We are in the middle of the second wave. It is too early to get any data to base this on but is it safe to say that consumer spending is going to be the biggest hit coming out of this second wave?
Yes, I would say that there are two aspects to this. Compared to last year, the disruption is probably not as bad but this time, the demand side disruption looks to be much more entrenched. It is too early to comment on that and we will have to wait for more data to substantiate that, but for now we were sitting on the brink of a reasonably wide and unequal recovery. We were seeing a K-shaped recovery earlier with the informal unorganised segment not yet reviving even while there was a reasonable pickup in economic activity. It was the formal segment which was doing well.
The second Covid wave is going to widen this problem further and we will have to wait for data but the situation is not looking that great and even if you look at the data available for April. Particularly on the demand side, the unemployment rates are looking significantly bad. The small trader community, the businesses, the salaried, smaller segment salaried employees — all are seeing a reasonable layoff. Clearly things do not look very promising.
Middle and upper income families are getting hit more this time around with very high medical expenses. SK Ghosh of SBI says in a report that in the last couple of months, an additional Rs 70,000 crore have been spent on private healthcare. So discretionary spending will continue to be lackadaisical.
Typically, the top 20% of the consumers contribute the maximum to discretionary spending. If I was to break that up, the proportions would have changed significantly. Maximum discretionary spending is done by the top 20% consumers but as they are also getting hit hard by Covid, we are going to see a prolonged slowdown in consumption and the revival is also going to be not as smooth as what we saw last time.
Last time, revival was helped by pent up demand. This time it is going to be much slower. Also fear of the third wave is already looming and vaccination drive is slow to pick up here. We will be seeing much slower withdrawal of restrictions across various states and that will limit economic activity. All in all, consumer spending is going to be reduced and postponed and at the same time there is going to be a much slower revival as against last time.
