Since the beginning of the Covid-19 pandemic, India has witnessed many behavioural changes of economic agents, with initial lockdown and subsequent reopening of the economy in phases. Such behavioural changes have resulted in a much faster economic recovery than anticipated not only in India but across economies.
One such change that merits attention for policymaking including the forthcoming budget is the penchant of ordinary people, particularly the elderly, to experiment with digital modes of transaction. Let us first allude to how the spending habits of consumers changed during the pandemic within essential and nonessential items. Most interestingly, such a change in spending habits has resulted in inflation estimates much lower than National Statistical Office (NSO) estimates. The Reserve Bank of India (RBI), thus, needs to be applauded for looking through the inflation cycle and for not getting overtly influenced by an inflation average of 6.6% during April-December 2020.
Owing to the constraints generated due to Covid-19, NSO has published limited data of consumer price index (CPI) inflation for April and May 2020. However, that was a pure statistical exercise based on fixed weights of consumer spending — in statistical parlance, this is computed by Laspeyres price index — since FY2012 based on the Consumer Expenditure Survey. The problem with this analysis, however, is that the shares of essential, or non-discretionary, and nonessential, or discretionary, consumer spending have changed significantly during the lockdown, and even beyond.
Against this background, we endeavoured to re-estimate the CPI inflation since April 2020 by using monthly credit card spends of State Bank of India (SBI) credit cards of a sufficiently large sample of customers on a recurring basis gender-wise across all age groups, and expenditure bifurcated into non-discretionary and discretionary spends. Obviously, we used such changing weights for all the months beginning April. In principle, we followed the methodology as Alberto Cavallo had employed in his June 2020 paper (bit.ly/2XZ2mDC) by constructing a Covid consumption basket for India and re-estimate CPI inflation. Our results are revealing.
The share of discretionary spending of consumers that had reached as much as 35% of total cards-spending in February 2020 crashed to 15% in April. Since April, the share of discretionary spends has, however, fluctuated wildly between 15% and 30%, indicating consumers are still uncertain when to splurge on items of discretionary consumption, as uncertainty has prevailed in the minds of consumer with different phases of the economy opening.
But the most definitive conclusion is that when we re-estimated CPI headline by using the Paasche index, the April and May inflation numbers on an average were 120 basis points (bps) lower than NSO inflation numbers. Even the latest December CPI number was higher by 25 bps. For the entire fiscal (AprilDecember FY2021), our computed CPI average is at 6%, as compared with 6.6% as per NSO estimates.
But, most importantly, the gap between NSO’s estimates and our computed inflation figures has been narrowing from October onwards. Even the discretionary spend has not picked up. This signifies that people are still spending mostly on items of non-discretionary consumption.
What are such items? A cursory look indicates that these are mostly items of health, grocery and utility services such as bill payments. Lately, items such as fuel have worryingly cornered a larger pie of such consumer spending. Additionally, even much elderly men and women have been using the digital platform more and more frequently during and long after lockdown(s). There are also new areas of consumer spending — broadcasting services, online education, etc —which can be directly attributed to staying and working from home.
A logical corollary of such change in behavioural patterns is that we must take steps to inculcate such habits on a permanent basis. To this end, Budget 2021 may just be the ideal opportunity to incentivise them. These could be done in a variety of ways. One, GoI may prohibit levying of any convenience fee and other charges on use of any digital mode of payment to a merchant. Three, the gazette notification to allow Aadhaar-based biometric authentication to non-bank entities can be expedited.
Also, why not make RuPay a default card option for all banks, both public and private, operating in India? Given that the per-capita credit and debit card transactions have jumped by 1.4 times more than pre-Covid levels, all utilities, municipal corporations and urban local bodies must also mandatorily offer digital payment options, especially in Tier-2 and Tier-3 cities, and further incentivise them. This has been already implemented by oil marketing companies at fuel stations. Finally, let use this budget to further incentivise social security schemes such as the National Pension System (NPS) and medical insurance for unorganised sectors like MSMEs.
This could potentially benefit 110 million workers of more than 633 lakh MSMEs, and can usher a new beginning for unorganised workers in India.
Source : Times of India