With poor employment growth, investment, consumption story set to end: Ambit

According to Ambit Capital, despite the slowdown in income and employment growth between FY12 and FY17, private consumption continued to grow at a rapid pace, especially in categories like FMCG and passenger vehicles “showing resilience”. As per the brokerage, the rise of consumption growth over FY12 to FY17 has been driven by higher retail credit. 

“As corporate credit demand waned over 2011-12 to 2106-17, both NBFCs and banks pushed retail credit aggressively. The retail credit-GDP ratio rose from 13 per cent to 16 per cent in 201617,” Ambit said. However, it noted the “current bout of consumption growth appears unsustainable mainly because consumption boom has uniquely been accompanied by a contraction in the investment-GDP ratio” to 7 per cent during FY12 to FY17, while the ratio for consumption-GDP is 3 per cent. 

“Cross-country evidence suggests that only consumption booms that are accompanied by an increase in investments tend to be sustainable as this is a tangible proof of jobs being created and/or efficiency improving,” it said where the averages of these have been 4 per cent each. 

The report also noted that the current retail credit-funded consumption binge is likely to experience a “hard stop” sooner than later on basis of various trends, including a plunge in consumer confidence to a four-year low during the first quarter of the current fiscal. Besides, households’ savings ratio at an 18-year low and retail NPA problems have begun to emerge particularly in the housing finance segment, are also factors which could affect retail credit-funded consumption, Ambit said.