So, will shoppers stop?

So, will shoppers stop?

Economic mayhem has hit us like a strain of cholera. How will the real world of consumer spending respond to such financial chaos?

My early forecast is that the impact on the real India will be through five levers: fear, liquidity, interest costs, asset values and economic growth. Many categories will be adversely affected, but some counter-cyclical products will benefit.

Fear and uncertainty: Our newspapers are full of plunging equity prices, banks going bust and housing collapses. The first human reaction to this slew of bad news is fear and uncertainty. Like all fearful animals, our first urge is to retreat to the safety of our caves. So, consumers will back away from buying risky financial products, preferring the security of “bank deposits and bottled water". Consumers will also prefer public sector banks, which they perceive as more conservative, government-backed and, therefore, less risky.


Tight liquidity: Discretionary spending requires liquidity, which is rare today. Trillions of rupees have already been lost in stock markets. Trillions more are badly stuck, because pulling out of equity markets now will cause unacceptable real losses.

Bank credit is already scarce and expensive. In addition, servicing existing loans will suck away even more money from individual and corporate wallets because of the sharp increase in interest rates. This will create further strain on liquidity. So, where is the money for discretionary spending?

Consumers will respond by cutting back on discretionary spending. Two holidays a year may well become a single holiday. Companies will frown on discretionary MICE (motivational, incentives, conferences, entertainment) spending. Travel will be a casualty. Luxury hotels, tourism and airlines should brace for tough times ahead.

Interest costs: The recent sharp increase in interest costs is here to stay, since the banking system is short of funds. This means consumer sectors dependent on interest costs will be adversely affected—as consumers put off purchases after ruefully contemplating unaffordable EMI payouts.

The sectors at risk include hou-sing, automobiles and household durables. There are also second-order effects. When demand for new housing falls, it hurts dema-nd for paints, furniture and other home accessories. Also, as existing EMIs rise, spending on fancy restaurants, holidays and movies will proportionately decline.

Decline in asset values: There is a strong link between consumers’ asset values and spending habits. Economists hypothesize that as a consumer’s home and equity investments increase in value, she feels happier and more secure, and therefore is more generous in her spending habits. The converse is also true. The National Institute of Economic and Social Research in the UK has estimated that a 15% decline in house prices leads to a 1% fall in growth of consumer spending.

With the fall in equity markets and slowdown in housing prices, we will see lower consumer spending across most categories. Even here, consumers in different strata will respond differently. The upper end of the luxury market will be insulated; billionaires spend a very small fraction of their cash flows on expensive cars and watches. But the lower end of the luxury market, which the upper middle class aspires to, will feel the pinch. They will lack the economic confidence to upgrade.

Lower economic growth: As our economy slows, consumers will adapt to lower salary increases, lower dividends and lower family incomes. My forecast here: in low-involvement, mid-priced categories such as soaps and shampoos, we will see active down-trading to less expensive brands; but Indians will make every effort to fully protect high-involvement categories such as baby food and children’s education.

While these five factors are at work, watch out for counter-cyclical products—which prosper during recessions.

Today’s legendary confectionery companies emerged during the Great Depression of the 1930s. Chocolate is an inexpensive comfort food to which consumers turn for solace as they deal with economic pain. Similarly, relatively inexpensive comfort products and gifts, such as casual clothing and stylish watches, will gain during traditional festive shopping seasons at the expense of more expensive durables which need credit. The allure of jackpot or lottery wins also intensifies during an economic slump. “People look to the lottery to get back to where they were financially", says Emily Haisley of Yale, in the Journal of Behavioural Decision Making. And, surely, the demand for pyschotherapists and antidepressants will increase.

So, will shoppers stop? All signs are that they will slow. Indian companies should certainly tighten seat belts, unless of course you are in the business of chocolates or casinos.

Harish Bhat is chief operating officer (watches) of Titan Industries Ltd. These are his personal views. Comments are welcome at