Consumers are important as personal consumption accounts for more than half or two-third of the GDP. It consumers income increases, they will save some and spend the rest. The amount spend becomes income for the other and a repeated process takes place. The amount save provides finance for investment for businesses, which is essential for future production, income and consumption.
Personal income earned by individuals includes wages and salaries which forms the major bulk of income. Other incomes include rents, dividends, interest earnings, assured income from pension and insurance.
When personal income after deduction of personal taxes and fees (is any) leaves the individual with disposable income that he or she spends or saves.
Higher the disposable income in a country, higher are level of economic activities and business growth.
Consumer spending forms a major chunk of large economies including India. Young and old households have a high propensity to consume their income where as mid-life save for retirement. Households tend to run down savings or borrow to maintain consumption during a recession, spreading spending over their lifetime.
There is a cyclical pattern in consumer expenditure. The most volatile component is spending on durables which are goods with life over one year such as washing machine, cars, furniture etc.
When economic conditions are tight then spending on durables declines and spending is intact in non-durables such as food, milk and other eating’s.
Consumer spending has declined in recent times due to low wage growth in the economy.
Personal saving = Personal Disposable Income – Personal Consumption
Personal savings is directed towards physical savings by purchase of gold or real estate or into financial savings such as deposits, stocks and bonds. Savings directed to physical savings leads to non-productive savings and asset inflation whereas savings into financial instruments leads to productivity, economic growth and low interest rate environment.
Household debt to GDP of India is at normal levels and in line with other major economies. Household debt is usually taken by consumers when interest rate are low in the economy to fund their consumption for purchase of real estate or durable products such as cars and other consumption related products or services. The prime lending rate (base) is the rate offered by commercial banks to grant loans to its costumers.
Consumer confidence Index
It is an index that tracks consumer’s perception of their well being. It determines short-tem spending, borrowing and savings plan of the household. It’s a leading indicator for business activity to take place.