The silver lining for the consumption story

The consumption cycle appears poised for a turnaround. Three elements have to come together to see concerted growth in this segment. These are timing, income and finance. Timing is important because there typically are seasonal variations in the spending cycles of households, which coincide with the harvest (October-November and April-May) for farm-related households, bonus/incentive payments in the organised sector (April-June) and festivals (September-December) for all households. Second, income is evidently required because households spend when income increases by more than food inflation, as normally non-food spending is based on what gets left over after spending on food. Third, when one spends on consumer durable goods or automobiles, access to finance is even more critical.

At present, all these three elements point in the same direction. A good harvest will ensure spending is on track and would be of the order of an incremental Rs 15,000-20,000 crore. Payouts from the pay commission's recommendations will add Rs 40,000-45,000 crore after adjusting for tax and savings. Hence, the income factor would also be working well, at a time when the festive season provides the right environment.

Bank finance is of importance and data on credit disbursement shows the personal loans segment is the best performing, with growth of 4.6 per cent in August over March. Of this, loans to the consumer durables segment, though small, have grown sharply at around Rs 20,000 crore. Automobile credit is around Rs 1.6 lakh crore and growing, while other personal loans that can range from education to current consumption are around Rs 3.1 lakh crore. Here, the driving factor is cost and availability of funds.

Of late, banks have preferred to target this segment mainly because delinquency rates are lower and returns competitive. This has provided a push to the consumer goods sector and, hence, the recent interest rate reduction by the Reserve Bank of India will have a lubricating effect on such consumption.

There are other factors at work to ensure that this scenario will turn out to be right. The first is that the consumer goods segment has been downbeat in the past three years with growth rates of -2.8 per cent, -3.4 per cent and three per cent, respectively. This low consumption base should create a possible demand upsurge in the coming months. Second, companies have excess inventories that have to be dispensed with. This holds for textiles/garments in particular, where fashions matter and holding on to stocks could be a liability. In a bid to sell these goods, there are signs of offers for customers that are positive for the consumption cycle. Last, the advent of e-commerce and competition have also led to a plethora of discounts being offered on almost all products, which is actually a cut on the profit margins by companies.

It does appear that we are at the cusp of a major recovery in the consumption story in India and the sectors that can look forward to better times are automobiles, garments, fast-moving consumer goods, white goods and electronics. The story so far this year has been more cheerful for these segments, relative to the rest of manufacturing. And, they can see acceleration in the next few months till the end of the year. While low demand conditions have affected growth prospects, consumerism can be the trigger for higher growth.

Views are personal

Madan Sabnavis
Chief Economist, CARE Ratings