Per-capita income growth to fall Rs 658 on 2% GDP drop

There’s now a broad consensus that the country’s GDP growth rate will fall at least 2 percentage points by 2009.

How does a 2% drop in GDP growth translate in terms of lower household and per-capita incomes would be the most critical parameter going forward for a host of businesses that sell directly to households: everything from homes, cars, consumer electronics, daily expendables to financial services like insurance and loans.

Our analysis shows that a 2% drop in GDP growth shaves away Rs 3,290 in 2008-09 and Rs 7,820 in 2009-10, both at current prices, from annual household income growth.

On a per-capita income basis — taking a five-member average household — the loss is Rs 658 and Rs 1,564 respectively.

To be sure, the figures are just the drop in relative incomes between the most pessimistic and most optimistic GDP growth projections going around. In absolute terms, GDP and per-capita income will expand this fiscal and next.

We have assumed a 2% drop in GDP growth simply by taking the best-case and worst-case scenarios painted by reputed research organisations.

The best-case projection, by New Delhi-based Centre for Monitoring Indian Economy (CMIE) is a GDP growth of 8.7% in 2008-09. We have assumed a best-case as 8% for 2009-10. And the worst case, by Goldman Sachs, is 6.7% GDP growth this fiscal and 5.8% for 2009-10.

The analysis — done for ET by New Delhi-based analytics firm Indicus Analytics — assumes average inflation at 9% for 2008-09 and 6% for 2009-10. Figures from the Central Statistical Organisation’s end-May 2008

Revised estimates of annual national income, 2007-08, and census projections for population were used to arrive at estimated numbers for GDP and per-capital income for 2008-09 and 2009-10.

At the macro level, for the fiscal ending March 2009, the absolute difference in GDP (at current prices) between best and worst growth projections will be Rs 12,037 crore.

However, the gap widens to a sizeable Rs 2,07,669 crore for 2009-10.

This Rs 2 lakh crore-odd figure is about 8% of private final consumption expenditure (PFCE) for 2007-08. PFCE is the total consumer spend on all products & services.

Investment-led growth, which accounted for over 55% of GDP increase in 2007-08, is perceptibly slowing down on the back of expensive and hard-to-get credit.

Domestic consumer demand (as reflected by PFCE), which accounted for 46% of GDP growth last fiscal, was widely expected to shoulder the burden of economic growth for two-three years.

However, with consumer demand faltering across sectors — from cars, two-wheelers, airline seats, houses to consumer loans — the impending squeeze on household income growth will only aggravate pain across the economy.