24 May 2024

GS 2 : [Governance]

Consumer Protection Act, 2019:

Consumer Rights

• Right to Safety: Consumers have the right to be protected against goods and services that may be hazardous to their health or safety.
• Right to Information: Consumers have the right to receive accurate and complete information about products and services, enabling them to make informed choices.
• Right to Choose: Consumers have the right to choose from a variety of goods and services at competitive prices.
• Right to be Heard: Consumers have the right to be heard and to have their grievances addressed by businesses and regulatory authorities.
• Right to Seek redressal: This means the right to seek redressal against unfair trade practices or unscrupulous exploitation of consumers. It also includes the right to fair settlement of the genuine grievances of the consumer.
• Right to Consumer Education: This means the right to acquire the knowledge and skill to be an informed consumer throughout life. Ignorance of consumers, particularly of rural consumers, is mainly responsible for their exploitation. They should know their rights and must exercise them. Only then real consumer protection can be achieved with success.

GS 3 : [Indian Economy: Banking Sector & NBFCs; Growth & Development]

The bone of contention in the recent debate has been the drastic fall in household net financial savings to GDP ratio during 2022-23 on account of a higher borrowing to GDP ratio.

Not a mere change in savings pattern

• The Chief Economic Advisor (CEA) to the Government of India has interpreted this trend as a mere shift in the composition of household savings, where households are argued to incur greater borrowing (or reduce net financial savings) solely to finance higher physical savings (investment).
• The household savings to GDP ratio is the sum of its net financial savings to GDP ratio, physical savings to GDP ratio and gold and, ornaments.
• A mere shift in the composition of savings would have kept the overall household savings to GDP ratio unchanged, with lower net financial savings to GDP ratio or higher borrowing to GDP ratio being fully offset by higher physical savings to GDP ratio.
• The net financial savings to GDP ratio declined by 2.5 percentage points, whereas the physical savings to GDP ratio increased only by 0.3 percentage points.
• The household borrowing to GDP ratio increased by 2 percentage points, significantly more than the increase in the physical savings to GDP ratio.
• With the gold savings to GDP ratio remaining largely unchanged, the household savings to GDP ratio declined by 1.7 percentage points.
• In short, the phenomenon of a household’s higher borrowing to GDP ratio cannot be explained exclusively in terms of change in savings composition.
• The lower net financial savings to GDP ratio and higher borrowing to GDP ratio largely reflects a household’s need to finance greater interest payment commitments at a given income amid higher interest rates and debt-income ratio, leading to an increase in financial distress of the household.
• A positive nominal growth rate of savings neither addresses the historic fall in net-financial savings to GDP ratio nor refutes the explanation of the higher borrowing to GDP ratio and the phenomenon of greater interest payment burden of the household that we pointed out.

Structural shift

• Since the share of interest payment in household income (interest payment burden) is the product of interest rate and debt-income ratio, any increase in the latter would lead to a greater interest payment-income ratio at a given interest rate. The recent period has been associated with a sharp rise in both these variables.
• The debt-income ratio of the household can potentially change through two distinct factors.
• The first factor pertains to a higher net borrowing-income ratio of the household, where net borrowing is the difference between total borrowing and interest payments.
• The second route involves factors that are largely exogenous to the household’s decisions-namely, the interest rate on the outstanding debt and the nominal income growth rate of the household.
• Any increase in interest rates or reduction in nominal income growth rate increases a household’s debt-income ratio during a particular period.
• If the growth in interest payments outweighs income growth, the debt-income ratio will continue to grow.
• Such mechanisms can be described as “Fisher dynamics” following Irving Fisher, who explained the phenomenon of rising debt-income ratio in terms of changes in interest rate and nominal income growth rate.
• Starting from the pre-COVID growth slowdown of 2019-20, the Indian economy has typically been characterised by such Fisher dynamics.
• The post-COVID period has seen a sharp rise in the ratio between nominal debt and nominal income of the household, largely on account of a lower nominal income growth rate.

Macroeconomic challenges

• The comforting news at the present juncture is that India’s debt servicing ratio is still lower than that of many countries. But with the emergence of the Fisher dynamics,  here are at least two unique challenges that confront the Indian economy.
• The first challenge pertains to decreasing the gap between interest rate and income growth and slowing down the growth of the debt-income ratio of the household.
• The second challenge involves stemming the possibility of downward adjustment of aggregate demand amid high interest payment and debt commitments of the household. 
• Such possibilities emerge when households tend to maintain stock-flow norms in debt and wealth management by curtailing their consumption expenditure. The sharp decline in the consumption to GDP ratio in 2023-24 points towards such a possibility.

Conclusion