The Sudden Pause in India’s Spending Frenzy

India is one of the most powerful country around the globe in terms of the financial world. It is also one of the fastest-growing economies which is driven by consumption. However, recent data shows a sharp dip in consumption across many sectors like IT, chemicals, finance, etc. India is a huge middle class population country yet it is surprising to see the consumption levels. India, one of the most biggest and powerful democracies has gone through general elections. However, the result of the election has put investors on a halt due to election results. As this term there is a coalition  government, they have slowed the spending but this might prompt to more cash infusion into the baking system. 

Over the last three weeks, the government has announced a buyback of short-term securities. This slow spending of the government may continue till August. The elections in India have slower the spending which has led to a liquidity deficit in the banking system. The average liquidity crisis is 1.2 trillion rupees till May. The government is seeing a strong tax revenue but they are in the process of cutting the borrowings. But the cut in borrowings can only be decided by the government in the final budget for this year.

Now this deficit is due to a disparity in lending and private consumption. There is a strong correlation between these two. Even though there was high retail lending, consumption grew very slowly in two decades. This can be a reason for the deficit and the worst deposit crunch which is being faced by Indian banks. Now this growth in retail lending is due to the default of corporate lending. Banks are concerned about giving corporate loans due to default risk. Due to this there is a huge gap which has been created where the money is not being used in the growth of the company's rather then they are lent to retail. 

Now what is the main concern if there is an increase in retail lending? This is because the major income of the household is going under pressure to repay the loans. This creates pressure on their consumption behavior. As the huge middle-class population has to maintain their savings as well the consumption. The interest repayment is putting a huge pressure on consumption. Yet another risk is also there when retailers start defaulting. RBI is concerned about this increase in retail lending. 

Therefore this has created a low spending overall in the economy which will affect consumption in the coming period.

Thank you.

 Regards,

Tushar Bangar,

Kautilya, IBS Mumbai.