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Photo: Priyanka Parashar/Mint
Photo: Priyanka Parashar/Mint

Opinion | India’s puzzle of consumption, credit and confidence

The three variables are so deeply linked that reviving one without the other two won’t deliver growth

In the last few months, much ink has been spilt on the slowdown of India’s economy. It has also been widely reported that the Indian consumption momentum has slowed down dramatically. However, to paraphrase Mark Twain, reports of consumption’s death are greatly exaggerated. While consumption has slowed down, the extent varies quite significantly across categories, channels, and geographies.

On one hand, real estate and automobiles have had another bad year, with growth being in the negative territory for most of 2019. At the other extreme are product categories such as white goods and mobile phones, which have surprised observers by delivering double digit growth. Somewhere in the middle is the fast-moving consumer goods (FMCG) sector, which has grown at 7% over the 12 months under consideration. General unorganized trade across sectors has been hit with slower growth, especially those with greater reliance on wholesalers and rural geographies. E-commerce, though, delivered robust growth, even as discounting practices declined and organized retailers such as Reliance Retail and DMart grew at 20-30% + quarter on quarter. When one examines differences within sectors, one finds wide variations. In the FMCG space, the average industry growth for listed companies over the past two years was 8%, but ranges from 2% to 12%.


It is important to recognize and acknowledge these variations and differences. When the going is good, it is not as good as it is made out to be, and when the going is bad, it is not as bad as it is made out to be. The key question to ask, therefore, is what drives these differences across sectors and channels. We believe that understanding these differences will yield insights that will help arrive at what actions are required to prime the country’s consumption pump.

The first difference concerns consumer credit, both its availability and rates of interest. Real estate and automobiles are large-ticket purchases for most consumers. As many as 45% of urban houses and 74% of passenger car purchases are financed through a bank or a non-banking financial company (NBFC), both of which have faced significant challenges in the past few quarters. NBFC funding continues to be extremely crunched despite government actions to ease it. NBFC disbursements fell 30% in the second quarter of 2019-20, compared to the same period of the previous year. Even for bank financing, the rate cuts being driven by the Reserve Bank of India (RBI) have not really been transmitted to consumers. The central bank’s policy rate has come down by 135 basis points since January 2019. However, consumer loan rates for housing and car purchases have fallen by just 80-100 basis points and 60-100 basis points, respectively, over the period in question.

A related point highlights the importance of credit or liquidity for distribution channels. Wholesalers of categories such as apparel and FMCGs have a high need for liquidity. The financing challenge in the ecosystem has impacted the cash flows and thus pipeline movement of these channel partners. Coming at a time of slowing consumer demand, this has consequently had a classic bullwhip impact. The degree of the cash crunch is more pronounced in smaller cities and rural areas, thereby impacting companies that have large rural businesses much more than others. Categories such as air conditioners, which have a largely urban footprint and a greater share of sales through direct dealers, witnessed value growth in the healthy teens in 2019, maintaining roughly the same mid-teens growth momentum as in 2018.

The second key factor has been consumer confidence itself. Income growth is observed to have slowed down, especially in the country’s rural areas. This, coupled with worsening sentiment, has greatly impacted spends on discretionary items.

According to the latest issue of RBI’s Consumer Confidence Survey, while sentiment around spending on essentials continues to hold steady, that around spending on discretionary items deteriorated significantly over the past year, falling from a net positive of 24.9% in November 2018 to mere 9.9% in November 2019.

In a nutshell, sectors and categories with the greatest exposure to rural geographies, wholesale dependence and large-ticket sizes have been the worst hit. Those with an urban bias, direct reach, and bite-sized outlays have been impacted less, so far.

While the central bank and government are taking steps to restore consumer confidence and ease the liquidity crunch, companies are not powerless. The question that the top managements of companies need to ask is what they could do to reduce credit requirements and increase the confidence of their consumers as well as channel partners. Could a solution lie in offering an iron-clad buyback guarantee to the real estate buyer? Or offering an inventory buyback to the auto dealer? Or reducing capital requirements for the channel partner through streamlined operations? What about subscription or rental models? Are there other innovative options to be explored?

Some of the above may seem like strange questions at a time of declining overall consumption in the country. However, perhaps we need to think of consumption, credit and confidence as a puzzle to solve. The three variables are deeply interlinked. Solving one without working likewise on the other two will not deliver growth.

Abheek Singhi & Kanika Sanghi are, respectively, managing director, BCG Asia Pacific, and partner and associate director, Center for Customer Insight, BCG India

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