Indians are tightening their belt

Indians are tightening their belt

Last updated: 17 Jun, 2020 | 05:12 pm

Indians are tightening their belt
  • Credit card spending is down: Although credit card penetration is still extremely low in India, it is a great precursor for the state of discretionary spending in the country. Post-Covid thus far has seen an almost 70% drop in credit card spends.
  • All this while people are paying off their credit card debt. Credit card outstanding has dropped 10.2% indicating an increasing aversion to debt by affluent India.
  • Private Consumption constitutes 60% of GDP in FY20 and is one of the most important drivers of economic growth in India. Private Consumption is the expenditure incurred by households on final consumption of goods and services.
  • Growth in Private Consumption declined to just 5.30% in FY20.
  • Households are becoming risk averse: The net financial assets or household savings increased in 2019-20, after witnessing a decline in the previous year, according to RBI’s latest study.
  • While both Financial Assets and Liabilities declined in the year, the decline in liabilities was sharper than the decline in assets, as the reduction in households’ bank borrowings was sharper than the reduction in deposits.
  • Personal loans overall (which include Education, Housing, Vehicles, Consumer Durables and Credit Card) have also witnessed a sharp fall in April-20, down to 24.90 lakh crore. (down 2.5% compared to March-20). 

What are the implications of this?

  • These are first indicators of a recession mentality where people feel insecure about economic conditions, leading to an aversion to risk and belt-tightening. 
  • This drop in spending and consumption directly affects the growth of our economy and will be seen in the GDP growth numbers this year. 
  • The most dangerous implication of this recession mentality is the psychological shift of the population towards an aversion to spending which will prolong the downturn in economic growth. 
  • This switch was seen in the 2010-2012 period where consumer spending fell sharply which pulled GDP to sub 5.5% levels.

So what should you do?

  • India’s economic growth in FY20 has hit an 11-year low of just 4.2%, mainly dragged down due to Q4 GDP growth of 3.1%. Given the ongoing pandemic, analysts have cautioned that India could see the worst ever recession in at least 40 years in FY21. 
  • The economy will get worse before it gets better, Credit risk in the country will remain high for the next 2-3 years. Your primary strategy on debt should be to stick to quality rather than chase returns.
  • Both equity and debt markets are expected to remain volatile in the medium term
  • Invest in equities in a staggered manner. Keep your SIP’s running. Stick to large caps and index stocks that are best suited to navigate the economic crisis
  • Stick to AAA-rated low duration funds and bonds over high duration funds, and long-maturity bonds as yields will remain volatile in the near future but in the medium term (2-3 years) the rate cycle is expected to bottom out and move up