Indian consumers seen as key to economic growth

Mumbai, India — The Indian consumer may be the white knight Asia’s third-largest economy has been waiting for.

With investment as a share of the economy set to drop to a 12-year low, Prime Minister Narendra Modi is counting on a once-in-a-decade proposed pay raise for government staff to galvanise demand and spur growth. If implemented, the 24 per cent increase would further improve consumer confidence that’s already received a boost from slower inflation and lower borrowing costs.

The stimulus also comes with a risk: the government could rein in infrastructure spending to meet a pledge to narrow Asia’s widest budget deficit. That threatens to slow the investment momentum started with public money as private companies still show little appetite to begin new projects.

“It’s good news to consumption and to that extent it will support growth in the short term,” said Anubhuti Sahay, an economist with Standard Chartered in Mumbai who estimates the stimulus at as much as 1.8 per cent of gross domestic product if state governments follow. “But diversion of the same amount of resources toward investment could have helped growth, inflation far better.”

India’s investment needs are massive and its financing means are modest, according to Ambit Capital. Crisil — the local unit of Standard & Poor’s — estimates infrastructure companies need to raise 47.2 trillion rupees through March 2019 or about $251 million (Dh921 million) a day.

Public spending is taking on the bulk of the burden, as evidenced by the 2.6 trillion rupees worth of project tenders issued by the federal and state governments in the six months through September, compared with 8.5 billion rupees by private companies. Central bank Governor Raghuram Rajan, who just six months ago said he’d cut interest rates to spur companies’ capital spending, is now making more mentions of customers at home.

More investment

“The capacity utilisation which really is the first factor which leads to more investment is still very tepid,” Rajan said in September. “That would suggest there is room for more domestic demand which will be non-inflationary and then that will eventually create more investment.”

Aided by a slump in global commodities, Rajan’s almost halved the inflation rate from 2013 and aims to lower it further to 4 per cent by March 2018. That’s making retailers such as Shoppers Stop optimistic.

“Spending will catch-up over a period of time and if this is the inflation level, overall retail should grow much faster,” Govind Shrikhande, India’s oldest department chain store’s managing director, told analysts on a November 2 call.

India’s consumer stocks rallied the most in more than two months on Friday, halting the drop in the benchmark index.

Not everyone is as optimistic. A drop in tractor sales and slowing rural loan growth show that the second straight year of below-average rainfall is hurting demand from India’s villages versus the cities.

Since more than half of the 1.2 billion population lives in rural India, overall consumption may not be strong enough to drive growth as it did in the last recovery cycle, said Jyotinder Kaur, an economist with HDFC Bank Ltd near New Delhi.

“It’s just not broad based enough this time,” she said. “The engine has to come from investment because the impact is much larger.”