India’s Financial Economy: Post 10

This week’s article is on the common man. So far most of our discussions and stipulations have been about institutions such as the RBI and the Government or on the affairs of corporations . But all of this is incomplete without the humble household. Today’s article is a study of their financial behavior during the period of COVID.

The household sector in aggregate play 3 key roles in an economy:
1. Labor: The household provides labor to the corporate sector. The price and quantum of it determines key factors such as productivity growth and inflation.
2. Consumption: The household uses their income, borrowed monies and govt transfer/subsidies to buy goods and services.
3. Savings and Borrowing: Household saves a part of their labor income and that savings either directly or indirectly ends up as capital for the government and the corporate sectors. Retail credit stands at about 50% of GDP.

In this article we will access all three aspects of household behavior.

Employment and Income

In India we do not have good high frequency statistics of Employment levels. The only source we have is the excellent survey based indicators published by CMIE.

CMIE data suggests that prior to COVID, India’s aggregate employment base used to be 410 million. In the depth of the COVID induced lockdown this reached as low as 320 million in around June 2020. This gradually recovered and in September the number stood at 397 million. From September to December these was again a decline to 388 million which finally recovered to 400 Million in January 2021 reaching a local maxima.

Now I will draw your attention to employment trends from an industry perspective. Agriculture sector employment has increase from ~150 Mn to 155 Mn. Services sector has declined from ~155 Mn to 150 mn with the bulk of job losses in the education sector. Manufacturing sector jobs went down from 40 Mn to 30 Mn with job losses in all industries barring pharmaceuticals and chemicals. Real Estate job count has been fully recovered to around 60 Mn despite a sharp almost 50% cut in the lockdown phase. The CMIE analysis also shows that much of the job losses have happened in the salaried segment and most of them are in the under-40 age group.

Next lets consider the Income trend for employees. Only a small fraction of India’s workforce is formal salaried employees (less than 25%). About 10% and 3% of them work in listed corporates and the central government respectively. It is only in these two pockets that we can observe the movement in income trends. The wage bill of listed corporates grew by 3.4% in FY21Q3 on a YoY basis. Most of this would be in the form of a wage increase to existing employees. Central Government has frozen the DA increase for their employees from June 2020 onwards.

Consumption

Private Final Consumption has grown 1% in FY21Q3. Listed FMCG companies have reported aggregate 8.9% revenue growth in this quarter. Some bellwether firms have indicated that the FMCG industry generated a revenue growth of 5% in this quarter with a sharp skew between rural and urban markets. Rural markets grew at double digit while urban markets have just about recovered. Rural-Urban skew is also clear in the commentaries made by Nielsen.

In this context it is important to draw-out the impact of two external drivers . These are government transfers and the impact of fuel prices. My naïve calculations suggest that the incremental transfers budgeted in FY21 vs FY20 (most of which got paid in FY21:9M) is to the tune of 4.4 Lakh crore which is offset by an increase in excise to the tune of 1.2 lakh crore, which brings the net impact to 3.2 lakh crore.

Impact of Fuel price increase will play out in FY22 and this is a combination of an increase in crude prices and a hike in central and state taxes. It is also evident that the increase in fuel based taxes will not be passed onto consumers in the form of transfers. Even a 10 INR net increase in the per liter cost implies a net outflow from consumers to the tune of 1.6 Lakh crore.

Savings and Borrowing

There are a few ways to analyze the savings behavior of Indian households. Aggregate Deposits of the Banking Sector grew by 8.5% between March to December 2020 or around 11.5 Lakh crore. The HH sector owns about 65% of the total deposits in India so approximately 8 lakh crore of incremental deposits belong to the HH sector. The stimulus programs of the government (both direct and indirect) have certainly augmented the savings pool. As discussed in the earlier section, this is a net transfer of about 3.2 Lakh crore from the government to the household sector. The household sector knows that this is a one time measure and thus it is likely that a good share of this transfer has been saved.

The other two avenues of savings are Life Insurance and Mutual Funds which account for 23% and 6% of the savings pool of households respectively. The investment book of life insurance companies have grown by about 18% during this period or about 6.45 Lakh crore with much of the gains coming from fresh inflows. The Mutual fund AUM (ex of Liquid fund) has grown also by about 3.77 lakh crore or 19% with about 2.8 lakh crore coming from net inflows.

Now lets come to liabilities. Household Sector Debt between FY20Q4 and FY21Q3 has likely increased by 5%. We can also comment on retail credit behavior by looking at the disclosures of the bellwether banks in India. Using a sample of the top banks as a benchmark we can see that Retail GNPA trend has gone up by about 122bps in the COVID period from 1.6% in March 2020 to about 2.8% in December 2020.

A sum of total increase in HH financial assets net of by the increase in HH liabilities takes us to a net savings number of 14 lakh crore, although this has a good share of MTM gains that I couldn’t clearly demarcate. To put this in perspective, in FY20 Net Household Savings in the first 9 Months of the year was 11 lakh crores. Thus it seems that despite the sharp cut in economic activity during this COVID period and some significant job losses, Indian households on aggregate have managed to save vigorously and have thus far exceeded their FY20 savings. Why does it matter? It matters because the thriftiness of the Indian Household serves two purposes in the our Economy. It keeps inflationary pressures in check. Secondly it provides the Government sector the financial resources to undertake countercyclical fiscal policy.