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The future of Indian consumer markets

Live Mint - December 25, 2013

Consumption kept the Indian economy going long after investment slowed, but over the past year, even this narrative has started to fray at the edges

Will consumer spending in India shake off its sluggishness and go back to growing at a fast clip and in turn drive economic growth?

The short-term answer of the next two years is that (1) the richer parts of it will step up spending in the next year and be the vanguard of growth, and since they account for at least 40% of all spending and over half of income, this is good news, and (2) however, we must be careful not to fall into our oft-repeated trap—assuming that the yo-yo upward growth that we are about to see as a result of release in pent-up demand is the right growth number to project for the future.

The medium-term answer of the next five years is that (3) the third decade of liberalization and the third trillion dollars of gross domestic product (GDP) will result in a very different spending pattern of consumers from the second decade and the second trillion dollars—in fact, discretionary income will shrink for a large section of Indian households as subsidies get withdrawn and income growth is lower, and inflation and interest rates are higher (remember the golden years of 2003-10?).

The long-term answer of the next 10 years is that we must urgently accept that the India consumption story has some big problems on the fundamentals that we must try and change or accept and factor into our expectations and our business strategies. Consumer India is not anywhere near what we believe it to be—a healthy, young fruit tree, growing in an environment that has all the natural ingredients needed for it to flourish and yield an ever-increasing crop year after year nearly as if on “auto pilot” and almost forever.

On the contrary, it is like the demographic dividend—it has lots of potential, but miles to go before it gets fulfilled. Consumer India comprises lots of people, but no regular income or formal jobs or decent living conditions, no social security either; perforce settling for micro-entrepreneurship livelihoods to compensate for no formal jobs, but with so little financial inclusion to enable them to grow to generate reasonable and stable incomes. If India doesn’t earn regularly and properly, if it has no social security, how can the spending engine be regular and confident?

“Top 20” to the rescue

The “Top 20” (percent by income) of Indian households account for 40-50% of total household consumption and 50–60% of household income, and are erroneously, in my opinion, labelled as the middle class. Their GDP per capita would be close to about $4,000 (around Rs.2.5 lakh), and they are not hurting anywhere near as badly as the rest. Their incomes may not have grown as much as they would have liked them to, they may have needed to work harder for it, but they have been protected. They have money, have been in a mood to conserve and not spend, and will be the group that will open its purse strings at the first sign of any good news. Why then is their spending confidence so low? About half of this group is in urban Indian and half in rural, and about one-third of rural and half of the urban Top 20 households have a salaried chief wage earner and, hence, stable, predictable income. Consumer confidence gets spooked far more easily if you are self-employed than if you are salaried.

However, this Top 20 will be the first gainers of income increases as investment starts happening—even those engaged in agriculture are rarely solely dependent on it. They will be the first in the queue to borrow as interest rates come down even a bit—retail lenders love them—and they will shift from “conserve to spend” in a jiffy. Remember how auto sales took off in 2010 (31% growth over the previous year) when a similar swing from conserve to spend happened? The Top 20 has money to spend even today. Their savings are still intact, in fact fetching higher returns than in the lower-interest days if invested in debt funds or bank deposits, and those invested in the stock market haven’t lost either. Inflation isn’t crippling this group and taking away its ability to spend, though many of us who belong here are feeling churlish at having to spend far more money than we have been used to on domestic help wages, food, eating out, airfares and electricity bills, leaving us with less surplus and having to think about big-ticket spending and borrowing more carefully than before.

This group has already increased its share of total income of Indian households between 2005 and 2010, and is increasing it even further. And in 2014, the Top 20 will make or break our consumption story. But marketers also have a large role to play here. They have to stop being bearish about their markets as they notoriously have been. They have to show their own confidence in the economy by even investing in advertising and launching new models and energizing points of sale. For example, this group has a large pool of consumer durables ready for an upgrade, if they can be persuaded to. This so-called middle class (upper class, actually) can easily manage holidays, though with less carefree budgets. If they can’t eat out as often as they used to, they want to eat better at home, and maybe the time has come for experimental ready-to-eat “foreign” or “different” foods. Given how they have been more careful about splurging these past two years, their consumption will surge at the slightest improvement in the economy, like a pressure cooker on simmer finally letting off steam. The only mistake marketers need to not make is to project this one time surge into the future and then get disappointed and complain of a “slowdown” and go bearish again.

Just by way of clarification, the top 20% of Indian households by income is what marketers may recognize as SEC A, B and a smattering of the upper end of SEC C. About 50 million households, they comprise about 45% of urban India and a little over 10% of rural India. Given how many more households there are in rural India than in urban, this group is about evenly spread in rural and urban India, and also between small and large towns, because in the increasingly networked and physically connected world of the past decade, you don’t have to live in a metro to get rich.

The rest

The next 40% (Next 40) is where the bad news lies. This is middle India, with a per-capita GDP just short of $1,000, accounted for about 40% of consumption expenditure, and just about manages to balance its budget, generating a modest surplus after meeting basic costs, in a good year. They were seated in the consumption train, but are now precarious footboard travellers, ravaged by inflation and subsidy removal, especially in urban areas.

