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If there are two engines that have been supporting India’s growth story, then it is consumption and government capital expenditure. For a long time now, the government has been nudging the private sector to invest more to lessen its load. But companies were reluctant to invest even when conditions such as lean balance sheets and low interest rates (before the RBI embarked on its rapid tightening policy) existed, maybe owing to uncertainty. Or, there’s adequate capacity to service the level of demand growth that is visible to companies.
A global slowdown does not augur well for exports and that’s visible in the numbers. It’s only when the uptrend in consumption growth is seen as long-lasting, all-round private investments will take place. Till then investments in will continue only in a few pockets.
Moreover, there’s a new fear on the consumption front. Weather is a critical input in India’s agricultural economy and Subir Roy had recently written about how the El Nino phenomenon could pose a threat to India’s southwest monsoon and why we should make plans to mitigate its ill-effects. Investors in FMCG stocks are also expressing concern, but a slowing of growth in El Nino years can’t be pinned to the weather phenomenon alone. The past three instances of El Nino saw FMCG stocks outperform, according to a Jefferies Research note. The note also points to this being an early forecast but then the probability ascribed in 2023 is also the highest in ‘many years’.
Our research team has done a comprehensive review to assess whether there is a consumption slowdown taking root, which pockets it is visible in and what the outlook looks like. They point to the divergence in volume and value growth in FMCG, the retail sector’s growth being more of a share grab from the unorganised sector rather than capitalising on market growth and pockets of growth such as high-end goods. Further, they also point to consumer credit showing signs of moderation. Do read to get insights on what’s driving consumption in some pockets and why others are displaying weakness.
It’s not clear whether the slowdown visible in consumption is here to stay or simply growth pausing to catch its breath. Rural demand has been weakening for some years now and while there may be pockets of growth here, the broad message from FMCG and durable companies is one of weak rural demand. If this continues, it should not be a surprise although it will be somewhat of a dampener on sentiment. But, there are hopes that a recovery in non-agricultural rural income could help support growth.
The bigger issue that needs to be addressed is inflation. Bring it down by at least a few percentage points and it will leave more disposable income in the hands of consumers. FMCG companies, for example, are showing volume growth in low single digits and price hikes in high single digits. While they may express helplessness due to rising input cost inflation, their sales growth numbers still look healthy.
RBI’s prescription for inflation is to hike interest rates till it is convinced that the medicine is working. Unfortunately, this prescription implies that demand should slow down creating conditions for inflation to decline to lower levels. But, once inflation is checked then consumption will revive to healthier levels. For companies, this will mean volume growth turning higher even as price-led changes taper. That’s a more sustainable growth model and helps companies deliver more consistent sales and earnings growth. Till they get to that point, however, consumption may continue to face headwinds except in certain pockets. Investing insights from our research team
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