Consumer spending powers Indian economy ahead of GST launch

Consumer spending powers Indian economy ahead of GST launch

By Reuters

  • 30 May 2017
Consumer spending powers Indian economy ahead of GST launch
Credit: Shah Junaid/VCCircle

Kaveri Shukla and her fiance are on a shopping spree ahead of their wedding next month. In just one week, the couple has bought home appliances ranging from a rice cooker to a refrigerator and is purchasing a new car.

"Marriage is a kind of big spending commitment," said the 28-year-old financial consultant while shopping at an upscale mall in Gurugram, a satellite city and business hub near Delhi.

"It is an excuse to spend, not defer your purchases."


Shukla is not alone. Millions like her are thronging shopping malls and stores in India, thanks to a busy wedding season. A heatwave is also boosting demand for air conditioners and refrigerators.

It's a welcome change for an economy where consumer spending, traditionally a driver of growth, took a blow after Prime Minister Narendra Modi's shock decision last November to scrap high-value bank notes.

The prospect of another big reform - the launch of a multi-rate Goods and Services Tax (GST) from July 1 - could also be bringing forward spending into the current quarter as shoppers look to avoid rates of 28 percent, or higher, on some consumer durables and luxury items.


The impact of the new tax regime is not clear -- some items are expected to be cheaper -- but the prospect of a price rise is seen pushing some people to buy ahead of July.

The risk is spending falls away after the tax is launched.

"GST is a big unknown," said Kumar Rajagopalan, head of the Retailers Association of India. "But it could turn out to be a big fillip in the short run."


Other headwinds loom: Layoffs in the information-technology sector are unsettling some households at a time when the economy is still not generating enough new jobs for workforce that is growing by around a million people a month.

High frequency

Economists polled by Reuters expect Asia's third-largest economy to expand by 7.1 percent on year in the January-March quarter, just up from 7.0 percent in the prior quarter and ahead of China's 6.9 percent growth rate.


Some even expect a growth print as high as 7.8 percent when the GDP figures come out on Wednesday.

India doesn't publish national figures on retail sales. But high-frequency indicators such as car sales, retail lending and goods imports show consumer spending has roared back to life.

New passenger car sales grew at their fastest annual pace in at least 16 months in April. Imports of consumer goods last month surged by nearly a half from a year ago. Credit card loans growth is at its highest in at least 15 months.


Quarterly earnings of consumer goods makers from Hindustan Unilever to auto maker Maruti have also been upbeat.

The consumer rebound backs the Reserve Bank of India's (RBI) prediction of a V-shaped recovery from the cash clampdown, whereas many in the private sector had expected a longer slump.

With a good monsoon and government pay hikes in prospect, the outlook for a sustained recovery looks good. And as consumer spending powers more than half of India's economic growth, the recovery has bolstered the prospects of stronger growth.

"We hope these drivers will spread the recovery far and wide," said Kamal Nandi, business head of appliances at Godrej consumer products.

Radhika Rao, an economist with DBS Bank in Singapore, reckons spending has recovered to near pre-demonetisation levels.

It should get a leg up from the GST, she says, as the measure will reduce taxes on food and other essential items.

"Cost savings on non-discretionary items post-GST will boost discretionary spending," she said. "An upward revision in GDP estimates might be warranted after Wednesday's data."

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