Column: Reading tea leaves of consumption

Written by Arvind Singhal | Updated: Mar 1 2012, 01:52am hrs
The spate of announcements of the last quarters financial results is over and, as is increasingly the case, leaves in its wake more confusion about the actual health of Indias economy. Some sectors seem to have done better than expected both in revenue and in profitability growth, while others give clear signs of being in distress or heading towards a more stressful situation. Further, in each of the sectors, the market leaders have generally given stellar performance while their peers seem to be struggling in the same environment. The situation is even more confusing in sectors directly related to consumer spending, and for companies marketing consumer products and services.

FMCG companies, especially those engaged in personal and home care products and in packaged food, seem to have done quite well in the last quarter. At the other end of the spectrum, almost the entire textile sector is seemingly in a big crisis and many of the leading players are hurtling towards becoming potential bailout cases. Automobile sector generally publishes only sales units data and that shows not only an unmistakable slowdown but the real possibility of a year-on-year decline in unit volumes for the sector. Consumer durables and appliances companies have also reported weakness in growth and it would not be a surprise if in the next few quarters their value growth slides to low single-digit levels from the heady double-digit levels for almost the entire last decade. Then there are other sectors such as telecom and healthcare that show steady revenue growth but deteriorating profitability indicators.

It is important to understand Indias private consumption trends since such consumption accounts for almost 60% of Indias GDP. With the governments financial health in shambles, it has no headway to provide any stimulus to the faltering growth by increased spending. If private consumer spending also slows down, there is no way the economy can grow at even a 6% level in the coming quarters. Unfortunately, with the governments decision-making paralysed on account of the current election season, and the PMEAC remaining hopelessly optimistic as ever, there is every reason to fear that private consumption will slow down and the biggest impact will be on relatively high-ticket items and on goods and services that are discretionary in nature. The worst-case scenario would be an attempt from the government to shore up its tattered finances by raising excise, service tax and other indirect levies in the coming Budget, which could bring down consumer spending growth rate to a near stall.

A deeper study of Indias private spending data over the last 10 years reveals fundamental shifts. Until early 2000s, the largest quantum of consumer spending was on intuitively predictable categories with the top 5 being food & groceries, textile & clothing, gold & jewellery, consumer durables & appliances and non-food & tobacco FMCG. In 2012, the top 5 categories of consumer spending are food & grocery, pharmacy & healthcare, CDIT (consumer durables & appliances, home electronics, personal telecom & personal computing/IT), education including private coaching, and textiles & apparel. Personal transportation including fuel, insurance and maintenance is a close contender to being in the top 5, and is likely to displace spending on textiles & apparel from the top 5 in the next 2 years or earlier. The much tracked non-food & tobacco FMCG is not likely to figure even in the top 10 consumer spending categories by 2015 with several other categories such as leisure & recreation, restaurants & cafes and furniture & furnishings growing at a much faster pace.

From the government policy perspective, it is crucial to get down to a much deeper understanding of the various current constituents of the Indian economy, beyond just the headline categorisation of manufacturing, services and agriculture, and then make an intelligent effort to forecast the likely growth potential and thereby the potential of each of these sub-sectors to generate employment and revenues for the government. The government then needs to shed all dogma and overcome narrow-minded political expediencies to come out with appropriate fiscal and operational policies that are most relevant for each of these sub-sectors.

The need to reform the agriculture sector from production to harvesting, processing and movement needs no further emphasising. With spending on healthcare already becoming the second largest category of consumer expenditure, the government must focus on giving appropriate stimuli to encourage more investment in the pharma side, and more investment in domestic manufacturing of healthcare equipment and consumables to bring overall costs down. Education sector needs much more than posturing and promising as has been the case over the last many years. The auto sector has to be treated with far more care and support rather than getting swayed by pseudo-socialistic posturing that it serves the need only of a relatively affluent India. It is literally one of the biggest growth drivers of the Indian economy. With spending on CDIT having the potential to grow in double digits, it is now critical to create conditions for large-scale manufacturing of semiconductors and various categories of electronic components, else Indias import bill for such inputs would easily exceed its import bill for oil before the end of this decade.

As far as investors and the analysts tracking leading players in each of these sectors are concerned, while they obviously need to track financial performance of the companies on their radar, quarter by quarter, it would be helpful if they were to also take a somewhat longer-term view on the medium- and long-term consumption trends across different sectors and then calibrate their recommendation and investment. If consumers are, indeed, deferring spending on high and relatively high value (or discretionary spending) items including housing, automobiles, consumer durables, furniture and apparel, etc, they could be giving themselves small treats and rewards such as buying a lipstick or a skincare bottle more often, having a more frequent cup of coffee at the neighbourhood caf, or even going to cinema more frequently.

Like one (or a few) swallows dont make a summer, encouraging results of a few companies or even a few sectors may not reflect the larger current stressed state of the economy.

The author is chairman of Technopak Advisors Pvt Ltd