Consumers will be cautious, and FY22 PFCE will likely not hit the FY20 levels
What is going to be critical for a sustainable recovery is consumer confidence. Right now, that is very depressed.
The contraction in the PMI for both manufacturing and services in June, the modest GST collections for May, and the very weak retail auto sales for April and May are a reminder the recovery is a fragile one. Business activity may be picking up at a pace that is faster than we saw post the first wave, but that is little consolation. While recovery trackers may indicate the economy isn’t too far away from where it was before the pandemic struck, that now is less relevant. What is going to be critical for a sustainable recovery is consumer confidence. Right now, that is very depressed.
As Mahesh Vyas, managing director, CMIE has pointed out, although the unemployment numbers may have taken a turn for the better, they haven’t really done much for consumer sentiment; the index trended down by 1.5% in June on the back of a 10.8% drop in May and 3.8% in April. The RBI consumer confidence index had hit a record low in May, falling to 48.5 from 53.1 in March. This is worrying, and could keep demand muted in the rest of the year.
An improvement in the pace of vaccination can help reassure households that the economy will be back on track. However, after picking up pace to around 6.5 million doses a day in in the fourth week of June, the rate of inoculations has disappointingly moderated to about four million a day in the last week or so. If half the population is to be vaccinated by the end of the year, a daily run rate of 6- 6.5 million must be maintained. To this end, the government must step up efforts to curb hesitancy.
While private final consumption expenditure (PFCE) grew 2.7% year-on-year in the March quarter after contracting in the three previous quarters, that increase came over an anaemic base of 2% y-o-y in Q4FY20. Given this was the time when the infections were tapering off, the poor consumption level suggested that demand had waned considerably after the festive and wedding seasons.
Even adjusting for a weak base, the PFCE for the June quarter, could again turn out to be very weak. After all, this was a period of very high infections, with the distress prompting state governments across the country to enforce lockdowns and curfews. Already, high food inflation—following partly from the sharp increase in diesel prices—is pinching. Prices of a host of other goods, too, have risen and could continue to rise given that crude oil prices are hovering around $75/barrel and show little sign of coming down.
As economists have pointed out, the pent-up demand, this time around, will be smaller than it was post the first wave. The one-time spends incurred due to the change in lifestyle—basically, the shift to the work-from-home mode, as also the need for personal vehicles to commute—would be missing. Also, the lockdowns were largely localised, allowing for some mobility.
Again, households are sitting on a large quantum of savings—as reflected in the deposits with banks—some of which could be spent during the festive season. However, even if there is no third wave, consumers could remain wary and rein in expenditure. Certain cohorts that are insulated from the pandemic—government officers, professionals and so on—will no doubt continue to spend as before. But, it is unlikely the PFCE this fiscal will head back to the levels seen in FY20, of `83.22 lakh crore.