The flagging of consumer demand

Any assessment of India’s consumption story—whether it’s still intact or finally running of steam—produces mixed results. A few sectors seem to have done better than expected both in revenue and profit growth, while some others display very clear signs of being in severe distress or heading towards trouble. Irrespective of sectors, the market leaders have generally performed encouragingly in recent quarters while their smaller rivals seem to be struggling in the same environment. Demand seems to be holding up quite well for personal and home care products and packaged foods, and for leading national and regional casual dining, fast food and café chains. At the other end of the spectrum, spending on clothes is visibly slowing. The automobile sector also shows signs of an unmistakable slowdown, holding but the possibility of a year-on-year decline in unit sales for the industry as a whole. Makers of consumer durables and appliances have also reported weak growth and it would not be a surprise if in the next few quarters their value growth slides to low, single-digit levels from the heady double-digit pace for nearly the entire last decade.

It is extremely important to understand India’s private consumption trends because such consumption accounts for nearly 60% of India’s gross domestic product (GDP). With the government’s own finances in disarray, it has no room to provide any stimulus to faltering economic growth by increasing spending. If private consumer spending also slows, there is just no way that the economy can grow at even 6% in the coming quarters. Unfortunately, with the results of state elections now out, it is quite likely that uncertainty will persist on the policy and reform fronts. The worst case scenario would be an attempt by the United Progressive Alliance government to shore up its tattered finances by raising excise, service tax and other indirect levies in the coming budget, which could dent consumer spending growth in sectors such as housing, automobiles, consumer durables and appliances, and textiles, to list a few.

A deeper study of India’s private spending data over the last 10 years reveals some very fundamental shifts. Until the early 2000s, the largest quantum of consumer spending was on intuitively predictable categories, with the top five being food and groceries, textiles and clothing, gold and jewellery, consumer durables and appliances, and non-food and tobacco consumer products. In 2012, the top five categories of consumer spending are food and groceries, pharmacy and healthcare, CDIT (consumer durables and appliances, home electronics, personal telecom, and personal computing/information technology), education including private coaching, and textiles and apparel.

Personal transportation, including fuel, vehicle insurance and maintenance, is a very close contender to being in the top five, and is likely to displace spending on apparel and textiles in the next two years or earlier. The much-tracked non-food and tobacco consumer products are not likely to figure even in the top 10 consumer spending categories by 2015, with several other categories such as leisure and recreation, restaurants and cafes, and furniture and furnishings growing at a much faster pace.

Hence, it would be prudent for businesses across different consumer goods and services to pause and carry out a fresh assessment of the near-term prospects of the Indian economy, the changes in consumer spending behaviour and priorities, the impact of persistently high inflation on the amount of discretionary spending money available with customers, and cross-sector competition for a share of customers’ wallets, and then recalibrate their business strategies and modify, where feasible, product attributes and pricing to come closer to what consumers are now seeking and are able/willing to pay. Of course, there is no reason to press any panic buttons yet since there is only a slowdown in the pace of growth, and in absolute terms India could still see 5-6% real growth in the coming fiscal.

As far as investors and the analysts tracking leading competitors in each of these sectors are concerned, while they obviously need to track the financial performance of the companies on their radar quarter by quarter, it would be helpful if they were to also take a somewhat longer-term view on the changes in medium- and long-term consumption trends across different sectors and then calibrate their recommendations and investment decisions accordingly.

If consumers are, indeed, deferring spending on high- and relatively-high-value (or discretionary spending) items including housing, automobiles, consumer durables, furniture and apparel, they could be giving themselves small treats and rewards such a buying a lipstick or a skincare product, have more frequent cups of coffee (or a pizza or a burger) at the neighbourhood café and casual dining outlet, or even go to the cinema more often. However, on an aggregate level, there is already a clear slowdown in consumer spending, and it seems the situation may worsen before it rebounds.

Arvind Singhal is chairman, Technopak Advisors.

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