From clothes to PCs, falling Indian production points to weak demand

According to an RBI survey, consumers have been pessimistic about non-essential spending since September 2019.

The output of consumer durable goods in India contracted by 2.7 percent in July, even as industrial growth hit a five-month high of 5.7 percent. What dragged down production of consumer durables in July? The underlying data showed continued weakness in manufacture of clothes, as apparel output contracted by 22.5 percent in July on a year-on-year basis.

Added to this was the production of computers and electronic and optical products, which shrank 16.8 percent, and furniture production, which fell 11.1 percent. Put together, these three segments overpowered the 8.9 percent growth in vehicle production.

According to India Ratings, the contraction in consumer durables output is worrisome and "reflective of the weakness and skewness in consumption demand".

To be sure, the poor performance of consumer durables – and, by extension, demand for non-essential goods – is nothing new. The contraction in July was the 10th such instance in 12 months. In the past 46 months, production of consumer durables has been lower on a year-on-year basis 29 times.

Source: ICICI Securities

Meanwhile, the production of furniture and computers and electronic and optical products has contracted in each of the past eight months, while the output of clothes has reduced year-on-year for 12 months in a row.

Pessimistic perception

The numbers could have been worse if not for demand for premium products. According to Kamal Nandi, executive vice president at Godrej Appliances, the premium segment has grown over 30 percent.

"Mass segments, on the other hand, continue to witness a sluggish trend," Nandi told Moneycontrol.

The data is backed up by official surveys. According to the Reserve Bank of India's Consumer Confidence Survey released in August, the 'net response' for household perception about non-essential spending was -10 percent. A 'net response' of less than zero is indicative of pessimism.

The RBI survey showed consumers have been pessimistic about non-essential spending since September 2019. This timeline is significant – headline retail inflation has been above the RBI's medium-term target of 4 percent starting October 2019.

More crucially, food inflation surged right about then – from 2.99 percent in August 2019 to 5.11 percent the next month. By November, it was above 10 percent and fell sharply towards the end of 2020, thanks to a favourable base effect. The Russia-Ukraine war then sent it spiraling again, with the latest number for August being 9.94 percent.

Any consumer will first spend on essential items such as food. A sharp rise in food prices leaves a smaller budget for discretionary items. Add the fact that inflation is high globally, and it’s a double demand whammy for Indian manufacturers.

"There is an increase in inflation across the globe and that would impact domestic production of consumer durables since not all of it is consumed within the country," said NR Bhanumurthy, vice chancellor of Dr BR Ambedkar School of Economics in Bengaluru, adding that subdued demand for these goods in the international market could also be holding back Indian production.

Murky outlook

However, hopes are high now – as is always the case when the festival season is near – in anticipation of Indians loosening their purse strings and indulging in big discretionary purchases. According to economists at Motilal Oswal Financial Services, industrial growth could rise to 8-10 percent in the next three months, "supported by a favourable base effect and the onset of the festive season".

While there is little doubt that the upper echelons of Indian society will spend in the coming months, there are questions about the lower-income segment, especially those in rural India who are bearing the brunt of a bad monsoon.

"Rural indicators are showing some signs of moderation with slowdown in two-wheeler sales, softer diesel consumption growth and slowdown in tractor sales. The uneven monsoon performance has resulted in demand for jobs under MGNREGA rising in August," Gaura Sen Gupta, India economist at IDFC First Bank, said on September 12.

MGNREGA refers to the rural employment guarantee scheme.

Making matters worse is high food inflation.

As food was the largest contributor to inflation in August, the poorest segments in both urban and rural areas faced a higher burden than their rich counterparts, CRISIL economists said in a note earlier this week.

However, the government disagrees with the assessment of the rural economy.

Source: Chief Economic Adviser V Anantha Nageswaran

According to chief economic adviser V Anantha Nageswaran, anecdotal information from high-value fast moving consumer goods (FMCG) companies was indicative of growth not being concentrated in just the large metro cities but even in small towns and villages.

"So, this pick-up in rural demand for FMCG items is not something that is distorted by statistical, very small set of centres, but it is fairly widespread," he said on August 31 following the release of the April-June GDP data.