The new coalition government must implement a multi-faceted approach to stimulate private consumption and sustain economic growth. Photo: iStock
What Modi's NDA must do to revitalise consumption, win back rural voters
Rural distress is seen as a key reason for BJP's loss of seats this time; it's directly related to a decline in rural consumption
One of the major drawbacks of the Narendra Modi government during its last decade in power was the slowing down of private consumption.
For it to redeem itself under a completely new setup, where it has to depend on coalition partners, the BJP-ledfaces the daunting task of revitalising private consumption.
By definition, private consumption, or consumer expenditure, is the final purchase of goods and services by an individual. It is usually driven by increased disposable income, rising house prices, lower interest rates and inflation, easier credit availability, and improved rural demand.
Stuttering numbers
The growth rate of private consumption, which forms 70 per cent of GDP, had hit a 21-year low, stuttering at around 3.5 per cent as of the third quarter of 2024, compared with 8.7 per cent a decade ago.
Analysts, post election results, said that one of the reasons for the decrease in the number of seats for the BJP is rural distress, which is directly related to a decline in rural consumption.
Rural consumption, as measured by NielsenIQ, has experienced a notable decline and, as of quarter two of 2023, it was around 4 per cent. Rising prices and inflation have contributed to a prolonged negative growth in rural consumption because of a significant reduction in purchasing power and spending capacity among rural consumers.
Inflation shoots up
As of April 2024, the provisional annual inflation rate in rural India was 5.43 per cent based on the All India Consumer Price Index (CPI). This was higher than the urban inflation rate of 4.11 per cent.
The primary drivers of this inflation have been increased food and fuel prices, which disproportionately affect rural areas where incomes are generally lower and more sensitive to price changes. This has had a direct impact on the BJP’s poor show at the hustings.
The NDA lost 44 rural seats compared to the 2019 elections, while the INDIA bloc gained 77. In the Hindi heartland and semi-urban seats, the NDA lost 53 seats and 10, respectively, while INDIA gained 61 and 23, respectively.
Going forward
The following measures could be pivotal in addressing this slowdown and sustaining economic growth.
Urban, rural challenges
The compounded annual growth rate (CAGR) of real urban consumption has significantly slowed, from 5.2 per cent in 2010-12 to 2.6 per cent in 2012-23.
This decline is attributed to factors such as housing affordability issues, urban decline, and gentrification. The government must address these challenges by improving housing policies, creating incentives for businesses to remain in urban areas, and managing urban sprawl through balanced urban planning and development policies.
Similarly, rural consumption growth has fallen from 6.6 per cent in 2010-12 to 3.1 per cent in 2012-23. Agricultural reforms to increase farm incomes, coupled with enhanced rural infrastructure and food security, are essential to reversing this trend. Despite nominal growth in rural consumption being higher than in urban areas, the convergence in consumption levels suggests the need for targeted interventions.
More funds
Economic shocks have hit rural areas hard, and revitalising these regions is essential. The government should allocate more funds to rural development schemes such as MNREGA, which can provide a safety net and boost rural incomes.
Improving food security and investing in rural infrastructure are critical to enhancing living standards and driving consumption.
Moreover, agricultural reforms to increase farm incomes will directly contribute to higher rural consumption, addressing the needs of a significant portion of the population.
Reducing IT rates
Tax relief is one of the most direct methods to stimulate private consumption. Increasing the income tax exemption limit from ₹2.5 lakh to ₹5 lakh would enhance disposable incomes, encouraging higher public spending.
Additionally, greater tax relief on housing loans would alleviate household financial burdens, promoting spending on other goods and services.
Taming inflation
Inflation erodes purchasing power, making it a critical issue for consumption growth.
The government should trim unnecessary spending and implement policies to control inflation. This can be achieved by enhancing supply chain efficiencies, reducing supply-side constraints, and ensuring stable prices for essential goods.
Lower inflation boosts household incomes, allowing for increased consumption.
Wealth taxation
Addressing income inequality through greater wealth taxation can channel resources toward social goals. This approach should be complemented by economic empowerment initiatives at the grassroots level, such as revitalising social security schemes targeted at income generation for lower-income groups.
These measures can help reduce disparities and boost consumption across different economic strata.
Fiscal discipline
According to Citibank, the government’s ability to accelerate spending through its finances will be challenging, despite the enormous RBI dividend.
Strategic divestments and private sector involvement in infrastructure development, particularly in the power sector, will be crucial.
However, the return of populism could pose risks to short-term inflation, capex, and fiscal discipline, necessitating careful policy balancing.
Encouraging exports
Encouraged exports can significantly boost the economy in the face of sluggish domestic demand. Allowing a gradual weakening of the rupee instead of increasing import barriers can make Indian exports more competitive globally.
This strategy can help tap into international markets, providing a growth avenue when domestic consumption is under pressure.
India Inc's expectations
The coalition government must navigate the complexities of maintaining corporate sector confidence while driving consumption growth.
The Modi 2.0 government did its bit by reducing the corporate tax from 30 per cent to 22 per cent but it has not translated into higher investments from the corporate sector. In fact, there has been a noticeable decline in private investment, which the new government needs to address immediately.
The share of private non-financial corporations in Gross Fixed Capital Formation (GFCF) declined to 36.2 per cent in FY23 from 36.3 per cent in FY22. Although this decline may appear minor, it is significant when viewed in the context of economic trends and investment cycles. The 36.2 per cent share represents the lowest level of private sector investment in the last four years.
Private investment
This indicates a downward trend in private investment activities. GFCF measures the net increase in physical assets (such as buildings, machinery, and equipment) within an economy over a period of time. It is a critical component of the GDP, reflecting investments in infrastructure and capacity expansion.
On its part, corporate India expects continued reforms in tax simplification, ease of doing business, and infrastructure development. The government must balance fiscal responsibility with the need to boost public expenditure.
However, according to Bernstein Research, the implementation of labour laws (the government has consolidated 29 central labour laws, out of 44 existing central laws, into four labour codes) could still take place as these are already cleared by both houses of Parliament.
Tourism sector
The tourism sector has vast potential for job creation and economic development. By investing in tourism infrastructure and marketing, the government can create more employment opportunities and increase disposable incomes, leading to higher consumption.
This sector supports urban areas and benefits rural regions with tourist attractions.
The new coalition government must implement a multi-faceted approach to stimulate private consumption and sustain economic growth. By reducing income tax rates, focusing on rural development, promoting tourism, controlling inflation, increasing wealth taxation, and encouraging exports, the government can address the slowdown in consumption.
Balancing these measures with fiscal responsibility and maintaining corporate sector confidence will be key to achieving long-term economic stability and growth.
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