India's consumer spending to return to growth in 2021: Fitch Solutions

After a Covid-19 pandemic-led contraction in consumer spending in 2020, household spending will return to growth in 2021, expanding by as much as 6.6 per cent, Fitch Solutions said on Monday.

Consumer spending is forecast to have contracted by 12.6 per cent in 2020.

"While growth will return to positive in 2021, we do note the recovery will be slower than most countries, as a result of the significant contraction over 2020," it said. "Unemployment will remain heightened, while the effectiveness of government support measures is questionable."

Fitch Solutions forecast a return to pre-Covid-19 levels only over the second half of 2021 and 2022.

"We forecast household spending in India to return to growth in 2021 after the Covid-19 pandemic led to a contraction in consumer spending in 2020," it said.

In nominal terms, total household spending will only be 1.2 per cent higher than what it was in 2019 (Rs 123 lakh crore in 2021, compared to Rs 121.6 lakh crore in 2019), indicating the extent of the impact that the Covid-19 pandemic has had on consumer spending.

Fitch Solutions said all of the main consumer spending categories will return to positive growth in 2021.

However economic impact of 2020 has created a significant base effect across a number of categories.

Food and non-alcoholic drink spending were prioritised in household budgets in 2020 and so growth in spending of these items, while remaining positive, will be slightly lower than in 2020.

"We forecast food and non-alcoholic drinks spending to grow by 7.9 per cent year-on-year in 2021, from the 10.1 per cent growth we forecast for 2020," it said.

Spending with other consumer categories is estimated to record significant contractions over 2020 as households cut spending on non-essential items.

As such, these categories will grow from a relatively lower base over 2021 and thus will report stronger growth over the year.

India recorded its first Covid-19 case on January 30, 2020, with the government announcing a country-wide lockdown on March 24, which lasted until late May.

Localised lockdowns are also being used in containment zones and were extended to November 30.

Containment measures and restrictions include travel restrictions, closing educational establishments, gyms, museums, and theatres; bans on mass gatherings and encouraging firms to promote remote work.

The Indian government first announced relaxation measures in geographical areas designated as non-hotspot from April 20, 2020. Domestic air travel resumed on May 25. The gradual easing of restrictions has come under 5 levels.

On September 30, 2020, the government issued 'Unlock 5.0' guidelines, which allowed for state governments to decide on reopening schools and other educational institutions, after October 15, in a graded manner.

Entertainment hubs, such as cinemas/theatres/multiplexes, are now open, but under a 50% capacity rule. The ceiling on mass gatherings has been extended to 200 people.

The latest government announcements on October 27 extended localised lockdowns until November 30, under the same guidelines as in 'Unlock 5.0'.

"Our forecasts take into account risks that are highly likely to play out in the short term, such as the easing of government support. However, there are risks to outlook that if they do start to play out will lead to forecast revisions," Fitch Solutions said.