Danger: A Vulnerable Consumer Base
Economic Times - December 13, 2009
Trying to find a singular explanation of Indian consumer behaviour is exhausting. Because there is none. So too, to try and find a purely consumer based explanation for apparently bewildering patterns of sales across categories or price segments. It takes two to tango and what banks and 2 wheeler and car companies are doing to consumers is a big part of how consumers behave, in response. Consumer India is a hydra headed monster and aggregate demand off take, or aggregate consumer behaviour is just the sum of its many parts. That's why people are always saying "yes… but." to any explanation. Why are car sales zooming? Here's an explanation. Because it is only the rich who buy cars - car penetration is a bit over 20% in the topmost quintile of Consumer India (i.e. the richest 20% of India), and 5% or less in the remaining quintiles. Car sales also come out of corporate pockets as much as out of consumer pockets in this segment of income. and Rich India is actually back to feeling comfortable – the stock market is back up again, and everyone is feeling secure looking at their NAVs climbing back. Banks are lending for car purchases again, corporate profits have been very good and tax planning time is near The economic typhoon seems to have mildly hit and then gone away, adding to an increase in level of this consumer's confidence. Pragmatic consumption is back again, and a new car with a bank loan is a pragmatic thing to do. Why are housing sales not taking off as much? The rental market has collapsed but the purchase prices are still high, and consumers still feel too wobbly to take on large long term commitments. Get affordable housing in (defining affordable according to consumers' income levels not builders coming a notch or two down the price ladder), let the banks learn to credit appraise self employed people based on their future income stream and past credit history, and yes, slowdown or not, it will take off.
Table 1 shows how much consumption expenditure and "income surplus" (income minus routine expenditure) each income quintile of the economy usually accounts for (((NCAER, Rajesh Shukla, How India Earns, Spends and Saves).Other than the top 20% of India, the ability to withstand shocks is low to very low in terms of the amount of income surplus ( and this calculation of income surplus does not include non routine expenditure of health emergencies or social commitments.)
2003 - 2008 everyone's income was growing in double digits, and inflation was low. Today inflation is high and in the lower quintiles the proportion of income that goes to fund food expenditure is high. In India a whole lot of people buy a ittle bit each that adds up to a lot. A little cut back of a lot of people can have a huge adverse impact on company revenues as can the other way around. However the desire to consume is still there and that's a good sign. Why are fmcg being bought? Perhaps because they don't have competition from durables and movie tickets and other such things at the moment? However we can second guess and speculate all we like, but what we need is to fund and find a way by which we can get data directly from consumers continuously. Once we start with the "WHO is buying" and not with the "WHAT is being sold" things ill start making sense. In good times a whole lot of people buying a little but each adds up to a lot of growth.