Inflation, extreme weather events could spoil the party for India Inc in Bharat

On Sunday afternoons in April 2020, 27-year-old Ashima Dhawan stealthily took driving lessons within her apartment complex on Madh Island in Mumbai. A nationwide lockdown was on to contain the spread of coronavirus, and asking a friend to teach her to drive was Dhawan’s way of coping with the isolation. She soon bought a Maruti Suzuki Swift. Three years later, Dhawan, a creative director in the Hindi film industry, is looking to upgrade to an SUV. “I am really excited to buy the (Mahindra) XUV700, but it has 8-10 months’ waiting period,” she says.

About 1,400 km away, Vikram, a driver in Delhi, had spent his lockdown days in anxiety. Confined to a two-room flat that houses his family of five, he did not have the luxury to develop new hobbies. He had to make sure he had a job when the lockdown was lifted. Like Dhawan, Vikram (who goes by his first name) hoped to make a purchase — an air conditioner to escape the blistering Delhi heat. But while Dhawan was successful, Vikram was not.

Dhawan’s current problems stem from a supply-demand mismatch. What has stopped Vikram is low and uncertain income.

When the lockdown forced people indoors, those with white-collar jobs ended up with forced savings while many in the informal sector lost their jobs. Some economists said the post Covid economic recovery was K-shaped with the rich getting richer and the poor poorer. However, now, industry executives and economists say the rural slowdown has probably bottomed out and recovery will start getting more even from here.

“Things are much more stable now compared with when the pandemic began,” says Vikram, who had enough savings to buy the air conditioner earlier this year but deferred it as the summer was short-lived.However, inflation was high for most of FY2023. This means the earnings of low-income families —those in rural areas as well as minimum wage earners in urban areas — have broadly been stagnant. But a moderation in inflation, apart from factors such as increased government spend and a rise in incomes, is expected to aid consumer sentiment and, in turn, spending.This is good news for consumer and automotive companies that are betting on low-income households like Vikram’s, who had cut back on their purchases, to bring back demand this year. The fast-moving consumer goods (FMCG) industry is seeing some encouraging shifts. “Both rural markets and non-food saw a positive consumption growth (in the March quarter) for the first time in six quarters,” says market analytics firm NielsenIQ.For the country’s largest consumer goods company Hindustan Unilever (HUL), rural market volume turned positive only in the April-June quarter. It had declined in double digits in the past. Its rival, Dabur India, which has a significant share in rural markets, is also seeing signs of improvement. “Sequential moderation in inflation is resulting in gradual improvement in offtakes in the industry and is expected to lead to year-on-year gross margin expansion,” says Dabur CEO Mohit Malhotra. Both HUL and Dabur feel the slump in rural demand has bottomed out.

The picture looks slightly different for the consumer packaged goods (CPG) industry for which the last 12-odd months, particularly the April-June quarter (Q1 FY2024), have been relatively challenging. “In Q1, April and May were a lot more challenging but since mid-June, we are seeing some greenshoots in demand,” says Krishnarao Buddha, senior category head, marketing, Parle Products.

“Things are even better in July.” Buddha has a positive outlook on consumption, “also supported by rural, which was subdued all this while”.

In 2022, the growth in sales for FMCG companies mainly came from price hikes as volumes lagged. That is changing slowly. HUL expects volumes to gradually recover, while for Parle, growth is largely volume-led now. “Last year we saw huge inflationary pressures, which have eased now and a lot more CPG companies have started giving better value to the consumer —by giving extra grammage rather than discount,” says Buddha.

The pandemic did not dampen demand for all kinds of FMCG products though. Ghadi detergent, one of the country’s largest home and personal care brands, witnessed a surge in demand immediately after the pandemic, before it rationalised. “We now expect volumes to start growing again,” says Sushil Kumar Bajpai, president, RSPL Group, which owns Ghadi.

The consumer durables and electronics industry is also seeing an uptrend, with growth in some key products in the first half of 2023 (January-June) driven by small cities, both in terms of volume and value, according to GfK Offline Market Intelligence.

Anant Jain, head of market intelligence–India, GfK, says: “For instance, growth of washing machines, air conditioners and panel televisions is in double digits in cities with population less than 5 lakh. Growth in smaller cities, with less than 1 lakh population, is even higher.”

FAST LANE
Another sign of weakness in mass consumption showed up in auto numbers. Two-wheeler volumes are still 24% lower than their pre-pandemic peak even as luxury car companies continue to post record sales. In twowheelers, the major drop has been in entry-level scooters and motorcycles. Automakers passing on high input costs is one reason for the drag in two-wheeler sales.

“The overall cost of acquisition in this (entry-level) segment has gone up due to regulatory changes, higher insurance cost and interest rates, among other factors,” says Vinod Aggarwal, president, Society of Indian Automobile Manufacturers (SIAM), which represents the automobile industry.

This anomaly, too, seems to be correcting now. Sales of two-wheelers rose in May and June after contracting in April, shows data from the Federation of Automobile Dealers Associations (FADA), which tracks retail sales. SIAM’s Aggarwal says: “We should reach the earlier peak (in two-wheelers) in one year.”

A normal monsoon and the recent increase in minimum support price for kharif crops are among the factors expected to boost the disposable income of rural consumers. “We saw good momentum this wedding season,” says Niranjan Gupta, CEO, Hero MotoCorp, the world’s largest manufacturer of motorcycles and scooters. “The festive period (which starts this month) will be better.”

What can spoil the party for companies? Inflation and weather, say executives and economists. “We expect volumes to continue to recover gradually due to the high levels of cumulative inflation and the fact that consumption habits typically recover with a lag,” HUL CEO Rohit Jawa said at an earnings call last month. “On the weather front, the situation remains challenging… El Niño has set in early and could impact the latter part of the monsoon.”

More than El Niño, for India, the key thing to watch out for would be the Indian Ocean Dipole, says Paras Jasrai, senior economic analyst at India Ratings. “If that remains positive, then the impact of El Niño would be less severe.”

Vikram, though, thinks the worst is over. Would he finally buy that air conditioner? “I will definitely buy it next year, unless the heat comes back this year itself.”

himani.kothari @timesgroup.com