touch to the economy. Most importantly, it could well suck out the liquidity, cannibalising the other sectors of the economy.
We judged the inclination to spend by asset ownership, like say a house. As the asset ownership declines, the number of people aspiring to spend more on food and related consumables increases. The poorer the respondent, the more the larger desire to spend on daily use items.
Clearly, these are seen as an affirmation of lifestyle. However, if a cash crunch were to continue, there would be a realignment of priorities. The White Goods sector would be the first one to be hit. This means a larger hit on manufacturing if things don’t improve. What is equally distressing is the fact that in either case the purchase of automobiles/tractors is completely low on the priority. This means that auto purchase is unlikely to pick up, even if the economy pulls through. The auto sector would remain in distress.
Putting money in the pockets of the people is therefore as important for long-term sectoral growth as it is for generating immediate cash to circulate in the economy. Harking back on the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) or farm income support schemes are likely to have limitations, as they are likely to spur only the lower-most segments, whose biggest priority is spending on food and daily use items only. This is not going to increase expenditure on evolved manufacturing goods that create a larger velocity of money in the ecosystem, and a larger tax footprint. Enhancing middle bracket incomes and giving them larger confidence to spend their rupee would do a far greater service to the economy than pushing more cash down infrastructure sector and subsistence wage schemes. That could only mean lengthening the exit for the vortex of the slowdown.
(The author is founder of M76 Analytics, a decision science company)