Is India seeing clear signs of consumer demand faltering?
During the last couple of weeks, we saw three diverse sets of news that pointed to a similar problem at a macro level. Firstly, there were the quarterly results of HUVR, Britannia, and Godrej where the pressure on the top line numbers was clearly visible. Secondly, the auto sales numbers for the month of April were really scary with most sales numbers down by nearly 15-20% and dealer inventories mounting. Finally, we have the YOY airline passenger traffic growth which fell to a multi-year low of just 3.1% in a potentially huge market!
Is it all about rural demand?
To a large extent yes, although not entirely! The FMCG companies that reported weak sales in this quarter saw a clear decline in rural sales. The reason is quite apparent. Farm distress is still quite high and the benefits of a higher MSP have not really percolated to the farmers. Most farmers are still selling their products well below their MSP and that is showing up in demand. Also, the lag effect of demonetization is still visible in the form of fewer jobs created by the MSME sector, which has been a major employer in rural areas. Thirdly, many of the large infrastructure projects have not really translated into higher incomes for the rural folks. But we also must appreciate that airline demand comes more from urban and semi-urban areas. So the problem is only partially rural. There is a problem with urban demand too!
Liquidity crunch is a reason
While liquidity had been largely addressed through remonetization, the pressure on liquidity still remains. The loss of jobs across MSMEs has taken its toll in a big way. Secondly, for consumer durables, the availability of cheap and timely funding is quite critical. In fact, a survey by Credit Suisse had discovered that Indian propensity to postpone the purchase of durables had nearly doubled in the last 1 year. That is also slowing down the demand for white goods as well as two wheelers and four wheelers. People are more willing to put off their purchases to a future date rather than take on liability when the situation is uncertain. The traditional liquidity crunch during election time is also adding to the problem.
Indian consumer anomaly
Over the last many years, Indian consumers have displayed anomalous behavior when it comes to consumption. Their sensitivity to price shifts continues to be very high. For example, when airfares started going up, there was a sharp downturn in aviation demand. Also when the price of petrol and diesel started rising beyond affordable levels, it directly and substantially impacted the demand for automobiles. As much as the Indian consumer size is large, it is also extremely and, at times, irrationally price sensitive. Consumer companies are learning it the hard way now!
