With some of the leading FMCG companies raising a red flag on demand conditions in the second half of the year, there is some concern on the growth path of the economy for FY25. This is understandable as any projection of high growth was premised on a sharp recovery in consumption. As the IMD has indicated that monsoon is above normal and well spread, it was logically assumed that the cog in the wheel, i.e. rural consumption would turn positive. This is the basis for being more sanguine about Q3 of the year as the period coincides with the post-harvest cum festival season.
The issue which has been flagged is urban consumption which does not appear to be in the take-off mould. In the last couple of years the picture was fogged to an extent by the pent-up demand phenomenon where there was an upsurge in spending. While the lower end products did not quite see the same traction it did not matter as the sales of higher priced goods were up. This was the phenomenon of premium products selling well in the market. The higher income groups have been impervious to any external effects; and post covid have been on an upward spending spree. This has manifested in buying more high-end goods. In fact, the number of BMWs, Audis and Mercedes cars on the roads has increased and reflect the wealth of this class. But lower down the pecking order, things have been different.
Quite clearly when segmenting society in terms of targeting goods and services, it is no longer a dualistic approach of rural and urban. There is also an income group which comes into the picture where there are three distinct classes. The affluent would be at the top while the middle order encompassing a large mass, which includes those employed in relatively low-income jobs get covered. At the bottom are the poor who are just on subsistence and would be surviving mainly due to the largesse of the central and state governments. Even with the rural folks, it is not just agriculture which matters as the allied activity comprises almost half of the workers as well as output and hence a classification here is relevant. And then there is the non-farm class which is primarily the MSMEs in petty manufacturing and service activity. Therefore, a more nuanced look is needed to understand why things are the way they have shaped up.
There are several factors at work which drive consumption. The first is the case of repressed consumption in the past in the last couple of years which can lead to higher spending especially at the lower- and middle-income levels. The current picture is that there has been less compromise made on expenditure on services like better living which includes travel, tourism and dining. But the same on goods has been limited. Second is inflation which has cumulatively taken a toll on real income. While incomes have been rising the real value is denuded due to inflation. This leads to less spending on discretionary goods. As food inflation has been high with the products being necessities, there has been a cutback on other goods.
Third, while employment numbers do indicate that more people are getting jobs, there has been concentration in those involving lower skills. Here typically incomes are low and can be seen in sectors such as construction sites or logistics where delivery has seen an upsurge in job creation. The spending power is limited after accounting for rentals in cities and the phenomenon of sending money back to families in the hinterland. Fourth, there has also been a case of jobs being lost in the organised sector and this is manifested in the layoffs announced publicly by several companies. This is due to downturn in business as well as shift to greater use of technology. Either way this means the threat of loss of jobs is always there. Aligned to this phenomenon is the salary increases which have been modest since covid where companies have not been giving hikes of double-digit numbers as their performance has tended to be under the weather for a longer period of time. The top echelons reap the benefits of stock options and have made substantial gains due to the stock market boom.
Last the access to finance has become a little tougher ever since the RBI came up with stricter norms for unsecured loans which has pushed up the cost. Therefore, leverage based consumption has ebbed which is again a factor working at the margin.
Now there is less clarity on how these factors will work out in the next couple of months. While data for October is not yet available there is a view that the spending from the urban side could be low key this year. One reason for the picture to be blurred is that September was a month that did not see much traction in sales for automobiles as well as consumer goods due to the custom of not purchasing such products during this phase which is considered inauspicious by some sections of society. This year all the festivals have come earlier which has come in the way of sales. Hence there is some hope that there would be a revival in sales which again could be more from inventories built-up rather than fresh production.
Hence the picture is quite blurred today though the major comfort which comes from a critical proxy variable i.e. GST collections is reassuring. The fact that collections in the first 7 months of the year are higher than that of last year is reason to believe that conditions are stable. The fact that a large part of consumption has shifted to the online mode means that what is observed at the brick-and-mortar outlet and shopping malls do not give a reliable wholesome indication of the picture. The higher discounts offered by the major portals has already weaned consumption away from the physical outlets.
Therefore, while there is still need to exercise caution in forming judgements on overall consumption including urban spending, the commentary on Q3 sales will throw light on the final picture. All underlying conditions of good monsoon, better kharif crop and declining inflation (which is rate of change of prices and not absolute change in prices) seem to be in place. However, higher absolute prices for food products and low pace of growth in employment in the organised sector are still areas where the picture is not too clear.
The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal
