Two out of three transitory factors have turned supportive

Private consumption is known to be more sensitive to factors that impact permanent, rather than transitory, income. Yet, in the short term, some factors do influence private consumption.

Last fiscal, India’s private consumption growth (in real terms) hit a two-decade low of 4%. Though it recovered sharply to 7.3% this fiscal, this growth bears watching because part of the lift was from a low-base effect.

To be sure, private consumption had been slow to rebound because incomes haven’t recovered fully from the impact of the Covid-19 pandemic.

Transitory factors had also weakened private consumption growth last fiscal.We examine the role of three factors — the performance of the agriculture economy, food inflation and government spending — and the outlook for them next fiscal.

When these factors turn adverse, private consumption takes a material hit, as had happened last fiscal.

Agriculture performance and food inflation are weather dependent.

When their growth is impacted, increased government spending — channelled appropriately — can cushion the impact on private consumption, as the national accounts data shows.

This fiscal has seen two of these factors turn supportive. An improvement in the third remains elusive.