Consumption tailwinds

A raft of factors can whet spending propensity

After hitting a low of 4 per cent last fiscal year, private consumption growth is set to strengthen this fiscal. Consumption growth has been slow to recover due to the incomplete recovery of incomes from the pandemic's impact. However, this fiscal year is expected to see a reversal of the factors that had dragged consumption growth below trend, including high food inflation, a slowdown in agriculture, and slow government revenue spending.

Additionally, the effect of a weak base will provide a statistical lift to consumption growth.

National accounts data from the past 13 years indicates that private consumption slows in fiscals when agricultural underperformance, high food inflation and sluggish government consumption expenditure coincide. Financial year (FY) 2013 was one such year. More recently, in FY24, agriculture gross value added (GVA) fell to 1.4 per cent (vs a decadal average of 4.1 per cent), food inflation soared to 7.5 per cent, and growth in real government consumption spending decelerated to 2.5 per cent (vs a decadal average of 5.3 per cent). That said, the hit to private consumption growth was more significant last year than it was in FY13.

Agriculture performance and food inflation are influenced by the vagaries of the weather and are outside the government's control, so they can be treated as transitory.

However, when they turn adverse, increased government spending, especially in rural areas, can cushion the impact on private consumption. For instance, in FY15, the adverse impact of agricultural contraction and high food inflation on private consumption was offset by above-trend growth in government consumption spending. The effects of these factors on private consumption provide interesting insights.

Weather and agriculture