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Did you buy that festive-looking dress that came with a discount as vibrant as its colour? Did you splurge on the India-Pakistan match in Ahmedabad earlier this week? Are you off to a special locale for a vacation and are you shopping in bulk to gift your employees for the upcoming festival of Diwali?
Chances are that we have done at least one of the above and are planning to splurge more. From company chiefs to policymakers, everyone wants consumers to loosen their purses. Consumption is an integral part of any economy, especially India where private consumption is the main engine of growth. The seasonal shopping spree that typically stretches from August to December is assisted by the cricket World Cup, which makes for a heady mix of consumption.
Fares of hotels, flights and holiday packages have already soared in the wake of the World Cup. Consumer lenders have witnessed the usual surge in personal loans that feed the shopping. Foot falls in malls are up and that explains the neat 46 percent growth in retail leasing space in eight major cities during April-September period (read this piece). This demand has also supported volume growth for fast-moving consumer goods firms such as HUL and even cigarette maker ITC Ltd.
But this is a story of urban India which is out and about fulfilling its desires—the haves among consumers.
Rural India isn’t fired up enough to match the exuberance of cities and towns. The cloud of a deficient monsoon is still around and uncertainty over farm output continues. That means the rural economy’s earnings aren’t upbeat. We go back to HUL, the FMCG major. HUL’s year-on-year volume growth was the slowest in six quarters at an abysmal 2.5 percent. ITC management has said that the demand outlook is uncertain.
My colleague Ravi Ananthanarayanan explains in his piece that part of the problem is the competition from smaller firms. With raw material inflation easing, small companies have been able to cut prices more to attract consumers. “What it also signals is HUL’s unwillingness to cut prices sharply in a bid to revive growth.” The company is for now favouring margins over volume growth. How long it can hold this strategy remains to be seen.
Another way to look at it is that consumers are substituting with cheaper products. India is a price-sensitive market and who doesn’t love a good discount? But this substitution for cheaper alternatives is also partly driven by lack of income growth. Rural wages have been stagnant for a decade and the latest Periodic Labour Force Survey (PLFS) data shows that wages and salaries in general have hardly grown in real terms in the last five years. In fact, India’s six-year low unemployment rate that seems to have triggered an optimistic conclusion masks a deeper problem. Higher education isn’t fetching Indians a paying job (our Chart of the Day details this trend), and the fall in unemployment rate is primarily due to low-paying gig work or self-employment. Casual labourers, the have-nots of the economy, have seen their wages decline consistently over many years. Manas Chakravarty, in his piece last week, captured the pain points of wage growth and employment here.
Subdued wage growth, and a fractured employment record are big drags to the effervescence surrounding consumption growth. Only income growth has the power to turn the have-nots into haves. Until jobs and earnings show a meaningful increase, India will have to rely on the festival sugar-rush every year to beef up her consumption growth. If we need a consumption Olympics with the motto of Citius, Altius, Fortius, i.e. faster, higher and stronger, we have to fatten the purse of the consumer through income growth.
Investing insights from our research team
ITC: In-line performance; focus shifts back to FMCG business
Hindustan Unilever: Road to recovery likely to be gradual
Weekly Tactical Pick: Recent correction opens up an opportunity for this fluorochemical stock
Nestle India: Resilient performance across portfolio
PVR Inox Q2: Merger synergy, content line-up help deliver blockbuster numbers
UltraTech’s Q2 earnings tick all the boxes
Polycab India Q2: Incredible execution justifies the phenomenal stock rally
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Tech and Startups
Wipro margins will expand once growth comes back: CFO Aparna Iyer
Technical Picks: Gold mini, L&T Finance Holdings, Jindal Saw, Bharti Airtel and Persistent System (These are published every trading day before markets open and can be read on the app).
Aparna Iyer Moneycontrol Pro
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