BackWhat’s ailing consumer discretionary demand?
Revenue growth data for 11 consumer discretionary firms across sectors shows that net sales grew at 3.8% in the quarter ended March against a year ago
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Revenue growth for consumer discretionary companies has slumped to a four-year low due to slower growth in nominal wages, an outcome of sputtering economic growth. This has erased the benefits of softening inflation and lower commodity prices.
Revenue growth for 11 consumer discretionary companies across various sectors analysed by Mint shows that net sales grew at 3.8% in the quarter ended March against a year ago.
The companies include Asian Paints Ltd, Arvind Ltd, Bajaj Electricals Ltd, Bata India Ltd, Berger Paints India Ltd, Jubilant Foodworks Ltd, Page Industries Ltd, Relaxo Footwears Ltd, Titan Co. Ltd, Videocon Industries Ltd and Whirlpool of India Ltd.
In fact, the consumer durables segment of the Index of Industrial Production has plunged 12.5% in the just ended fiscal year, the lowest in over two decades. Analysts expect recovery in consumer spending to be at a snail’s pace.
What is ailing consumer demand despite consumer price inflation softening to 6% in the past year? Consumer discretionary spending in 2010-11 was driven by profligate government spending to spur the economy after the Lehman crisis.
However, this time around the government has tightened its belt as subsidies and rural spending have been curtailed drastically. “As capacity utilization continues to hover near lows at around 75% and corporate leverage is very high, companies are unlikely to spend on capex and employee wages," said Deep Mukherjee, senior director at India Ratings and Research Pvt. Ltd.
Since households have less disposable income in their hands and are uncertain about future earnings, they are likely to cut down on expenditure and save more.
Nominal wage growth after rising in excess of 14% year-on-year from FY11-13, slowed to a tad below 14% in FY14 and is likely to further slow to around 11% in 2014-15, said Mukherjee.
Notional income in the hands of people in rural towns has also come down as land prices have dropped steeply. “There is stagnation in the rural economy. Earlier land was bought at exorbitant prices by industries, leaving more money in the hands of farmers and people in rural towns, but we are not seeing such activity any more," added an analyst from a leading domestic brokerage firm who did not want to be named.
“We could be entering into a potentially vicious cycle where lower corporate and government spending will lead to lower rural and urban wage growth. This is going to dampen consumer sentiment and bring down demand for discretionary and essential items, which will weigh on corporate and government revenue," said Mukherjee.
The Reserve Bank of India, during the policy review last week, cited that the 6% inflation target for 2016 has chances of exceeding that limit and the latest rate cut will be the last for some time.
Along with poor monsoon, it may further dent rural demand. Unless government spending in infrastructure bolsters corporate recovery, it will take around 12-18 months for consumer spending to revive.
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