India’s Consumption Story: A Quick Look

“India is one of the most attractive retail markets in the world,” said Doug McMillion, President and CEO, Walmart.

He stated this in the background of Walmart’s acquisition of Flipkart in 2018. 

India is the world’s second most populous country with a population of 1.3 billion. With an annual population growth rate 1.1 per cent, India is estimated to become the most populous country by 2024.

With its size and growing middle class, India provides an enormous business potential. According to a recent report published by World Economic Forum, India is poised to become the third largest consumer market next to US and China by 2030. The report also states that the consumer spending in India is expected to grow to USD 6 trillion by 2030.

Consumption has always been the driving force and pillar of India’s growth story. For instance, presently, consumption has a share of 57 per cent in the total gross domestic product. It shows that consumption demand has a greater impact on the overall growth of the country. However, the consumption demand measured by Private Final Consumption Expenditure that has averaged around 7 per cent over a decade, dipped to 3 per cent and 5 per cent (YoY) growth rate in the first and second quarter of FY20.

Capturing The Consumption Slowdown

The impact of this consumption slowdown is felt across sectors, which is well captured by various indicators. The current consumption slowdown has severely affected the FMCG and automobile sectors. According to a report published by the Nielsen group, the volume growth of the FMCG sector declined to 3.9 per cent in Q2FY20 from 13.2 per cent in Q2FY19. Needless to say, sales of major FMCG companies were negatively impacted.

For example, the year-on-year (YoY) sales growth rate of Hindustan Unilever dipped to a mere 6.6 per cent in the first two quarters of FY20. The YoYsales growth rate for the first two quarters of FY19 stood at 11 per cent. Another FMCG giant, ITC, also witnessed a decline in the first two quarters of FY20. The YoY growth rate slipped to 5 per cent in the first two quarters of FY20, from 9 per cent and 15 per cent in Q1FY10 and Q2FY19 respectively.

The domestic car sales that marked improvement in October 2019, mainly due to the festive season, registered a negative growth rate (YoY) of 10.83 per cent in November. The two-wheeler and tractor sale that captures the spending of the rural economy also registered negative growth rate the same month.

Cause or Effect: What Will Be The Impact?

Now, the question is whether the consumption slowdown is the cause or whether it is the effect. Consumption is positively related to the disposable income. Higher wage would lead to higher income, and thus higher consumer spending. However, a declining trend is visible in the case of wage growth in both the rural and urban sector. Rural wage growth declined from 27.7 per cent in FY14 to less than 5 per cent in FY19. Corporate wages have also exhibited a single digit growth in FY19. The Reserve Bank of India Annual report also points out that the wage growth for agricultural and non-agricultural labourers remained subdued in FY19 at around 4 per cent.

Performance of the agricultural sector—major employment provider— determines the health of the rural economy. The growth of the value-added in agriculture and allied activities started decelerating from Q3FY19 onwards. The low food inflation at 0.70 per cent in FY19, negatively affected the income growth in rural sector. Similarly, the deceleration in industrial output to below 4 per cent during 2014-19 also had its impact on the income and employment generation both in the rural and urban areas. Adding to this, the liquidity crisis further dampened the consumption demand in the economy.

These developments lead to a ‘domino effect’ in the economy and are acting like a vicious cycle. A vicious cycle of low income, low consumption, low production and low employment generation.

Now, the focus should be on how to break this vicious cycle, and lift the economy out of it.

Let’s wait and watch!

The author is an Economist with Geojit Financial Services