Auto, durables sales, air traffic not good consumption indicators
Of the 12 broad consumption items that official data publicly available, food is the largest component with a 29% share; next biggest component is transport.
India is a consumption economy, but auto sales, durable goods sales, rail and air traffic, or residential property sales alone aren’t definitive indicators of the underlying resilience of the Indian economy or the lack of it. Private consumption expenditure accounts for about 60% of the national output and interestingly the high-frequency indicators listed above have relatively limited weights within household consumption, which means, a slowdown in auto sales or durable goods doesn’t mean the shoe’s going to drop.
Vehicle sales
Passenger vehicle sales data is everyone’s darling, thanks to the manufacturer’s dutiful monthly disclosures. It’s said that two-wheelers are the second most expensive thing after property and hence, their monthly, quarterly and annual sales data are needlessly extrapolated to gauge the direction of the economy. But household expenditure on vehicle sales stood at Rs 1.5 lakh crore in FY22 (inflation-adjusted). That’s 1.7% of the total private consumption expenditure of Rs 87 lakh crore! Unbelievably, Indians spent more on alcoholic beverages than on vehicles at Rs 1.6 lakh crore.
One of the reasons for such a low number, as Prof Anil K Sood notes, is because 60% of the sale value is computed under gross fixed capital formation, or investments, which unfortunately isn’t publicly available. But given that annual auto sale itself is about Rs 4 lakh crore, it’s a negligible component of the overall consumption expenditure story. While declining vehicle sales do indicate tightening household finances, along with a hit on manufacturing, the increase or decrease of vehicle sales alone shouldn’t be taken as a proxy for the underlying economic performance.
Smartphone sales
Indians are spending steadily on smartphones, but they aren’t an important indicator of aggregate demand. Smartphones are part of durable goods and official data shows households’ consumption expenditure on durable goods itself stood at Rs 3.1 lakh crore in FY22, or 3.6% of total private final consumption expenditure. This includes all spending towards home appliances, consumer electronics, furniture and more. Again, some of the spendings towards long-term durable items may figure in capital formation, still a decline in smartphone sales or even electronics may well be small potatoes.
Rail and air traffic
While railways and airways are an important source of transport, it’s the road transport that contributes a kings ransom. Of the Rs 8.8 lakh worth economic activity generated by transport segment in FY22, 49% or Rs 4.3 lakh crore came from roadways. Railways contributed Rs 83,000 crore, while airways stood at Rs 5,000-odd crore. Moreover, of the Rs 15 lakh crore worth private consumption expenditure towards transport in FY22, if Rs 8 lakh crore was spent towards transport services, an additional Rs 5.5 lakh crore was forked out on personal transport equipment. It means, the increase and decrease in footfalls of air and rail passenger traffic alone shouldn’t be used as a marker for economic activity.
Real estate:
Residential property sales stood at Rs 7.34 lakh crore in FY12, but have been slowing down since. At Rs 4.84 lakh crore in FY22, they are yet to regain pre-covid levels. Residential property purchases aren’t computed as consumption expenditure, but given their role as tangible assets, they are considered as part of gross fixed capital formation. Yet, a slowdown in property sales is often seen as an indicator of weak consumption demand. Residential sales accounted for only15% of the Rs 31.5 lakh crore worth value added by construction sector in FY22.
It’s the non-residential buildings, other structures, roads and bridges that comprise a lion’s share.Further, consumption of non-residential buildings has been steadily rising, regardless of demonetisation or the 2018-19 slowdown blues. From Rs 7.2 lakh crore worth output in FY12, expenditure on non-residential buildings peaked to Rs 11.95 lakh crore in FY18. It dipped marginally in FY21, but shot up to Rs 14.34 lakh crore in FY22.
Unarguably, housing is the most expensive component of households, but for the overall economy, a slowdown in residential sales may not be as disastrous as a decline in non-residential buildings and other strucutres, which currently isn’t the case.Barring two post-covid years, construction output data shows decent rise indicating the health of the underlying economic activity.
If not vehicle sales, durable goods, and real estate, what drives the Indian economy? There are several moving parts. Of the 12 broad consumption items that official data is publicly available, food is the largest component with a 29% share. As an aside, Indians collectively spent Rs 2.7 lakh crore on vegetables, higher than the Rs 2.4 lakh crore spent on meat, fish and seafood in FY22.
The next biggest component is transport followed by miscellaneous goods including financial services, insurance and personal care items. Housing rentals, house furnishings are also one of the significant expenditure heads under consumption.
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