Consumer demand has been one of the missing links in the India growth story and it is not surprising that the progress on this front in the period - October-December merits interest. There is a lot of buzz in the market of things looking up and there are several indicators to vindicate this optimism. At the same time there are some other factors working in the background that can blunt the story line and cannot be ignored. What is one to make of this?
To begin with one cannot miss the positive signs. The newspapers are overflowing with advertisements of festival sales which range from the lower end groceries to high priced jewelry and hence covers all income groups. The high number of pages devoted to such advertisements is testimony to the optimism of India Inc., in both manufacturing and services which gives a feeling that all is well. Second, this sentiment is echoed by the GST collections which are rising at a steady rate. GST is a consumption based tax and steady increase indicates that consumption must be increasing.
Third, the PMIs for both manufacturing and services have been elevated at above 55 in all the months of this year. There has been a drop in October to 55.5 and 58.4 respectively but is not really significant in the larger scheme of things. Fourth, industrial growth as per the IIP has increased by around 6% for the first 5 months of the year with consumer durables registering growth of 5.7% for the first time in August after very low or negative growth rates in the first 4 months.
Fifth, the growth in air passengers flown has been 20.4% on the domestic segment and 31.4% on the international routes for April-August. These high growth numbers come over very high base numbers of 134% and 347% respectively. All these pictures do indicate that demand is on the right track and that there are good times ahead.
This is the good part of the story. There are however some concerns on how the plot may develop in the next two months. First, the commentary posted by several companies in the consumer space while announcing the second quarter results borders on being cautious. The general drift of the companies is that they would be keen to see how rural demand plays out in the third quarter as this has been the Achilles heel even in the past. Also they have pointed out that there has been buoyancy in the premium segment while the demand in the general category remains subdued. Second, the phenomenon of pent up demand has ebbed to a large extent after two years of ebullient growth. Post the lockdown there was a tendency for a lot of revenge spending to take place where consumers spent money to make up for what was not accessible in 2020 and 2021. This led to a phenomenal growth rates in sales in 2022. The question is whether or not it will be sustained. On the services side it has still be seen in travel and leisure spending with the World Cup cricket contributing to the acceleration. But the question being asked is how long it will last? On the manufacturing side there has been a slowdown in most consumer products and in the auto segment for instance, two wheelers and entry level vehicles have shown subdued momentum.
Third, the first advance estimate for kharif production indicates shortfalls in almost all crops relative to last year. This means that rural income will be affected for sure that can come in the way of revival of demand this time. Last, inflation has been a nagging problem all this while. For the past 3 and a half years, it has cumulated to 25%. In the past, inflation has been overwhelmed by the pent up demand phenomenon which kept consumption ticking. There is hence question mark on whether households will continue to spend with such high levels of inflation. While prices of manufactured goods have plateaued, inflation has lowered the real income of households which can affect consumption decisions. It is true that the higher consumption levels in the past two years have been at the expense of savings. Further, households have been using leverage to finance such spending as reflected in a sharp increase in the component of 'other personal loans' of banks which has been rising at a steady rate this year.
Therefore, the overall spending prospects this season is fuzzy when both sides of the story are juxtaposed. Growth numbers look good as of now. However, the factors that can slowdown the process look real and will be of concern to companies. Rural demand this time is under a bit of shadow and hence urban demand will be the driving factor. One can still be sanguine that demand will remain stable, but an acceleration in a broad based manner still looks a bit distant.
(Madan Sabnavis is Chief Economist, Bank of Baroda and author of: Corporate Quirks: The Darker Side Of The Sun.)
Disclaimer: These are the personal opinions of the author.