Domestic consumption growth is what our hopes are pinned on now, in order to get the economy back on the fast growth track. The bet is that putting more money into the hands of aam aadmi, one way or another, and not making the rich feel bad by taxing them further, will make people spend more on consumption. And if consumption grows, then can corporate profits, corporate feel good and investments be far behind? Some economists caution that this might not come to pass, and in the past, households have preferred to save more rather than spend more, and domestic investment did not follow primed consumer goods growth. Whether this happens again, is dependent a great deal on supplier conduct rather than on the laws of economics?it takes two to tango, and suppliers need to persuade and tempt consumers into spending by offering them things they will value. Unlike 8 or 9 years ago, there are no huge unutilised new capacities lying around, created because of the belief in hype about the great Indian middle class story. Since then we seem to have gone the other way; now Consumer India is far more ready for more in terms of quality and quantity, and suppliers are lagging behind. The fact is that consumption has not collapsed in any segment so far?just slowed down or got postponed. It is important not to confuse companies collapsing with consumer demand collapsing. As Warren Buffet famously said, you only know who is swimming naked when the tide goes out.
Therefore this is a good time for suppliers to take stock of all that we have learnt about the nature of consumer demand in India, and decide what sorts of investment bets are warranted; and what kind of product/business portfolio is needed, in order to ride the opportunities created by the new round of fiscal stimulus for consumption.
First of all, there is no doubt that the domestic consumption story is sound. It has held up in good times and bad. The glory days of 2004-2008 may not come back again in a hurry, when consumption surged ahead in all segments of society, and more so with the rich getting richer and spending disproportionately more. However, we still are an under-consuming country because so many people have just about started their consumption journey, and aspiration is ahead of income. As long as we don?t shrink our economy, it will continue to be a slow burn consumption story. So, steady investments and a religion of truly catering to consumer needs and increasing the value delivered to consumers cannot ever be a misplaced bet in this market. What is the wrong way to go?and we have seen a lot of that in the past five years?is valuations driven investments or dominance desire driven investments leading to chasing reckless and unprofitable growth. In either case the logic was ?first let us get there, then we will see?! Such leveraged bets on the Indian economy have paid off handsomely in the past, but then, that was a lucky time and place, where fortune favoured the bold. Now we are wiser about risk after the enormity of what happened in the developed world!
However we have also learnt that there is no simple homogeneity to this consumption; it?s not about doing more of the same products with only the incremental cost of widening distribution. Consumption growth and growth in complexity go hand in hand. The cost of complexity and the cost of a lot of diverse people consuming a little bit each, is brutal on the economic models of most businesses. Consumer India is a hydra-headed monster or a many-splendoured beast, depending on which metaphor you prefer. If you want to fully take advantage of the India consumption story, a wide product (and price-performance) portfolio is unavoidable. Different parts of the consumer market will grow at different times. Rural India showed us that last year. There were furious debates about whether India was coupled or decoupled (safe or not safe) from the mess that was the world economy; and the answer was ?both?. India?s consumption is like the proverbial curate?s egg. It will always be good?and bad?in parts. If you are a ?premium segment? player only, then too bad, you will have to sit out of the next few dances till it?s your turn again.
Going forward, rich consumers? consumption limps back to normal, cushioned as they are even at their current levels of income, and cheered a bit by the stock market moving up more than down. Good deals, back-ended, longer term locked in, purchase propositions will work for them. Anything positioned as ?sensible? and not ?extravagant? will work?even an Alaskan cruise that educates the children.
Over extended young earning folk, all liberalisation children of middle and upper income parents who have never seen a downturn so far?don?t bet too heavily on them. But they have a life time value, so customer acquisition and life time value pricing are important.
Mass market growth on the back of indiscriminate credit is over. The growth rates will decline, but the quality of the franchise will be a lot better, and brand building will work far more than bargain hunting. That?s good news in the long term.
Rural demand will grow if infrastructure grows?what we have learnt from NCAER analysis is that the urban-rural difference in consumption is explained most of all by infrastructure (42% weight), then by income (31% weight) and least of all by lifestyle and exposure. More roads, and more NREG money, and continued credit availability keep this market safe. Dr R Shukla of NCAER calculates that there are 5 crore (26%) families in rural India whose major source of income is labour, and they have 20% of all rural India?s income today. Assuming the NREG goes where it should, that is another Rs 7800 per family per year. Caution: They are poor but not backward, and will spend on things that help them to earn more.
Finally it is important to know how India spends. NCAER?s recent study (see tables) is revealing in terms of what Indians will spend more on, as they get richer. In terms of routine expenditure, there is an increase in percentage expenditure (on top of a growing income) on housing, education, transport and miscellaneous items including communication. In terms of non-routine expenditure, there is a decline in the percentage spent on medical and an increase in one-time education expenditure?probably capitation fees!