Impact of Covid-19 on Private Consumption Expenditure-An overview | Adamas University

Impact of Covid-19 on Private Consumption Expenditure-An overview

Covid-19, Management

Impact of Covid-19 on Private Consumption Expenditure-An overview

Co-Contributor : Mr. Mainak Chakraborty, Teaching Assistant, School of Management, Adamas University

Curtain – raiser

Consumers are the backbone of any economy. The consumption expenditure adds up to a significant amount in GDP. The world economy, as well as the Indian economy, was on a slow track since the inception of 2020. The industries were assumed to grow by 3.2% whereas the service sector was expected to grow by 7.2%. The GDP was expected to grow by 5.1% in 2020 – 2021, the reason which is mentioned behind this is the credit crunch mostly from the NBFCs. The gross share of this was expected to be contributed by the consumer-focused businesses in India.

The History Unfolds

After opening up the Indian economy in 1991, consumers got more choices of goods than before since more and more foreign brands are entering to capture the market, and the Indian customers are getting more choices available. In rural India, for FY2018, the annual consumption growth stood at around 9.7%. At the same time, urban India has seen a growth rate of 8.6%. The spending is more and more characterized by durables, health and personal care products, foods and beverages, etc. In 2020 it was expected to grow by 9 – 10%. Indian   FMCG market had seen a growth of USD 31.6B to USD 70.2B at a CAGR of 9.3%. This sector expected growth to cross USD 100B in 2020 at CAGR of 20% plus

The population of 1.3B of which half are at the age bar of 25, catalyzed the growth of the Indian FMCG market. There was a sharp increase in per capita income of 8% for the last 11 years. The income pyramid is also facing a sharp change, where the middle-class population is expected to increase to 58.3 crores by 2025 which also changes the consumption pattern as people looking desperately to evade poverty and to move up the ladder. Also, the trend of becoming a nuclear family also increasing the consumption pattern and that increases the consumption expenditure by 20% – 30%. The logic as stated is that in a joint family if someone desire to buy something for his or her children, he or she has to buy the same thing for all other children in the house, which sometimes becomes impossible.

But a mixture of macro and microeconomic factors, global crisis, consolidation of many small players of the market with big players pushed the way to slow down. Due to weak consumer demand, more than dozens of daily use consumer goods have seen a slowdown, even some commonly used goods like soap, cream, shampoo, biscuits, skin creams have seen a single-digit growth during the FY19.

The Crisis

The pandemic starting from China enters India at the end of February, where most cases were detected in Kerala first. After the middle of March, as the cases started increasing, all transportation and other activities needed to be shut down in a phased manner. At first, locality and state-wise lockdowns were imposed, then the whole country was put under a lockdown scenario. All types of communications were stopped, total country except emergency services was put into a standstill. This is going to affect massively, on what India will consume in the next 6 – 8 quarters. As communication is stopped, there is minimal transportation of finished products. Markets are closed. Before the announcement of lockdown, there was panic buying among the consumers. The demand for daily essentials sore high, in some places black markets, developed. But when all stopped, there was excessive demand but a fewer supply of products and essentials. Even medicines also were out of stock in some places. The wholesalers and distributors from metro cities could not be able to meet up the demand as the production halted. Side by side, the production units also stopped, due to lack of labors, raw materials. They also suffer a loss due to not able to clear the finished products. SMEs got hit very badly. Migrant laborers failed to return to their homes.

During 21 days lockdown period it was estimated that it would cost merely INR 7 to 8 lakh crores. Almost 70% of the activity related to production, investment, and other business activities are now at standstill. It is also estimated that there will be a loss of INR 7.5 lakh crores in terms of GDP.

Along with that the demand for power and fuel also will decrease in tandem with other essentials. A steady decline in demand for petrol by 64%, diesel by 61% can be seen, as the commercial transport as well as private transports are on a halt. Airports are closed, the aviation fuel just evaporated at a rate of 94%. But, as all the members of a family are staying at home, the demand for domestic gas has risen by 21%, whereas the restaurants, hotels, food courts are closed, there is a sharp decrease in demand for commercial gas. Production has been shortened by almost 50%. The power sector faced a steady fall of 26% due to a lack of industry demand shows in the following table –

The Aftermath

Consumer spending can be categorized in different areas – some are for daily essentials, some are for luxury.

The food and grocery items, in which the consumer spending is about USD 550 Billion, seems to bleed lesser than other sectors. The retail channels like Spencers, Big Bazar, More Supermarket, are affected most in terms of volume of sales, but the local grocery shops are maintaining their sales steadily. So this sector is likely to be less impacted. But lifestyle foods like health supplements, packed frozen foods, will be getting a high impact.

In the second place the textile and apparel industry where consumer spending is around USD 65 Billion, will get a bad shock. They are currently struggling with finished and semi-finished goods, and after the lockdown period, the raw material crisis. Many big players in this category may suffer a huge loss. The branded products will be getting a negative customer sentiment after opening up as the income of consumers is also supposed to decrease to be spent on these items. In coming festive seasons, if the situation improves, then also it will take a little bit of time to normalize the operations.

So it is evident that two of the major segments will face a slowdown maybe till 2022 and branded players in both textile and apparel and food and grocery market have to face more shock as consumers will look for discounted buying as they will going to have less money to spend. Branded items will need to be offered at a discount at par to market.

Next comes the consumer electronics segment, which accounts for nearly USD 50 Billion. This sector will face the music initially but will be the first sector to rise from the ashes very soon, which is in the last quarter of 2020 or early. The summer essentials like AC, Fridge, Air Coolers, Cool Water Filters, will get their demand back, as India faces a long summer in most parts of the country.

The other branded manufacturers like footwear, home and living, and other luxury goods, it will be a tuff time ahead. It is expected that up to March 2021 they will face a slow down because spending will be much lower. Jem and Jewellery industry will also face a similar type of setback.

The Ending

It took more than 10 years to get out of the great depression of the 1930s. In 2008 the world saw another setback for the world economy. Now nobody knows when this pandemic will be over, as the fight is still on to find out vaccines or proper medicines. Lockdowns are a partial solution of this pandemic but no country can ignore the adverse effect on its economy. Every country is dependent on consumer expenditure to improve their GDP. But if this is halted, it will be very tuff to recover in recent times.

References:

  1. FICCI Economic Outlook Survey – January 2020.
  2. https://economics.rabobank.com/publications/2020/january/india-economic-outlook-2020/
  3. https://www.livemint.com/news/india/what-google-tells-us-about-lockdown-impact-in-india-s-biggest-cities-11585634729068.html
  4. https://economictimes.indiatimes.com/news/economy/indicators/45-billion-of-discretionary-spending-may-be-locked-down/articleshow/74800637.cms?from=mdr
  5. http://mospi.nic.in/134-private-final-consumption-expenditure
  6. https://m.economictimes.com/industry/energy/oil-gas/fuel-sales-slump-50-in-april-petrol-down-64-diesel-61-atf-94/articleshow/75200049.cms
  7. https://energy.economictimes.indiatimes.com/news/power/coronavirus-impact-within-ten-days-26-per-cent-fall-in-indias-energy-consumption/74854825

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