COVID-19 pandemic reshaped consumer spending behaviour, Budget 2021 must reflect changes: SBI Ecowrap report


The COVID-19 pandemic has reshaped consumer spending behaviour “at all levels,” as per the State Bank of India (SBI) Ecowrap report.

SBI Group Chief Economic Advisor Dr Soumya Kanti Ghosh expects Budget 2021 to encompass these behavioural changes of the Indians.

What were the changes?

The most important findings based on SBI Card spends were twofold – the first being the trends between April 2020 and November 2020, and the second being the December 2020 CPI inflation coming at 5 percent, which was 40 bps higher than the CSO estimate of 4.6 percent.

>> Trends between April-November 2020: Spending habits of consumers within essential (non-discretionary) and non-essential (discretionary) items have changed. Data showed the share of non-essential spends dropped from 35 percent in February to 15 percent in April, and has since April “fluctuated wildly” between 15-35 percent.

A definitive conclusion came from the re-estimated CPI headline in April and May using Paasche’s Index showed inflation numbers were on average 120 bps lower than NSO numbers.

SBI has computed the April-November 2020 CPI average at 6.3 percent, compared to NSO’s estimated 6.9 percent.

>> December CPI inflation: Trends showed that non-essential spends jumped up by 65 percent in December 2020 – but only because of fuel spend. SBI’s calculated CPI inflation for the month is at 5 percent, a sharp 40 bps higher than CSO’s 4.6 percent.

“This demands an urgent cut in oil prices through tax rationalization otherwise consumers’ non-discretionary spending will continue to get distorted and crowd out discretionary expenses as has been the case in December,” Ghosh noted.

She further said that this trend imparts “an upward bias in inflation.”

Expectations from Budget

Ghosh felt the Budget must make announcements to continue incentivising digital transactions, noting that data shows “even the elderly have been using the digital platform more frequently, during and even long after the lockdown has ended and ideally this should be preserved.”

She also felt the Budget must incentivise the jump in household financial savings, stating: “This could be done by incentivising the investments in public provident fund (PPF), Sukanya Samriddhi Scheme and through new instruments such as infrastructure bonds.”

Liquidity position & RBI management

The Reserve Bank of India’s regulatory changes is “keeping liquidity in sufficient surplus this year,” Ghosh said. Current outstanding level at Rs 5.0 lakh crore as on January 20, 2021.

She however noted that record US Dollar inflows to India is “complicating” the RBI’s liquidity management.

“The net excess supply of Dollar is thus now at a staggering $ 20.5 billion when we look at interbank and merchant segment,” the report noted.

It added that the RBI has “turned into a purchaser of forward contracts, despite no build-up of excess demand in the forward market, as it is giving financial stability a priority.”

The report further reasoned the RBI “has no recourse but to build their own forex reserve buffer anticipating a rise in the future import demand” similar to what happened in 2009. And that this must have been done “to mitigate global spillovers, and meet rising demand of foreign exchange on account of the widening trade deficit and capital outflows in the subsequent period.”

“Ideally, we believe the RBI should use market stabilisation scheme (MSS) to manage liquidity instead of going for the voluntary retention route (VRR) as liquidity is lying with insurance companies and mutual funds,” it said.

On the liquidity front, the report recommends Rs 20,000 crore worth of open market operations (OMOs) be conducted once a month to remove durable liquidity from the market with preference through state development loan (SDL) OMOs and Operation Twists.