Declining 'Household savings & consumption' and increasing corporate profits signal tense times ahead

How vulnerable is the Indian economy in July 2022? Two years and more after the pandemic-induced lockdown, the economy is still spluttering and the revival has been uneven and slow. While pro-government economists and economic advisors have put up a brave face and have been seeing ‘green shoots’ for over a year, the situation continues to be grim for 90% of the population. Some of the pointers are as follows:

1. Household consumption has contracted by over Rs. 7 lakh crore over the last few years

2. Household savings have declined by over Rs. 3 lakh crore, indicating that households are coping with less income and higher expenses

3. While wage to GDP ratio has contracted, profit to GDP ratio has increased, indicating that wages have fallen and corporate profits have increased to a 10-year high despite the lockdown, poor capacity utilisation partly due to poor demand and supply chain bottlenecks.

The skewed nature of the Indian economy is also highlighted in the fact that 20 top companies in India are raking in 70% of the profit. Thirty years ago their share in profit was just 14%, said a blog by analysts at Marcellus Investment managers. The monopolistic trend, the blog claimed, is apparent with one or two companies in every sector dominating the market at the cost of the smaller players and the unorganised sector.

“India is already an economy with extraordinary levels of profit share concentration in many key sectors. For example, in paints (Asian, Berger), premium cooking oil (Marico, Adani), biscuits (Britannia, Parle), hair oil (Marico, Bajaj), infant milk powder (Nestle), cigarettes (ITC), adhesives (Pidilite), waterproofing (Pidilite), trucks (Tata Motors, Ashok Leyland), small cars (Maruti, Hyundai) we have one or two companies accounting for 80% of the profits in the sector,” the blog stated.

On the other hand, there are needs that people have but which remain unfulfilled because companies are unwilling to produce them in bulk and making them affordable to the masses.

Almost a quarter of the Indian households, covering at least 75 crore Indians, have no personal transport and do not have a bicycle, motorbike or a car. Just a quarter of the population owns air conditioners or air coolers. While bottled water manufacturers are going to the bank laughing, a vast majority of the population cannot afford safe drinking water. From the kitchen to the hospital, there are products that Indians need but access to which is available to only the privileged and the entitled.

The Labour Force Participation Rate, the proportion of population which is employed or looking to be employed, was 42% in May 2022—one of the worst in the world (it is 65% in the US).

Centre for Monitoring Indian Economy (CMIE) data suggest that millions of Indians, among them women, have stopped looking for jobs. What’s more, out of the currently engaged labour force of 430 million Indians, only 20% have salaried jobs, 50% are self-employed and the remaining 30% are daily wage labour.

The median monthly income of a household was just Rs.15,000 and consumption expenditure Rs.11,000. That is why any Indian making Rs.25,000 a month is among the country’s top 10% of wage earners, said the State of Inequality in India report collated by the Gurugram-based Institute for Competitiveness. Ninety percent of Indians do not earn even Rs. 25,000 a month, the report stated.

How many of them are therefore saving any money at all? The poorer they are, the greater the incentive for them to have liquidity or cash. At the same time, they have less and less incentive to save because of spiralling cost of healthcare, transport, education and food. Lower interest rates for deposits and savings instruments in banks are also a deterrent.

In a column published on Money Control website, founder of Finsave India Mrin Agarwal shared data from a survey conducted by his firm. Only 27% of the 5,769 individuals surveyed, all of whom were salaried employees, admitted to having an emergency corpus and insurance. They were clearly unprepared for medical emergencies and job losses. Almost half of them (45%) did not have a clue how to manage expenses in the event of losing jobs. Around 56% claimed planning expenses and setting financial goals were tough with their level of salary. Most of the individuals surveyed worried about medical expenses and repaying credit card debts.

The focus for a long time was on incentivizing and increasing savings with higher interest rates. Pronob Sen, former chief statistician of India when asked whether the common Indian is actually saving anything at all, said, “While this is fantastic for the well-off middle-class Indians, for the poor liquidity is more important. So how do you encourage him to save by giving them a proper return and still preserving the liquidity? A daily wage earner with no work for the next two days needs liquidity to draw from. That is the way the government should be thinking.”

Indians still do hand over their savings to the local money lender and hope to borrow when they need. “But we have no idea what kind of returns they are getting. Nobody is giving us that data. And number two, we do not know the level of risk they are taking because they are essentially dependent on relationships and there is no formal security in those transactions,” Sen says.

Madan Sabnavis, chief economist, Bank of Baroda says policymakers have never looked at the economy from the point of view of savings. “If you look at our entire approach towards monetary policy, the minutes of the RBI’s Monetary Policy Committee’s meetings rarely mention savings. Quite evidently the focus has always been on growth, industry, and investment,” he says.

Which is why the RBI doesn’t mind lowering the interest rates. “We want to protect the industrialists; we want to protect the government. When they keep interest rates low, it is impossible for people to save,” he adds.

Available data suggest that very few Indians have income that can be saved. Sabnavis points to the Jan Dhan accounts. “If you look at the balances, they remain where they were. They have no money to save and keep in there.”

Pune-based Economist, Prof Ajit Abyankar however believes that the savings rate in India is fair at 28% though it has declined from 35% in 2008. A further decline will be a bad sign.

In the absence of savings which can be turned into investment, there will be a fall in aggregate demand. If you see capital expenditure, and the rate of capital formation that is also going down, he says, which means the future looks gloomy, if not bleak.

(This was first published in National Herald on Sunday)