Wherever you look, consumers are in a mood to tighten their belts, a clear sign that high inflation, high interest rates and price increases have started impacting demand for consumer goods in the country. With growth in capital investments ? the economy?s growth engine for the past few years ? already grinding to a halt, this bodes ill for India?s economic growth, as close to 57% of GDP, a measure of economic value added in the country, is driven by private household consumption. Already, GDP figures for the quarter ending March have indicated a sharp moderation in growth, down to 7.8% from 9.3% at the beginning of last fiscal.
Dipping sales growth numbers portend tough times ahead for a host of companies that sell directly to consumers. Car sales growth in May suddenly fell to a two-year low of 7%, after 13% in April. Recollect that the 2.5-million unit Indian car market grew at 29% for the year ending March. Initial car sales data for June have not been inspiring either. Tata Motors domestic sales were down 21% year-on-year, while Maruti Suzuki sold 3.8% fewer cars. Hyundai Motor was the only large car-maker to post better figures: Up 11% from the June 2010 sales.
Sales growth in consumer expendables like soaps and detergents for the first four months of 2011 moderated to 5%, from 8% in the corresponding period of last year, according to research firm IMRB. Growth was much more tardy in personal care items like skin creams and shampoos, down to just a fifth (8%) compared to a high of 40% in 2010. And soaring cotton prices and duty hikes have actually contracted demand for apparel by almost a fifth in the last two months.
Says Vijay Bansal, CMD, Cantabil Retail India: ?In these inflationary times, the consumer is spending more on food and cutting down (her) spending on apparel and other products. As a result, we are going for early sale season (to liquidate stock) this time.?
A new report by credit rating agency Crisil out Tuesday said that high inflation, averaging 8% per year between 2008-09 and 2010-11, have made the 221 million households in India spend an additional R5.8 lakh crore in the last three years, R3.76 lakh crore in 2010-11 itself.
Says Sunil Sinha, senior economist, Crisil: ?High inflation has hit sales in finance-dependent categories, and even to an extent in non-finance driven ones.? Expensive loans have also slowed construction and sales of residential properties across metros and big cities. No wonder, consumers plan to cut spending and opt of cheaper alternatives according to a report, ?Winning Indian Consumer in 2011?, released last week by the Boston Consulting Group.
Says Harsh C Mariwala, chairman & managing director, Marico: ?I think there is a marginal impact on consumer demand due to high inflation, higher interest rates and price increases. I would say it has impacted consumer consumption to an extent.?
Industry analysts observe that consumer expendable or fast moving consumer goods (FMCG) companies will adopt fresh marketing strategies to drive consumer consumption this quarter. ?FMCG companies will now offer freebies and discount offers. Also, they will opt for cross promotions to drive volumes,? said a Mumbai-based FMCG analyst. Even in apparel, retailers like Reliance Trends are reporting down-trading by consumers within national brands, and often to the retailer?s private label. Arvind Brands, which markets Arrow and Lee, too is reported to be grappling with low growth in June, and most apparel retailers anticipate tardy sales even in the upcoming festive season, traditionally a good time for apparel sales. The slowing consumer markets come as a double whammy at time when capital investments or investments by companies, have slowed appreciably of late. According to the Centre for Monitoring Indian Economy, a Mumbai-based economic think-tank, the number of stalled projects in January-March rose to 390 from 330 in 2010. There is also a dip in the number of new projects announced, down 990 for the first three months of the year from 1,070 in 2010. New capital investments too, at Rs 2.6 lakh crore, hit a seven-quarter low in January-March, 2011. ?We are immediately focussing on what we call call-for-action or tactical ads to increase enquiries and showroom footfalls. These ads right now are talking about our offers related to accessories, free gifts, EMIs, and exchange bonuses in particular. Every marketing and sales scheme becomes critical in such an environment as it is a fight for volumes,? Shashank Srivastava, chief general manager (marketing), Maruti shared with FE in May after the month?s low sales growth figures were made public.
The Reserve Bank of India (RBI) has jacked up interest rates ? increasing the benchmark rate by 2.75 percentage points since March 2010 ? to rein in inflation at the cost of growth, derailing growth in interest-rate sensitive industries like cars and houses. Notwithstanding all the monetary tightening, India?s main inflation gauge, the wholesale price index, for May remains stubbornly high at 9.06%, with the government expecting it to moderate to 6.5-7% only by March 2012, indicating continued pressure on household budgets.
In May, eight core sector industries grew at 5.3%, compared with 7.4% a year ago, while in June, the HSBC Markit Purchasing Managers? Index ? a leading indicator of industrial activity ? hit a nine-month low of 55.3 from the May figure of 57.5, its steepest monthly fall since November 2008. These figures worsen the outlook for May industrial production data (as measured by the index of industrial production) due next week. IIP for April was 6.3% versus 13.1% in April 2010. In a recent report, Nomura observed that demand sluggishness was becoming widespread, noting that ?commentary from FMCG companies continues to get more cautious, suggesting that the tightening cycle is finally starting to have an impact on end-consumer demand.?
Car sales data for May and June come in the backdrop of a Barclays Bank report in April which said that slowing auto sales in China and India would adversely impact overall economic growth in the two countries. The $74-billion automobile sector in India employs 13 million people, one of the biggest formal sector employers in the country. The country?s largest carmaker Maruti Suzuki has already brought its growth projections down to 8% for the year from 13% a few months ago. Bike sales too have moderated to 14% in May, from 26% last fiscal. This disquiet in consumer demand, coupled with slacking investments, puts the projected 9% GDP growth for 2011-12 in question. The decline in GDP growth for the past five quarters has been secular: starting at a high of 9.4% in Jan-March 2010, 9.3% in Q1 FY11, 8.9% in Q2, 8.3% in Q3 and finally sub-8%, at 7.8%, for the last quarter of FY11, the latest period for which data is available. Already, many analysts and observers have started paring GDP growth projections to anywhere between 8.5% and under 8%. Though it?s still early days, the country?s met office has brought down its projections for monsoons to just below normal. Good monsoons are key to strong demand for consumer goods across rural India, a big market for everything from colas to cars. Higher farm incomes and government largesse in terms of better support price for crops and guaranteed rural jobs had buoyed up consumption in rural areas. And positive real wage growth had kept the retail counters ringing across urban India. Another heartening sign is the fall in food inflation to 7.78% for week ending June 18 from 9.13% the previous week, thanks to cheaper vegetables and pulses. And many, including Kaushik Das, chief economist at Deutsche Bank believe that this scenario will hold.
Chairman of soaps-to-furniture Godrej Group, Adi Godrej too remains upbeat; ?Demand continues be very strong despite the inflationary pressure in the Indian FMCG industry. We expect a very strong growth in FMCG in 2011-12.We expect a normal monsoon, good crop and therefore, a good agricultural season.? A majority of marketers and policy makers, though, are keeping their fingers crossed.
