Urban demand: dark knight rising?
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What’s the outlook for consumer companies? The implementation of the goods and services tax (GST) from April 2016 was keenly awaited by them. But that is on the back burner now. And the most recent monsoon update gives a worrying picture, with lower agricultural output growth. These are two setbacks for consumer companies, though a pullback in either area cannot be ruled out. Even if that doesn’t happen, they can withstand the blows if urban demand makes a strong comeback.
The question then becomes, what’s the outlook for urban demand? Earlier predictions have proved premature. Two brokerage houses have cast their lot with those who believe that urban demand is about to recover. Both have used different roads to reach the same conclusion.
A Bank of America-Merrill Lynch report predicts a consumption recovery of over 1% of gross domestic product (GDP) in the coming months. That discretionary demand should get an additional cumulative boost of $100 billion plus ($1 billion equals Rs.6,500 crore) in the next three years. It believes falling interest rates, higher salaries to government employees (linked to pay commission recommendations), household savings from lower oil prices and a boost to rural incomes, if the government hikes wheat procurement prices by accepting the Swaminathan pricing formula.
While falling interest rates and lower oil prices are a reality, the others may turn out rather differently than expected. The thrust of this report is that more money and cheaper credit will lead to higher consumer spending.
Another report, from Morgan Stanley, assesses urbanization trends using data on jobs, income, bank infrastructure and consumption outlets (such as restaurants and car showrooms). It concludes that urban consumption is showing clear signs of improvement. Its consumption index was up by 5% for the six months ended March versus 3% in the previous six months and job opportunities have risen too.
Now, the June quarter results of companies did show some signs of a recovery, though not enough to call it sustainable or widespread. In the packaged consumer goods sector, companies said that growth was better than earlier, but rural growth remains higher. However, they said discretionary products have not seen an increase in demand.
The fast food companies continue to flag sluggish demand. Listed modern retail companies too reported better same store sales growth during the quarter. Car companies have seen sales increase but growth has slowed from earlier levels.
If these early tentative signs of a recovery in urban demand firm up into a more established trend, then one could see a spurt in consumption demand, which could gradually spread to more segments of the consumption basket. False starts in earlier periods call for caution but it would also be unwise to dismiss the possibility of a recovery altogether.