Analysts are getting increasingly wary about the outlook for consumption demand, even though investors are brushing aside these risks for now. In its 2019 India outlook, Credit Suisse said it would prefer investment-related stocks over consumption-focused ones in the coming year. The brokerage expects sharp downgrades to GDP growth forecasts for 2019-20. The drag comes from consumption as the impact of the seventh pay commission fades, and aggregate credit availability slows, it says.

In fact, the 2019 outlook reports of other brokers are also taking into account the impending slowdown in India’s consumption story. For instance, JM Financial Institutional Securities Ltd said in a 7 December note that “the consumption outlook is a tad worse (not better) than it was in early calendar year 2018".

Two factors are expected to spoil the consumption party. One, is the NBFC liquidity crisis after the IL&FS crisis. And, with flow of credit being impacted, consumption has slowed.

A sharp increase in funding costs for non-banking financial companies (70-80 basis points since September 2018) and pressure on net interest margins will ultimately lead to NBFCs passing on this increase in cost to consumers, says Ambit Capital Pvt. Ltd. Higher borrowing costs may take a toll on the demand for such loans, which in turn, will affect growth.

One basis point is one-hundredth of a percentage point.

JM Financial says housing and small businesses could bear the brunt of NBFC liquidity issues even in the first half of 2019. Spending on consumer discretionary items too will suffer to some extent.

The second element that is likely to weigh on consumption is the ongoing rural distress, which can keep rural consumption under check. According to a report by Deloitte and Ficci, rural households contribute around 50% to GDP, 40% of fast-moving consumer goods (FMCG) sales, 50% two-wheeler sales, 30% four wheeler sales and 45% to telecom.

In fact, the first cracks in consumption have already emerged. In a report on 10 December, Nomura Research said it believes that the growth cycle peaked in Q2 2018 and will slow down to 6.6% year-on-year in 2019 from 7.4% in 2018. “This is corroborated by the moderation in Q3 GDP growth to 7.1% y-o-y," added Nomura.

One sector where the tremors are being felt is automobiles. In an unexpected negative development, medium and heavy commercial vehicle sales declined by 19% year-on-year at the industry level for November. Passenger vehicle sales were muted, too. Rising interest rates, coupled with a sharp rise in fuel prices, have weighed on retail consumer sentiment.

There are external risks too, such as a slowdown in the global economy.

In sum, as we enter the new year, investors will do well to factor in a moderation in consumption demand. Having said that, the jury is still out on whether capacity expansions by cement and steel makers can be termed as green shoots of a revival in investment demand. If that is so, then investors can hope that investment demand makes up for the slowdown in consumption, going ahead. That will be a crucial factor to watch out for.

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