India’s consumption Vs Income growth:An analysis by Trinath Lenka

The housing market experienced modest but steady growth from the period of 1995 to 1999. When the stock market crashed in 2000, there was a shift in dollars going away from the stock market into housing. To further fuel the housing bubble there was plenty of cheap money available for new loans in the wake of the economic recession. The federal reserve and banks praised the housing market for helping to create wealth and provide a secured asset that people could borrow money to help the economy grow. There was a lot of financial innovation at the time which included all sorts of new lending types such as interest adjustable loans, interest only loans and zero down loans.

As people saw housing prices going up, they were stepping over each other to buy to get in on the action. Some were flipping homes in an effort to take advantage of market conditions. With 0% down needed to buy new homes, an unlimited supply of money could be created. With each loan, banks would quickly securitize the loan and pass the risk off to someone else. Ratings agencies put AAA ratings on these loans that made them highly desirable to foreign investors and pension funds. The total amount of derivatives held by the financial institutions exploded and the total percentage of cash reserves grew smaller and smaller. In large areas of CA and FL there were multiple years of prices going up 20% per year. Some markets like Las Vegas saw the housing market climb up 40% in just one year. In California, over ½ of the new loans were interest only or negative-amortization. From 2003 to 2007 the amount of money subprime loans had increased a whooping 292% from 332 billion to 1.3 trillion.

Observers and analysts have attributed the reasons for the 2001–2006 housing bubble and its 2007–10 collapse in the United States to “everyone from home buyers to Wall Street, mortgage brokers to Alan Greenspan”.Other factors that are named include “Mortgage underwriters, investment banks, rating agencies, and investors”, “low mortgage interest rates, low short-term interest rates, relaxed standards for mortgage loans, irrational exuberance, tax policy (exemption of housing from capital gains), failure of regulators to intervene, and speculative fever”.This bubble roughly coincides with the real estate bubbles of the United Kingdom, Hong Kong, Spain,Poland, Hungary and South Korea.

Situation in India now:
Same way India’s consumption has increased from 2013 on the anticipation of income will grow in same direction. As a result our Economy grows from below 5% to closed to 8% in this period . People have spent spent and spent . Our Economy has grown due to this and we became fastest growing Economy. But now income has not grown in private sector, in Govt sector people have received salary with new scale . But the main driver of Economy by people from private sector employees or business class people not grown . This might be one of the main reason of slow down . Now people are conscious and spending less which causes slow down in Economy. Side by side US vs China trade war still on which puts pressure in Indian companies. After getting Rs 1.76Lakh crore from RBI , Govt still not optimistic to meet the fiscal deficit . GST collection is in line with little variance of target . SME and MSME segment still in pressure . Manufacturing segment is under huge pressure due to that plants are getting shut down for few days as dealers are having adequate inventory to meet their sales . From my previous report I have mentioned few points on auto sector slow down like OLA and UBER is better way of getting taxi services rather than buying a car and hiring drivers . Yesterday’s statement of honourable Finance Minister also told same thing . Now we have to see how consumers are buying products in this festive season and how credit uptake takes place . Q1 GDP was 5% and Q2 should be less than 5% as per my expectations. Q3 and Q4 GDP has to be main target to average Q1and Q2 . If Q3 and Q4 number above 7 then our this year GDP will be above 6%. Which looks like very tough. Govt spending and Private spending has to increase to boost the economy what I feel . Another problem is if people will not spend and only save them Economy is not going to revive . Still India 🇮🇳 growing at 5% which is better than developed countries where USA, German grows very less than this like 2 % to 3 %. Interest rate needs to come down further looks like .

My suggestion to Govt : At this time different sector committee should be formed and they should analyse and give the correct views to grow our Economy. People in the committee should be from Industry, all political parties too . All should come forward to grow our economy. We have to be passionate about towards growth.

Trinath Lenka , Director,
www.wallet4wealth.com.

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