Number Theory: The festival season has begun, what does the economy look like?

The festive season is an extremely important part of the fiscal year for the Indian economy as consumers are expected to spend more money on non-durables such as clothing and durables such as household appliances and vehicles.

The southern state of Kerala is celebrating Thiruvonam on September 8, marking the beginning of the long festive season in India, which includes the festivals of Durga Puja, Diwali and Christmas and ends with the new year.

An artisan clays an idol of the Hindu Goddess Durga at a workshop ahead of Durga Puja festival in New Delhi (AFP)

The festive season is an extremely important part of the fiscal year for the Indian economy as consumers are expected to spend more money on non-durables such as clothing and durables such as household appliances and vehicles. Private consumption spending accounts for more

Customers wishing to buy an expensive car this festive season will likely face a waiting period extending beyond the season itself.

... but there is enough data to suggest that the poor are still struggling

Real rural wages, which are a good proxy for the incomes of unskilled workers in both rural and urban labour markets, have been contracting continuously between November 2021 and June 2022 (the latest period for which this data are available). While a sharp rise inflation has been an important reason for this contraction, average rural wages were below previous year’s levels even in nominal terms in the month of June. These findings are in keeping with the insights from the quarterly round of Periodic Labour Force Survey (PLFS) for the April-June period which shows that even though unemployment rates have come down, quality of jobs has actually seen deterioration.

While a sharp rise inflation has been an important reason for this contraction, average rural wages were below previous year’s levels even in nominal terms in the month of June.

Inflation might have hurt the poor, but it is helping government finances

There is a widespread consensus that high inflation has hurt the purchasing power of the relatively non-rich in the Indian economy. However, inflation has not been an unambiguous curse for the Indian economy, and ironical as it may sound, the government is one of the biggest beneficiaries of the high inflation phase via the public finance route. High inflation, by boosting nominal incomes, also generates tailwinds for revenue collections. The nominal growth component of GDP growth for the quarter ending June was 13.2 percentage points. Because the GDP deflator is more aligned to the Wholesale Price Index (WPI) than the Consumer Price Index (CPI), it will be important to see what happens to WPI over the festive season. If it continues to remain at high levels – WPI growth was 13.9% in July – one can expect a high nominal growth component driven boost to revenues in the both the September and December quarter. This will definitely help tax collections. Not only will this help the cause of government spending it will also ensure the government stays close to its declared deficit targets, which, in turn, will ease the sentiment in markets such as those for government securities and neutralise some of the headwinds from monetary tightening in advanced countries.

High inflation, by boosting nominal incomes, also generates tailwinds for revenue collections.

Inequality notwithstanding, a good festive season might boost consumer sentiment

While there is every reason to believe that the Indian economy is undergoing a K-shaped recovery where the rich, both among firms and households, have experienced a faster revival than the poor, spending by the rich in a ‘normal’ festive season will definitely help. Firstly, it is important to underline the fact that the last festive season came after the scars of the deadly second wave of the pandemic and was followed by the third wave driven by the Omicron variant of the Covid-19 virus. Weeks after the third wave subsided, the economy had to deal with the external shocks of Russian invasion of Ukraine. With the pandemic under control and international commodity prices below their peaks (at least for now) even the rich will be more inclined to spend money than they would have been a few months ago. The trickle-down effects of such spending -- such as through eating out and travel and tourism -- will help to restore the purchasing power and sentiment of the poor, which has the potential to provide a limited boost to the virtuous cycle of rising consumer sentiment and spending. The first evidence of whether or not this is happening will come in RBI’s Consumer Confidence Survey (CCS) after its October and December Monetary Policy Committee meetings.