Consumption In India: Two steps forward and one step backward

Debt levels of farmers have increased from ~Rs 1.10 lakh to ~Rs 1.17 lakh while savings have fallen to very low levels, currently at an average of 22‐24 percent against pre‐COVID levels of ~32 percent, being the highest.

If inflation reduces and income goes up, any increase in farmer’s income will first go towards payment of loans, children's education, daughter’s marriage, and then investing back in farming and only after that will it be spent to buy white goods or high-cost consumer items. I suspect we may see farmers shifting to regional and value-for-money brands to curtail expenses.

Urban Consumption: After growing strongly by 18 percent and 10.9 percent YoY in Q1 and Q2FY23, respectively, urban consumption rose only 6.6 percent YoY in Q3FY23, leading to slower growth in the first nine months of FY23 compared to the same period of FY22.

Now what we are encountering is the slowdown of discretionary-led momentum. Sectors such as consumer goods, paints, jewellery, quick service restaurants (QSR), apparel, and footwear are now showing signs of waning growth, as the December quarter results depict following the holiday season.

This rural and urban slowdown is likely to prevail for more than 1-2 quarters. Adding more fuel to the fire, India's agricultural output is now under a new challenge from possibly unfavourable climatic circumstances, as the country struggles with rising food (cereals + protein) inflation. Like the previous year, heat stress is intensifying and placing strain on Rabi crops including wheat, oilseeds, and pulses. Also, the potential emergence of an El Niño situation might ruin the upcoming monsoon season.

If an El Niño state does emerge by summer, India is likely to experience a deficit monsoon in 2023. As higher temperatures can lower yields, it poses a serious threat to already planted rabi crops, particularly wheat. Second, El Niño frequently results in weak monsoons, which threatens to reduce the Kharif crop. Poor harvests in Rabi and Kharif could further accelerate food inflation and delay the recovery of rural demand. Third, warmer weather may increase the demand for power, which might increase coal imports and cause consumer price inflation.

Indeed, growth has slowed, but it is not reflective of the correct picture.  India enjoyed a K-shaped recovery as restrictions eased in a post-pandemic world. People had pandemic savings after being confined to their homes during lockdowns, which they splurged when restrictions eased. This pent-up demand following a period of almost nil spending during the pandemic led to higher spending over the past few quarters, thus giving a higher consumption base.

Growth Prospects For The Long Term

However, it's important to point out that India's GDP growth is still rather strong, especially in comparison to other rising economies. With GDP expanding at a rate of 6-7 percent and around 60 percent of that increase coming from domestic private spending, growth will be insulated. A good household savings rate of around 21 percent of disposable income (2021–22 statistics), and a sizable working-age population are further benefits along with a shifting trend towards premiumisation. These factors will probably lead India to have a larger market and one can see rapid organic growth.

India still remains underpenetrated in many segments such as e-commerce, footwear, consumer durables, etc. The penetration of online food service is only 7.8 percent compared to 36.3 percent in the US and 53.6 percent in China. E-retail penetration in India is ~5 percent vs 28-30 percent in China. Factors like an increase in mobile commerce, the emergence of new payment methods, an increase in the use of AI and automation, etc., are bound to push the penetration. More than two years into lockdown, the fast-moving consumer goods category is on the mend, despite persistent inflationary pressures. The rural market accounts for about 35 percent of FMCG's total sales.

If we go by the economic fundamentals, lower-income groups tend to have a high propensity to consume, while higher-income groups are more likely to save or invest in assets. This means a rise in income among lower income groups has a higher chance of boosting consumption in the economy than the increase in income for higher income groups. So, it is important the income reaches the hand of lower and middle-income groups to spur consumption-driven growth. Measures for the agriculture sector announced in Union Budget such as  - (a) digital public infrastructure for agriculture, (b) agricultural accelerated fund to encourage agri start-ups, (c) promotion of millets, etc are steps in the right direction that may lead to an increase in the per capita income.

Conclusion

To sum up, there are increasing short-term concerns because of global geopolitical and economic problems, El Nino, and unfavourable noise levels before the general elections in 2024. Among the positives are high-frequency indicators like the GST collection rate, the peak in electricity consumption, the rebound in air travel, an increase in demand for passenger and commercial vehicles, housing, and capital goods, and an increase in capacity utilisation.

A quote of economist and former director of NCAER SL Rao resonates with India’s consumption growth trajectory now more than ever - India's consumer progress is like the walk of a drunken man. You know he will get home eventually, but it will be two steps forward, two steps sideways, one step backwards - resonates with India’s consumption growth trajectory now more than ever.

Vikram Kotak is co-founder and managing partner of Ace Lansdowne Investments. Views are personal and do not represent the stand of this publication.