RBI is likely to go for multiple rate cuts to boost consumption, but monetary policy transmission remains a pain point. (Abhijit Bhatlekar/Mint)
RBI is likely to go for multiple rate cuts to boost consumption, but monetary policy transmission remains a pain point. (Abhijit Bhatlekar/Mint)

It's a prolonged winter for India's consumption story

  • Fitch has cut India GDP growth forecast for FY20 to 6.8%—a mere reflection of the slowdown in auto and FMCG sectors
  • Heavyweights in both the industries—Maruti Suzuki and Hindustan Unilever Ltd (HUL) have a lacklustre outlook on sales

"No winter lasts forever; no spring skips its turn," said Hal Borland, a US writer and naturalist. But as far as the Indian economy’s prospects go, it seems to be a prolonged winter this time around, with spring nowhere in sight.

Fitch Ratings has cut India GDP growth forecast for FY20 to 6.8% from 7% in December.

Of course, India isn’t alone. Fitch has lowered growth forecasts for 15 countries, and has cut its global growth forecast for 2019 to 2.8% from 3.1% earlier.

For India, the revision in GDP growth forecast is a mere reflection of the slowdown in several industries such as automobiles and consumer goods. What’s more, there have already been telltale signs of weakness in consumption demand in India.

“A consumption slowdown is underway and a part of it was led by the liquidity crunch in the NBFC (non-banking financial company) space and its impact has been lingering," said Tanvee Gupta Jain, chief India economist at UBS Securities India Pvt. Ltd. “The UBS India-Financial Conditions Index suggests growth momentum could remain sluggish in the March quarter and real GDP growth could range from 6.2% to 6.5% year-on-year, versus 6.6% in the December 2018 quarter."

For instance, carmaker Maruti Suzuki India Ltd reported flat sales for February compared to those a year earlier. News reports suggest Maruti Suzuki has cut production for this month by as much as 27% year-on-year.

Sales of tractors and two-wheelers have been weak, too.

Likewise, fast-moving consumer goods (FMCG) major Hindustan Unilever Ltd (HUL) recently put a check on analysts’ expectations.

“There is some concern on demand as industry growth rates are moderating. This is in contrast to the earlier quarter, where commentary was that demand conditions are stable," CLSA analysts said in a note to clients on 15 March, based on their interaction with the HUL management. Analysts at Emkay Global Financial Services Ltd say their research suggests sustained demand weakness across the consumer durables space, with increased cashback schemes resulting in some volume offtake.

“The data suggests this cyclical slowdown could extend until the June 2019 quarter, before it starts to recover," said Jain. Economists at Nomura concur. “The latest prints of concurrent indicators seem to suggest that the March quarter will mimic the December quarter, but with deterioration also spreading to services, industrial and investment demand. This is also corroborated by Nomura’s proprietary leading indicator, which points to a continued moderation," economists at Nomura Financial Advisory and Securities (India) Pvt. Ltd said in a note on 21 March.

The hope, of course, is that the situation will improve after the general election results are out and the new government takes charge. “Consumption-linked data might get worse in the interim before it improves. We may be in the last two quarters of a consumption slowdown," said Sahil Kapoor, chief market strategist at Edelweiss Professional Investor Research.

As pointed out earlier, one of the main reasons for the slowdown in consumption demand is the liquidity crisis at NBFCs that started when Infrastructure Leasing and Financial Services Ltd (IL&FS) defaulted last year.

“The flow of funds from the corporate bond and commercial paper market into the NBFC space is slowing down decisively from around 25% per annum CAGR (compound annual growth rate) over FY14-18 to an expected rate of around 8% per annum over FY18-21," said Ritika Mankar Mukherjee, senior economist at Ambit Capital Pvt. Ltd. This means NBFCs are lending at a slower pace and that too at higher rates, as they pass on the increase in their cost of funding.

To be sure, the Reserve Bank of India is expected to do its bit to boost consumption. UBS’s Jain foresees a cumulative repo rate cut of 75-100 basis points (bps) in this cycle. This includes the 25 bps easing announced in February. But then, transmission of reduced rates by banks is easier said than done, as pointed out in a Mark to Market column. One basis point is one hundredth of a percentage point.

Also, as Nomura’s economists point out, “Fiscal and monetary policies are turning expansionary but are unlikely to change the near-term trajectory."

Apart from domestic growth concerns, the Indian economy has to contend with the global slowdown, which is hurting exports.

Again, the farm income support scheme of 6,000 a year for around 120 million households could help increase rural consumption, but only to a limited extent. In short, there’s no magic wand. It could be a few quarters for this measure to yield the desired results.

Despite this, consumption-focused stocks, especially FMCG, continue to trade at expensive valuations. But sooner or later, a cocktail of these heady mixes will prove to be nauseous, at the least giving valuations a reality check.

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