The Next 40 households are two-thirds rural and one-third urban.

They will, however, be cautiously ready to spend on productivity tools that they need to earn—so if the motorcycle packs up, it will be replaced; if tuition classes are needed, they will be paid for. In urban India, particularly the bigger cities, a lot of this group’s household and apparel consumption is happening through every manner of goods imported from China or made by small Indian suppliers.

Marketers will recognize this group as being SEC C and the top half of SEC D. Interestingly, in both urban and rural India, this group that provides the services and labour for industry and for the richer households has managed to get a one-time step jump in income for itself on account of inflation and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) benchmarks.

The bottom 40% of households by income contribute significantly to the revenue and profit of a very small number of companies. Their incomes have grown and will grow on account of social schemes, gifts of election years etc., contributing to slow and steady growth for basic items such as soap, tea, cooking oil and, I dare say, Fair & Lovely and cheap nail polish. One-third of this group is urban poor, and they are far worse hit than their rural counterparts, falling as they do outside the ambit of many social schemes.

The bigger picture on consumption

In the first and second decades after liberalization, the quality of everything went up on account of competition and privatization, and prices went down on account of duties, tax reductions and competition. The subsidies were held, the economy grew at a fast pace and incomes grew, too, and there was a very sweet period indeed where discretionary income grew faster than total income. Now, let’s fasten our seat belt for the reverse ride.

The third trillion (of GDP), third decade (after liberalization) that we are entering is one where high consumption aspiration meets a spectacular failure of public goods. Fed-up consumers buy more public goods from private providers at higher prices, and there is a “new normal” on costs (check out our electricity bills or what the plumber now charges). Consumer credit will not come cheap and easy as it did once (more than Rs.5,000 crore of bad debt on credit cards were written off in 2009), and companies are unlikely to go back to their past predilections of periodically betting on the likelihood of increased volumes and absorbing cost increases and not passing them on to consumers.

So yes, this is going to be five years, at least, of corrections happening, and across-the-board growth in consumption will be slower than in the past. But there is enough consumption expenditure for companies that want to grow to do so (even at 2012-13 levels, there is Rs.17 trillion after removing 59% for food, fuel, rent, medical) provided they believe in having a market strategy that makes it obvious to the customer “why spend on me and not something else, how does this add value to you and your family’s lives”.

An even more serious, even longer-term problem that will plague the growth and development of India’s consumer economy is the way Indians earn. The occupation demographics are dismal—90% of the Indian labour force is employed in the informal economy, and only 40% of urban working people and less than 10% of rural working people in India have regular income. A large chunk even in urban India are “self-employed”. We have for far too long suppressed the bad news that the label “self-employment” harbours and thought of it as “entrepreneurial”. In reality, self-employed people are tired job-seekers who are settling for any livelihood that can help them make a modest living. They will earn more money in good times when the general levels of economic activity are higher and make less money in bad times—but the swings will be higher, the recoveries longer, the transmission of any policy incentives will be slower, and their linkages with the corporate sector, whose results we read carefully as a health indicator of the economy, will be very nebulous.

Being in the informal economy with volatile incomes, most of Consumer India lacks full and uninterrupted access to financial services.

As we have just seen, the most important question that we have to consider when gazing admiringly and hopefully at our consumption driven economy is “how does Consumer India earn”? Because earn it has to, before it spends and saves. Regular jobs—the kind that give regular salaries and social security benefits—have declined both in the government and the private sector, and large infusions of foreign direct investment in modern manufacturing doesn’t necessary mean more jobs.

“Joblessness and informality” are the two termites gnawing away at the health of the Consumer India edifice. Young India faces these more than any other generation before them. This is the “bad” narrative that applies to about 80% of young India’s 200 million 15- to 24-year-olds.

Another oft-touted assertion is that “urbanization” is the fuel that will power consumption. However, “non-ruralization” is what we see in India, not urbanization. Urbanization in India is not putting masses of people into neat, planned cities with superior and modern ways of life, compared to the villages and hence creating a surge in more developed market-like needs; nor is India urbanizing in a way that enables people to earn more (because it creates more guaranteed, value-added work). And it certainly isn’t fulfilling its promise of providing economies of scale for businesses, because of the heterogeneity an average Indian city harbours.

What is true is that urban incomes are higher than rural incomes on a job-to-job basis, not too much must be concluded from it about easier urban living or richer urbanites. The median income of urban India (i.e. the amount below which half of urban India lives) is far lower than the average income of urban India. This means that there are a few very rich and many modestly poor people in urban India. About one-quarter of urban Indian lives in what the census classified as slums, and 40% of these slums are in the large cities.

Therefore, the supply side has to get its act together—consumers are ready and waiting—and figure out how to add value to and extract value from such a consumer base for consumption to grow. And the policy side has to see how we can get people to earn steadily and earn more for value-added and more productive work before we declare victoriously that our consumption driven economy has “taken off”.