Trade data provides more evidence of India’s K-shaped recovery

The most obvious explanation for this surge in imports of costlier food items is an increase in arbitrariness or ‘revenge’ consumption of luxury products to mark the end of the lockdown. The luxury sector is experiencing strong growth globally as the wealthy can spend more to beat the lockdown blues. Luxury powerhouse LVMH has broken into the ranks of the world’s top 10 companies by market value and has seen its share price rise by 29% in a year.

While these changes in the consumption patterns of the wealthy may or may not persist in India, they may also result in some sectors, such as high-skill exports, performing better than the overall economy. This suggests that as the wealthy few get richer, their attitudes towards consumption are changing. A minor point here is that the central bank is spending dollars from its forex reserves to prevent the rupee from depreciating too much. By doing so it is subsidizing imports across the board, thus supporting luxury consumption by the affluent.

Why doesn’t a Kashmir-sized recovery impress serious economy watchers? Because luxury consumption does not serve as the engine of growth. This role is played by non-wealthy consumers, and their consumption is yet to recover permanently as the pandemic has hit household incomes. Free food grains from the government are providing some relief, but the ever-increasing inflation is reducing the spending power of non-affluent consumers. Industry by industry is telling the figures which point in this direction.

Market intelligence firm NielsenIQ reported less spending by rural Indians on Fast Moving Consumer Goods (FMCG) including washing powder and shampoos in the last three months of 2022 as compared to the previous three. FMCG companies have had to struggle a lot to increase sales from them. Many have raised consumer prices more than their input costs, increasing profits at the expense of shopkeepers to compensate for slow growth in sales volumes.

There are also differences in the post-pandemic experiences of the rich and the non-rich, As Mint Snapview wrote last week, in falling sales of entry-level vehicles. Meanwhile, the high-end sports utility vehicle segment has registered impressive growth. manufacturers of luxury cars, like lamborghiniRegistering record sales in India in FY23 (although volumes are still low compared to other countries).

K-shaped recovery is a global reality today. Global inflation has hit a 45-year high, people’s spending power is shrinking, and country after country is reporting that consumers are hunting for special offers and discounts, shopping at cheap supermarkets are buying less and choosing cheaper alternatives – known as the cost-of-life crisis.

As policy makers in Delhi and Mumbai deal with the aftermath of the pandemic, they need to keep in mind that big companies will not be able to keep raising prices to post a rise in profits, even as sales volumes struggle to keep pace . Sustainable economic growth and rising prosperity will come when household incomes improve and consumption confidence is firmly on the mend, which requires a sustained reduction in inflation. Serious inflation control, thus, will have to support the large, growing and sustained push that the Union Budget provides for capital expenditure on infrastructure creation.

There is also a need to guard against long-term structural shocks such as the divide in skills and education between privileged and less privileged children lost due to the closure of schools during the pandemic. Without a special effort to correct the loss of learning, the earning capacity and quality of human capital in the economy will suffer, which is not good for development.