With private investment and exports failing to recover and terms of trade gains dissipating, it is the Indian consumer who is expected to lift GDP growth in the current year. While private urban consumption is expected to be stimulated by wage revisions of central government employees, a normal monsoon after two years of drought is anticipated to spur rural spending. Against these expectations, what are the indications about the evolution of consumption demand in the year so far?
The Reserve Bank of India’s (RBI) comprehensive analysis of listed private companies (2,775 firms) sheds some light upon trends in the first quarter (April-June). This shows a 0.1 deceleration in overall sales after a small revival in the preceding quarter (January-March); sales growth in manufacturing and service sectors actually contracted. As gauged by operating profit margins, pricing power increased in the quarter for manufacturing firms but declined for the services sector.
The slack in consumer demand seems to have persisted into the September quarter, which also throws some light upon the interaction between pricing power and sales. For example, Hindustan Unilever, the largest consumer goods firm in India, saw net sales increase just 1.34% year-on-year, following 3.6% in the June quarter. Interestingly, volume growth—a 1% decline—was its lowest in seven years and the increase in net profits was price-driven as the firm responded to the pick-up in commodity inflation. Dabur, another FMCG major, also reported poor revenue growth— net sales grew just 1% above the previous year’s corresponding quarter. On the other hand Jubilant Foodworks, a pizza-franchise owner, witnessed net profits decline 1.4% in the quarter but net sales surged 13.3%. ITC saw double-digit (13.3%) revenue growth in its fast-moving consumer goods segment owing to new product launches and favourable base effect in a top-selling item (noodles).
There are a couple of bright stars, viz. housing and automobile segments. Revenues and profits both grew robustly in double-digits for major housing finance firms. Car and motorbike manufacturers did well too, a trend that may well sustain in the current quarter that traditionally sees consumer demand rise owing to many festivals.
So far the indications are of a challenging demand environment except in spheres like housing and automobiles where easy availability of finance matters. The trade-off against rising material costs seems to be sharpening too—producers’ gains from selling price increases are impacting volumes and those seeing sales grow are facing margin pressures. That suggests a recovery of both revenues and profits has not yet happened.
The signals also make the October-December quarter critical for the interplay between pricing and sales. For now, forward-looking indicators like the just-released Purchasing Managers Index (PMI) compiled by Nikkei and Markit shows the manufacturing PMI jumped to 54.4 in October (September’s was 52.1), the highest level since December 2014. Moreover, it was consumer goods that drove demand but producers passed on their higher input costs by raising prices while protecting their business in the coming months by buying more stocks last month. Since there is a usual seasonal surge in consumer demand in this period, the sustainability question will remain unanswered until these effects wear off. For instance, Maruti, which accounts for nearly half the passenger car market in India, saw its October sales shrink -0.31% compared to last year.
Renu Kohli is a New Delhi based economist.
The promoters of HT Media Ltd, which publishes Mint, and Jubilant FoodWorks are closely related. There are, however, no promoter cross-holdings.