Trade data provides more evidence of India’s K–shaped recovery

The most obvious explanation for this spike in the import of expensive food items is a rise in pent-up or ‘revenge’ consumption of luxury products to mark the end of lockdowns. The luxury sector is experiencing strong growth globally as the rich rush to beat the lockdown blues by spending more. LVMH, the luxury powerhouse, has stormed into the ranks of the world’s top 10 companies by market value and seen its share price rally 29% in a year.

While these shifts in the consumption patterns of the rich may or may not sustain, in India they could also be an outcome of certain sectors, such as high-skill exports, outperforming the overall economy. This would suggest that as some of the rich are getting richer, their attitudes towards consumption are changing. A small point here is that the central bank is spending dollars from its foreign currency reserves to keep the rupee from depreciating too much. By doing so it is subsidising imports across the board, thus supporting luxury consumption by the affluent.

Why doesn’t the K-shaped recovery impress serious watchers of the economy? Because luxury consumption does not serve the engine of growth. That role is performed by non-rich consumers, and their consumption has yet to recover sustainably since the pandemic hit household incomes. Free foodgrains from the government are providing some relief but sticky high inflation has been shrinking the spending capacity of non-rich consumers. Industry after industry is reporting figures that point to this.

Market intelligence firm NielsenIQ reported reduced spending by rural Indians on fast moving consumer goods (FMCG), including washing powder and shampoo, in the last three months of 2022 relative to the previous three. FMCG companies have struggled to pull in sales from them. Many have pushed up consumer prices by more than the rise in their input costs, boosting profits at the expense of shoppers to compensate for the slower growth in sales volumes.

The different post-pandemic experiences of the rich and the non-rich can also be seen, as Mint SnapView wrote last week, in the falling sales of entry-level vehicles. Meanwhile, the high-end sports utility vehicle segment has clocked impressive growth. Makers of luxury cars, such as Lamborghini, are reporting record sales in India in FY23 (although volumes are still low compared to other countries).

The K-shaped recovery is a global reality today. Global inflation has hit a 45-year high, reducing people’s spending ability, and country after country is reporting that consumers are hunting for special offers and discounts, shopping in cheaper supermarkets, buying less and choosing cheaper substitutes – what is known as a cost-of-living crisis.

As policymakers in Delhi and Mumbai deal with the aftermath of the pandemic, they will have to keep in mind that big companies won’t be able to continue raising prices to keep reporting growth in profits even as sales volumes struggle to keep pace. Sustainable economic growth and rising prosperity will come when household incomes recover and consumption confidence recovers robustly, which requires inflation to drop durably. Serious inflation control will, thus, have to support the big, rising and sustained push the union budget has been providing for capital spending on infrastructure creation.

There’s also a need to guard against long-term structural setbacks, such as in the skills and education divide between the privileged and less privileged children who lost out due to closure of schools during the pandemic. Without a special effort to make good the learning losses, earning abilities and the quality of human capital in the economy will suffer, which does not augur well for growth.