Mumbai/New Delhi: Gurgaon-based interior designer Arti Goswami has deferred her plan to upgrade to split air conditioners (ACs) from window ACs for her house.
Rahul Bhardwaj, 33, used to drive his car 40km a day from Indirapuram in Ghaziabad to his workplace in Gurgaon till his higher petrol bills forced him to switch to public transport a month ago.
“Too much traffic on the road and convenience were also responsible for the decision,” said the learning and development business partner at Hewlett-Packard Co. Then, the price of petrol has risen by nearly 11% over the past 12 months.
And middle India, which had begun travelling abroad in increasing numbers in the last half of the previous decade, is now spending holidays at home.
“Travelling overseas was slightly out of our budget, so we chose Goa instead,” said Siddharth Goel, 31, assistant vice-president at a Delhi NCR-based provider of transformation and outsourcing services.
A slowing economy, rising prices, falling rupee, lower pay hikes and uncertainty about the future are turning even well-heeled consumers, who were once free with their money, into fiscal conservatives.
Goswami, for instance, has even cut back on visits to her favourite restaurants Mainland China and Fresc Co. And she even thinks “twice before throwing a party for 20 people at home” because the cost of living “is going up”.
That sentiment is reflected in consumer confidence indices.
According to one managed by BluFin Advisors Pvt. Ltd (BluFin), consumer confidence is slightly negative (49.2 on a 100-point scale). Worse, the confidence of consumers in the future of the economy is at 38.7—indicating a belief that the future will be far worse than the present.
“The current economic upheaval and the global scenario has left the consumer in a ‘wait-and-watch’ mode. Now we need to watch for the next month’s numbers to know if this is the beginning of a negative trend, or is just a temporary pause,” said Rashid Bilimoria, chief executive officer of BluFin.
That behaviour has resulted in falling sales and swelling inventories across companies selling products as diverse as apparel, cars, washing machines and refrigerators.
“Consumers are putting off their purchases and being a lot more cautious across categories, be it travel, leisure, fine dining or the purchase of big-ticket items, auto, home, consumer durables, even apparel and footwear,” said Abheek Singhi, leader, consumer practice, India, partner and director at the Boston Consulting Group. This is happening largely on account of two factors—high interest rates (the central bank has kept them high to combat rising prices in the absence of any effort from the government to do so) and inflation.
Inflation in terms of an increase in wholesale prices was 7.55% for May, and that in consumer prices, 10.36%. Meanwhile, the rupee has depreciated 21.2% against the dollar since 1 August and now trades at 56.15. On average, vegetable prices have gone up by close to 50% over a year ago. Dairy pulses, meat and poultry are costlier compared with the year earlier, according to Bloomberg. And the Union budget increased excise duty on several products.
“Continuous inflation for the last 18 months has led to an erosion of purchasing power in the hands of the consumer. Since prices of food items have risen at an exorbitant rate, consumers are cutting back on any kind of discretionary spends,” said Soumya Kanti Ghosh, director, economics and research unit, at industry lobby Federation of Indian Chambers of Commerce and Industry (Ficci).
That explains why growth in the Rs.52,000 crore consumer durables category (television sets, refrigerators, washing machines and the like) has seen a sharp drop—from 14.2% in 2010-11 to 2.5% in the fiscal ended March, as per data compiled by Centre for Monitoring Indian Economy Pvt. Ltd, an independent economic think tank headquartered in Mumbai, and Ficci.
According to George Menezes, chief operating officer at Godrej Appliances, the prices of washing machines, refrigerators and ACs have risen by 7-8% this quarter, and that hasn’t helped either. “Price increase in our categories is a further hindrance, even as consumer sentiment is down owing to inflation on basics such as food and petrol,” said L.K. Gupta, vice-president, marketing, at LG Electronics Inc.
Car sales, too, are almost flat, and most companies are stuck with a huge (and stagnant) inventory of petrol cars. Domestic passenger traffic in the airline industry is tapering off. “Passenger traffic has slowed to 7-8% levels from mid-to-high teen growth about a year back,” said a 24 May report by JPMorgan India Pvt. Ltd analysts Princy Singh and Dinesh S. Harchandani.
Still, there are some areas that are holding up, executives said.
For instance, people continue to spend money eating out at quick-service restaurants such as McDonald’s Corp. and small indulgences such as chocolates, said Singhi of BCG.
Likewise with movies.
“We do find that discretionary spends on entertainment have gone up across the country in the out-of-home (OoH) entertainment category,” said Pramod Arora, group president, PVR Ltd, which operates 173 screens in 40 cinema halls across 24 cities. According to Arora, people are spending, on an average, 15% more on entertainment than last year.
Consumers have also not cut back on spending on food, snacks and consumer products such as soap and shampoo, said Govind Shrikhande, managing director and chief customer associate at Shoppers Stop Ltd, which runs department stores chain Shoppers Stop, hyper market chain HyperCity and home decor chain HomeStop. Overall, though, demand will remain weak for the next 18 months, he said.
And, much like the slowdown in 2008, the current one is more a big-city phenomenon, according to Shrikhande. “Tier II cities such as Lucknow continue to do well,” he added. The urban skew of the slowdown is because of a surfeit of bad news in newspapers and TV channels, said an expert.
“This is a top-down recession caused due to the non-stop bad news that we are hearing. It is making people tentative and recalibrate their spends. Even if consumers have money they don’t want to spend it,” said Santosh Desai, chief executive officer, Future Brands Ltd, a part of the Kishore Biyani-led Future Group.
Urban consumers account for 50% of the overall consumption, even though they constitute just 30% of the population, said Singhi of BCG.
Shally Seth Mohile and P.R. Sanjai in Mumbai contributed to this story.