Consumption revival hit as virus jolts middle class
NEW DELHI/MUMBAI: Revenge spending by the urban middle class, which helped the country swiftly ride out the recession last year, may fail to rescue the economy this time around as households belonging to this cohort have been hit the hardest by the second wave, economists said.
The first wave of the pandemic and the abrupt nationwide lockdown that followed caught the poor off-guard, with hundreds of thousands of families having to dip into their savings to save lives amid shortages of medicines and oxygen. Economists said demand revival might take longer this year, given the scale of devastation in affluent households. While the affluent class are a small slice of India’s 1.3 billion population, they account for a giant share of the discretionary consumption. “This not only implies an immediate setback to discretionary consumption but also higher out-of-pocket medical expenses, and precautionary savings,” a report by Quanteco Research said on May 17.
As the first wave ebbed, the report pointed out that consumer durables demand was quick to overtake pre-covid levels due to a combination of festive and pent-up demand in the December quarter, partly financed by forced savings during the nationwide lockdown. However, such a demand recovery may remain limited in 2021-22 as part of the pent-up demand may have already been exhausted in these categories, economists at Quanteco Research said.
A April 24 Bloomberg report said over 170,000 households in Mumbai are in buildings sealed by authorities compared to 120,000 slum households in containment zones. This indicates a higher rate of spread in high-income households during the second wave.
During the first wave, 34% of cases were in residential buildings compared with 90% this time around, Pranjul Bhandari, chief India economist at HSBC, wrote in her Mint column on May 17.
The lockdowns announced by states to contain the spread of the virus also do not augur well for demand. For a consumption-driven economy, the imposition of lockdowns is a significant blow. According to an analysis by brokerage CLSA, the 16 states that have imposed restrictions account for nearly 90% of India’s gross domestic product.
The central bank, too, is worried about the demand shock caused by the second wave. High-frequency indicators for April and May are scanty given data lags. Still, they suggest the biggest toll of the second wave is in terms of a demand shock— loss of mobility, discretionary spending and employment, besides inventory accumulation, the RBI said in its May bulletin. “Aggregate supply is less impacted,” it said.
The pandemic has brought about significant shifts in consumer behaviour globally. In India, the current surge is manifesting in different ways, prompting Indian households to skimp on discretionary expenses as they focus on essentials and save up for any unexpected medical expenses.