How to bring the elusive consumption back

Of all the reasons cited for GDP as a good measure, I like the connection to consumption; if consumption goes down there can be little respite to take the GDP up. Well there are some examples like China, which remains still investment driven, but things are slowly and steadily changing there as well.

India stands in between consumption and investment but we see a higher correlation to consumption than investments when we look at economic growth; the latter, investments,  equals savings but how much of that is moving into productive capacity instead of as a parking spot is the question.

But we see some mixed signals, for example we see higher savings still, at least the corporate savings remains strong and the stock market indicates that large part of the savings is moving here, which is actually great. But this is not the entire story as we must look into other suspects.

If savings is booming in asset creation, consumption could be the biggest sufferer. 

Is there such an evidence in our economy? I would say it is a mixed bag, but given the state of uncertainty on interest rates and the rising expectation that it would go down in the future, our behaviors are getting tuned to this eventuality. 

First of all a view that interest rates should be low starts from the belief that there are little takers of credit in the economy, a demand for credit would have changed this the other way. The evidence is also all around that credit growth has ebbed.

But on the other hand the behavior that consumers of credit display stems from the cognitive dissonance (the difference between belief and what is truth) that they would expect the interest rates to be further down than what it is.

When interest rates are low and it is more likely to go down in the future, people tend to save even more. This seems to be not that simple to understand. But the discounting rate adjusts to this new number, riskier assets like stocks get a fresh lease of life.

RBI has announced four rate cuts but the consumption has showed no signs of ticking up and neither has investments, in fact consumer confidence remains subdued. 

The solution to this puzzle may not be more easing of interest rates, in fact it could spark of inflation. 

But what about the general people in the economy, who are large consumers of the goods and services that get produced?

Think of the people in the age group of fifty plus, those who earn more as well and how would they be responding to a lower interest rate when the remaining years of work is coming down? Or think of the retirees, their retirement nest eggs in fixed investments readjust to lower earnings; Consumption behavior changes very dramatically. 

What about the rest of the population, why isn’t consumption picking up? Well to that we have a whole host of reasons and we cannot simply point to interest rates as the only factor to stimulate consumption. 

The developed world has been facing such events in every business cycle, thankfully India is facing this after a long time. There are not singular prescriptions to jump start consumption, but the most potent has been the strong process of communication that allays fears, removes doubt and gives a clear unambiguous message on the directions of things to come.

The Federal Reserve has been doing this in the last crisis in U.S. with methodical precision, making the markets come out of the cognitive dissonance, the gap between beliefs and truth must be removed.

There needs to be an approach that brings divergent operators to believing in the strength of the economy and the direction of monetary and fiscal policy; far too many changes and rapid introduction of changes in quick succession could be one area to work on. 

Finding a rationale to explain a set of evidence or data rather be consistent and that is crucial for avoiding confusion. 

These are essential ingredients for sparking off continuity of consumption effort. Our focus on the demand side of the economy has always been weak and it is good to see that we are returning to the real challenges there. 

We cannot ignore the supply side as well as the two must tango.

The supply side is fraught with sobering issues, raising capital is one. Too much of supply could be an area to be concerned about that could raise questions of the quality of supply.

In crisis how can more capital be raised and for that we need not follow unconventional methods, like the one like contingent capital or ask banks to raise equity, which is an impossibility; avoiding the known demons that brought us here could be the starting point.