Thursday, 2 November 2017

Cautious consumer spending is a drag on economy

  • It is a tough time to be in the retail business with consumers spending cautiously.  Demonetisation has developed a psychology among customers to spend only on essential items. 
  • Post demonetisation, cash situation might get normalised soon, but when this psychology will change is unpredictable.
  • Retailers suffer worst as broader pattern of consumers becoming more cautious with their money.
  • Struggling with customers unable to pay on time and plummeting sales, Indian small-businesses fears the government's crackdown on cash will have a much larger impact than predicted by top policymakers. It wasn't certain when things will get back to normal as much depends on a revival in consumer spending.
  • Consumer confidence has fallen sharply with households uncertain about their income, employment and spending capability.
  • Even Amazon and Flipkart will get affected.
  • It's important not just for retailers, but for the whole economy.
  • Total household consumption sector accounts for over 50% of GDP and any broad-based slowdown in spending will have widespread impacts.
  • It's harder to cut back on education, or health, or electricity expenses than spending on clothing etc and hence retail trade that accounts for about a third of total household consumption suffers drastic effect.
  • Retail trade is an important indicator of how willing households are to spend their cash, and  the weakness in retail is important for the economy.
  • Turnover is likely to fall in decline in food, cafe and restaurant spending, and household goods.
  • Low wages growth, higher utility bills, rise in interest, joblessness, underemployment, insecure future and household indebtedness are some reasons for cautious household spending. 
  • All these causes greater caution may well mean consumers play a smaller role in kicking along economic growth.
  • Unless consumer get some wage growth, he is going to be really cautious, and that makes it really difficult.
  • In the past, consumers have been happy to save a lower portion of their income and support their spending. It's the result of households feeling wealthier due to the property boom. 
  • They may be reluctant to continue cutting back on their savings when the biggest asset most people own – their house – is no longer gaining value as it has.
  • It's a disaster that jobs growth has shrunk, a bad news for spending.

Modi should realize that having destroyed booming Indian economy with his 'hare brained demonetization' and 'badly rolled out noble GST', economic recovery and reversal are not going to be with out pain. The best way is to fund is to increase household spending by middle & lower classes by aggressive welfare measures and infrastructure spending. The only way to mobile funds is to tax the rich for this purpose. Increasing budget deficit will only hurt middle & lower classes and slows down foreign capital inflows. Slowing down ongoing projects will hurt powerful businessmen. Funding banks recapitalization with bonds will only drain banks and PSU's surplus cash and serves no purpose. Funding banks recapitalization with budget support means money meant for middle & poorer classes will end up in rich men's pocket and will not boost consumption. So what ever Modi & Jaitley does now consequences will be disastrous. Not doing any thing will also be worst. Demonetization and GST resulted in evaporation of over Rs.3-4 lakhs crores from economy and recouping that much amount is painfully slow over several years. In short, India lost 3-4 years for Modi's adventures and experiments.

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