Will the recovery in consumer demand hold? | So Good News

View Full Image

It is unlikely that international remittances will be sufficient to cover this large foreign exchange gap, especially as the global economy expands. Forecasters polled by the Reserve Bank of India (RBI) estimated in a recent September survey that India would incur a $57 billion fine in the current financial year. The rupee naturally weakened against the US dollar due to this foreign exchange gap, even though the central bank of India supported the currency.

You might like it too

Stocks can pull back if bears exit short

HUL is running a fast-paced B2B supply chain

Why investors are flocking to buyers

India’s oldest ETF travels to nearly 1 crore folios

Now is a good time to look closely at the three drivers of domestic demand: households, companies and the government. These three groups also share the country’s income in terms of wages, benefits and taxes respectively. The line has already been known twice (December 2020 and June 2021) that the early signs show that the Indian economy is doing well with the pandemic being led by profits and not wages. Now there is another reason to believe this. The split in recovery has a big impact on the way forward. A little more explanation is probably in order.

One way to find out what’s going on is to look at how wages, benefits and taxes are moving as a percentage of the economy. It is well known that corporate profits and tax collections have performed well in recent times. On the other hand, the labor market has been recovering slowly. Simple math shows that the wage share of the nation’s income must have fallen since corporate profits and government taxes have been growing faster than the rest of the economy.

There is nothing sacrosanct in recovery led by salary or profit. Much depends on the growth of the economy at any given time. Here’s a simple way to think about the situation. An increase in the wages of the national currency can raise employment when companies have more power due to a decrease in consumer demand; but it can be expensive if there is no additional power to meet the high demand.

There is a similar argument to be made about the rate of return on the national economy. Its utility is constant. A large share of profits can improve economic activity if companies use their capital to increase capacity in their factories by purchasing new machinery; however, companies may prefer to use all their capital to save money or pay off old debts if there is no good reason to buy new machinery due to high volume or business uncertainty.

Households spend their current income, either by investing their income in instruments ranging from bank deposits to mutual funds, or by borrowing from the financial system. The latest data released by the RBI on household savings for the quarter shows that these savings are improving after a big rise during the covid lockdown, when we were forced to save because everything around us was closed.

However, there is reason to believe that Indian households have not yet spent all their savings from April to September 2020. money collected? Mr. Shayan Ghosh reported in the newspaper on September 28 that the savings of Indian families has fallen to the lowest level in five years “as people used their savings to spend on post-pandemic expenses” (see savings chart) .

This year’s celebrations have started well, but companies, policymakers and analysts should be alert to possible low wages in the national economy, long-term inflation and a slow decline in the funds collected during the covid lockdown. consumer weakness in emerging markets. In that case, the role of government and industry in supporting domestic needs will increase. The government has done a good job of spending money on infrastructure, although the non-food and fertilizer sectors have declined. A long-term revival in private sector investment, however, remains uncertain.

India’s economy had not surpassed its pre-pandemic level by the first quarter of this financial year (see second chart). Sustainable recovery requires a strong increase in public sector spending, which until now has focused on reducing rather than increasing capacity.

Niranjan Rajadhyaksha is the CEO and senior partner at Artha India Research Advisors, and a member of the academic advisory board of the Meghnad Desai Academy of Economics.