Bank of America Merill Lynch (BofAML) has said that it sees a recovery in consumption equivalent to 1 percentage point of India’s GDP in the coming months giving the reasons of rate cuts where banks have cut rates by 0.30% in last few months, a likely hike in salaries by government as per the revised guidelines (up to 0.5 % of GDP), savings of 0.4 % of GDP from lower oil prices and a boost in rural demand on the back of a hike in support prices
Lower oil prices are providing savings on the household front, which ultimately gets diverted to consumption. While talking about the rate cuts, BofA Merill Lynch said that the discretionary spends generally react to actions in up to two quarters and cited the case of motor vehicles. Over two years this one percentage point cut in call money market rates can result in a 3% growth in sales of two wheeler and passenger vehicles, 6% in the LCV segment and 9.5% in that of commercial vehicles.
A surge in consumption, especially in rural India, was a big contributor which led to the recovery in the post-2008 financial crisis years. Further there is an estimation for next three years that there will be a $100 billion boost to discretionary spends due to aforementioned factors, which is 40 % of the total $230 billion spending of 2014-15.