In an interview that deflates some of the government’s euphoria about the recently announced Q1 economic results, the chief executive officer and managing director of the Centre for Monitoring the Indian Economy (CMIE), Mahesh Vyas, says the sizeable and worrying collapse in private consumption, which constitutes 56% of GDP and is by far the single biggest engine driving the Indian economy, is “very serious bad news”.Worse, surveys done by the CMIE suggest that private consumption is not likely to pick up significantly over the next 12 months because households are “in deep despondency”. Consequently, the CMIE forecast is that this financial year the economy will grow between 7-8%. The chief economic advisor’s target of 11% seems unattainable and already several independent agencies have reduced their growth target to around 9%, Vyas said.Vyas says whilst the government has every right to be pleased by GDP growth of 20.1% in Q1, “the problem is momentum”. He adds, “We are not growing fast enough”. The 20% increase in Q1 is “essentially a base effect increase”.He also adds that this is at best “a stunted V” shaped growth. To call it V-shaped without that clarification is “slightly misleading” because the right side of the V is not as high as the left.In a 35-minute interview with Karan Thapar for The Wire, Vyas spoke at length about the collapse in private consumption. He said: “This matters the most because if this does not grow the economy will not grow.” At the moment, in Q1, private consumption levels are 12% below pre-pandemic levels of 2019-20. More importantly, private consumption in 2021-22 is almost identical to private consumption in 2017-18 i.e. four years ago. That is the extent to which private consumption has collapsed.Surveys by the CMIE help explain why private consumption has fallen so sharply. At the end of August, consumer sentiment was 44% lower than in March 2020. Vyas pointed out that separate surveys done by the RBI’s Current Situation Index come to an almost identical result. Therefore, this is not simply a private sector think-tank’s findings. The government’s own RBI has reached the same conclusion.Digging deeper, the CMIE survey shows that during the last year i.e. 2020-21, household incomes fell by 20% in real terms. This, Vyas pointed out, is one explanation why private consumption remains so low. Households are poorer and, therefore, they are not spending and, consequently, there is no demand boost to the economy.Perhaps of greater concern, Vyas says, is what the CMIE surveys suggest about the next 12 months: 41.5% of households expect their incomes to worsen over this period while another 50% do not expect their incomes to improve. Therefore, these households will not be spending enthusiastically and that means there will be no pick-up in demand. As a result, private consumption, which contributes 56% of India’s GDP, will not improve significantly, if it improves at all.Vyas says “the government needs to take cognizance of the fact there is ‘deep despondency’ in households”. He says the CMIE surveys show “households are not gung ho about the economy”.The CMIE CEO and MD says that the obvious and correct response to the situation is income support for households, but apart from the small steps the government initially took in 2020, it has not done anything and is unwilling to do more. He says this is “the biggest enigma of our times”. He asks: “Why is the government so reticent to intervene and help households overcome their difficulties?”Vyas agreed with The Wire that this means that “the one thing the government needs to do i.e. income support for households, it’s not doing”.Asked by The Wire if the collapse in consumer sentiment, which CMIE surveys suggest will continue over the next 12 months, poses a serious challenge to the prospects of the Indian economy’s recovery, Mahesh Vyas forcefully said “absolutely”.Vyas said the government has done a lot on the supply side but, in the situation facing the country today, people and households are not willing to borrow and take on credit. He says the government needs to do more on the demand side but is reluctant or unwilling to do so. He even pointed out that this is not because the government is short of revenue. Direct taxes and indirect revenue has increased significantly beyond expectation and the government has the money if it wishes to spend it. Even if this were not the case, Vyas adds, it would still be the government’s duty to find a way of providing the necessary income support to boost demand. Its failure or refusal to do so means that the economy will perform poorly and growth will be limited.In this context, Vyas said the fact that government expenditure i.e. Gross Fixed Capital Formation, is 4.8% lower than Q1 last year is “particularly disappointing”. He said it was expected of the government to respond with Keynesian measures to boost demand but it has not done so in a way that can be considered adequate.In this situation, Mahesh Vyas added, private investment is not going to easily take off. He said investments will come only when there is sufficient consumer demand. Secondly, perhaps as much as 30% of existing facilities are unutilised and investment is not likely to happen while that continues to be the case.The above is a paraphrased precis of Mahesh Vyas’s interview with Karan Thapar for The Wire. Although recounted from memory, it is not inaccurate. However, there is a lot more in the interview than has been covered by this precis. Please see the full interview for a better appreciation of Vyas’s viewpoints.
