Daniel Kahneman in his book, Noise - A Flaw in Human Judgement, uses the term availability heuristic, which suggests we operate on the notion that if something can be recalled, it must be important or at least more important than an alternative solution. In a similar breath, varied notions of consumption and its anticipated recovery are written about. In this piece, we use hard facts to show how and why India is seeing a K-shaped recovery in consumption.
No reversal yet seen in K-shaped recovery
A consistent sentiment evoked after the Q2FY23 results across consumer companies was of the likelihood of demand recovery from 2HFY23, especially from rural markets. But this has not played out as anticipated. We have been sceptical of demand recovery, especially in the mass consumption category, as we believed the fault lines which began to appear during Covid only got accentuated due to subdued macro-economic situation coupled with stubborn inflation.
In the near term, the rural segment may show volume growth but we believe it would only be optical since it comes on a low base versus that driven by a structural uptick driven by improving macros. So we believe that the K-shaped recovery spoken about during Covid is yet to reverse and consumption will remain a tale of two halves.
Macros are turning favourable but at a slow pace
Our thesis of continuing pain in the mass consumption category emerges from these facts:
(i) YTD FY23 agri and non-agri wage growth has been 5.5 percent and 4.9 percent respectively compared with FY23 CPI inflation of 6.7 percent. This signifies that real rural wage growth has barely been in positive terrain during YTDFY23.
(ii) The absolute number of MNREGA job seekers has just come in sync with the levels at which it was during pre-pandemic period of FY15-20.
These macro indicators suggest that at the mass/economy level, consumers' wallet continues to remain stretched, making them prioritize their spending. The latest GDP data for Q3FY23 also confirms this point. Private consumption, accounting for almost 60 percent of GDP, grew just 2.1 percent in Q3FY23. The stress in the mass consumption segment is beginning to show up in GDP growth as pent-up demand from high-end consumers reach saturation. The lack of employment opportunities in the non-farm unorganized sector (which accounts for the bulk of jobs in India) is primarily responsible for this situation. So, employment and income growth in this segment needs to pick up for mass consumption to grow at a healthy pace heron, which seems tough in the short term.
Growth comfort resides in premium
On the other hand, analysing growth trends across discretionary segments gives a different picture and echoes our view of a continuing K-shaped recovery. For example, growth rate for premium retailers like the Lifestyle segment (at 13-16 percent for 9MFY23) of Aditya Birla Fashion and Retail (average selling price >Rs 1,500) was better than that of Pantaloons (4-6 percent for the same period) which caters to the value-to-mid pricing segment. With footwear too, we see Metro brands (average selling price of around ~Rs 1,500) growing at ~2x that of Bata and Relaxo (average selling price of ~Rs 650 and Rs 175 respectively).
Even when we observe monthly automobile data, we notice that utility vehicles (UVs) have grown ahead of passenger cars and premium motorcycles and scooters have grown ahead of entry variants. As we go up the aspiration level, waiting periods for high-end cars are closer to 12 months and spending by Indians towards overseas travel over April-December 2022 was close to $10 billion. All of these clearly point to a K-shaped recovery sustaining across consumption categories. These may come to risk as incremental job addition and wage hikes in IT sector slows down.
What can further delay the anticipated rural recovery?
Another risk is El Nino, which is knocking at the door, as temperatures around the country are soaring. We recognize the divergent views given by SkyMet and IMD on the same, we understand that some regions in India are already recording temperatures 3-5 degrees higher than normal with heat waves in various parts. This may lead to destruction of some crops, putting further pressure on food inflation. These may have an adverse impact on Indian agriculture and rural economy since heat wave poses threat to the standing Rabi crop and weak monsoon will be a risk to Kharif crop. Should that happen, we are in for an even slower recovery at a mass/economy level.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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