Consumption in India: Two Steps Forward and One Step Backward

- Vikram Kotak

Dear Investors,

Hope this letter finds you in good health and spirit.

Over the last 30 years since economic reforms started in 1991, the Indian growth story has largely been consumption driven. Private consumption on the whole accounts for 55%-60% of the GDP. However, a fallout of the consumption trend has been the growing gap between the rich and poor, which widened further post-COVID-19. The recent Q3FY23 economic data reveals that private consumption was 63.3% of the GDP, and its growth moderated to 2.1% from 8.8% in the previous quarter. This is a worrying signal, notwithstanding the growth in gross fixed capital formation at 8.3%. This investment growth may not sustain in the absence of consumption support. Although the government is supporting the economy with fiscal measures aimed at both the demand and supply sides, and RBI is also monitoring the situation with monetary measures, will this consumption downturn prolong?

Short Term Outlook

Rural Consumption: Rural consumption indicators suggest that rural spending rose 5.3% YoY in 9MFY23 v/s 0.6% YoY growth in 9MFY22. However, consumption grew at a three-quarter low of 4.6% YoY in 3QFY23 v/s 6.5%/5.6% YoY rise in 1Q/2QFY23, respectively. This rural slowdown can be attributed to a continuous fall in non-agri wages, higher inflation, drop in real farm exports. All this leads to higher debt for marginal farmers and lower savings.

Debt levels of farmers have increased from ~Rs110k to ~Rs117k while savings have fallen to very low levels, currently at an average of 22‐24% vs pre‐Covid levels of ~32%, being the highest.

If inflation reduces and income goes up, any increase in farmer’s income will first go towards payment of loans, children education, daughters’ marriage, and then investing back in farming and finally will come to buying white goods or high-cost consumer items. I suspect we may see farmers shifting to regional and value-for-money brands to curtail expenses.

Urban Consumption: After growing strongly by 18%/10.9% YoY in 1Q/2QFY23, respectively, the urban consumption rose only 6.6% YoY in 3QFY23 leading to slower growth in 9MFY23 (v/s 9MFY22 level).

Now what we are encountering is the slowdown of discretionary-led momentum. Sectors such as consumer goods, paints, jewellery, quick service restaurants (QSR), apparel, and footwear are now showing signs of waning growth, as the December quarter results depict following the holiday season. 

This rural and urban slowdown is likely to prevail for more than 1-2 quarters. Adding more fuel to the fire, India's agricultural output is now under a new challenge from possibly unfavourable climatic circumstances, as the country struggles with rising food (cereals + protein) inflation. Like the previous year, heat stress is intensifying and placing strain on Rabi crops including wheat, oilseeds, and pulses. Also, the potential emergence of an El Niño situation might ruin the upcoming monsoon season.

If an El Niño state does emerge by summer, India is likely to experience a deficit monsoon in 2023. As higher temperatures can lower yields, it poses a serious threat to already planted rabi crops, particularly wheat. Second, El Niño frequently results in weak monsoons, which threatens to reduce the Kharif crop. Poor harvests in Rabi and Kharif could further accelerate food inflation and delay the recovery of rural demand. Third, warmer weather may increase the demand for power, which might increase coal imports and cause consumer price inflation.