Savings Dip, Prices Spur
By Shivaji Sarkar
The country’s banking sector deposit crisis symbolises grave ailments afflicting the economy hitting many sectors, including manufacturing, the automobile and industry severely with about Rs 73000 crore unsold car stockpile with dealers and severe sales crunch in the fast-moving consumer goods (FMCG) sector. The bank crisis reflects the hardships across the country hitting individuals to industry — severe slowdown that affects livelihoods.
Sales growth of FMCG slumped by both value and volume during the first two months of the June quarter compared to a year ago, an early indication that demand has not recovered, according to Nielsen IQ. To add to it, exports of 30 commodities including rice, gems and jewellery, marine products declined steadily. Exports of these items are almost stagnant at $31.83 billion indicating a grim global situation.
The International Monetary Fund (IMF) first deputy MD Gita Gopinath flags the situation, during her India visit, saying seven per cent growth not coming with enough jobs – a key to resuscitate the market. Inflation varying in states from 5.9 per cent in Bihar to 5.1 per cent in Assam, 4.8 per cent in Odisha, 4.6 per cent in Uttar Pradesh and 5.4 per cent in Haryana and Kerala is a concern for the Reserve Bank of India.
Food inflation has impacted the spare people have for spending on other necessities. The Economic Review for July says confidence in the general economic situation, sentiments about current employment and income also worsened. The RBI survey finds decline in manufacturing. Even households are less optimist about economic conditions, the Consumer Confidence Survey of July 2024 indicates. Considering the food inflation as crucial, the RBI rejects calls to exclude food from inflation targets.
Another significant concern for the banks is the severe decline in household savings that has been the mainstay of the India growth story since Independence. It hits a low of 14.16 per cent in three years in 2022-23.
One of the main reasons for car sales decline is stated to be 10-year-old cars being forcibly junked by government orders. Instead of benefiting auto-makers, the rule has harmed them. The automobile industry finds that this has led to the shrinking of the second-hand car market, a factor that boosted new sales. The lack of opportunities to sell the old cars prevents average citizens from buying a new car as they can’t make up for the loss of the old. A new car is prohibitively priced. Though a 10-year-car has the same emission level as the new cars, junking it against international norms of 40 years leads to deprivation of wealth. Inflation and continuous price hikes pose problems of financing.
As of June 14, 2024, deposits decreased by ¹ 3.5 lakh crore, or 1.6 per cent, year-to-date over last year, as per RBI data. The July 26 figures, however, show an increase of 10 per cent but non-food credit rose by 13.7 per cent. This shows deposit growth remains a significant challenge not only for the banking sector but overall health of the economy.
Deposits fall with incomes squeezed, purchasing power reduced and demand slowdown. In 2022-2023, the total deposits in scheduled commercial banks were Rs 18,145,238 crore, a 6.7 per cent increase from the previous year. Actually, it is a marginal increase since the demonetisation when total currency circulation was around Rs 17.77 lakh crore. The saga of deposit fall started in 2016 itself.
Despite the upcoming festive season, the Federation of Automobile Dealers Associations (FADA) has announced that passenger vehicle inventory has seen a significant increase at dealerships across the country. As per latest reports, this stockpile has reached over 7 lakh units, valued at around Rs 73,000 crore. However, Society of Indian Automobile Manufacturers (SIAM) estimates that it is around 4 lakh units.
This unprecedented stock levels have caused automakers in India to mull slowing down of production and Maruti Suzuki becomes the first to make such an announcement to scale back production. Even pricey Honda has gone slow and cut capacity. Some of the Honda dealers have sold their shops to competitors. Vehicle financiers are feeling the heat as auto loan growth declines by 15 per cent. The auto price rise with high GST of 28 per cent has muted the demand in the mid-segment, largely comprised of the salaried class and average traders.
The production glut and issues of financing is feared to lead to lay-offs in the industry. If it becomes cyclic across the industry, it could aggravate the problems with a further squeeze in the market. The fears are backed by business growth slipping in manufacturing as reflected by the Purchasing Managers’ Index (PMI). It fell to a three-month low in August to 60.5 from 60.7, according to S&P Global.
As per government data, net household savings in India declined sharply by Rs 9 lakh crore to Rs 14.16 lakh crore in the three years to 2022-23 (FY23). Overall, India’s household savings rate has fallen from 22.7 per cent of GDP in FY21 to 18.4 per cent in FY 23.
Almost 48 per cent households across the country say they are increasingly facing a decline in earnings and savings. They elaborate saying they are facing rising costs related to food, school education, rent, transportation, cost of electricity, etc., the basic expenses incurred by a middle-class family. The big concern is a declining earnings scenario for many and the need to dip into savings, ancestral property/land, or take loans, just to make ends meet, a survey conducted by research agency Local Circles revealed.
Finance Minister Nirmala Sitharaman’s concern for the falling bank deposits and asking banks to improve operations is a signal to the country of an abnormal situation needing immediate correction. It means the overall financial structure, including years of infra funding, policies like car junking, tolls, less investment in education and health, high GST, municipal and other taxes need reversal.
It is a tough decision. Manmohanomics, high taxation and utopian decisions such as car-tractor junking to benefit car makers and indiscriminate road constructions for high tolls are hitting the well-being. The NDA government has not changed the basic Congress policies that had led to major economic problems till 2014.
India needs a drastic change in its march towards growth in the next two years, not 20 years from now. The policies must turn pro-people, stop unnecessary construction of devastating roads, rail and infra projects. A low inflation, as RBI suggests repeatedly, is the sine qua non for happiness and growth of the households, key to the success of the country in the global commune. — INFA