Consumers adjust to a supply squeeze

Consumers have stepped up borrowing to keep up with price hikes across household gadgets and electronics. Prices have risen across consumer durables due to chip shortages and the US war on Iran, and households are stretching their budgets to upgrade smartphones and TV sets. Easy credit from banks and NBFCs made available digitally without too much paperwork is feeding demand for loans. But the surge may be short-lived. Rising loan payouts limit households' ability to sustain borrowing for consumption. Electronics makers, on their part, are offering products with lower memory and storage specifications to hold the price line as sales struggle. This episode of heightened consumer borrowing differs from the post-Covid credit-fed pent-up demand. Consumption is now adjusting to a supply squeeze.

An uncertain monsoon and delayed transmission of rise in price of plastics are likely to keep up inflationary pressure. The economy is expected to clock slower growth than projected before closure of Hormuz. Effects of I-T and GST rate reductions are fading as household budgets are redirecting towards lifestyle upgrades. Mass market consumption is cooling as premium categories sustain growth. Combination of deteriorating macros and changing consumer behaviour creates space for credit-led growth. But maintaining lending momentum may become difficult.

Banks and NBFCs are lending to households because companies have not stepped up to borrow to expand capacity. Growth in consumption is not broad enough to convince producers to increase investment. Their revenue gets a degree of protection through price. But volume recovery needs to move further to affect capacity utilisation. The temporary bump in economic activity due to consumer debt can unravel if household budgets are stretched too thin by inflation or slowing GDP. Combination of tax relief and credit expansion offer temporary support to consumption that suggests an underlying fragility. It may be tested some more by resurgence of inflation.