Special Feature     09-Oct-18
Consumption: Set to spurt
Increase in manufacturing output, normal monsoon and low inflation point to purchasing power of urban and rural population
An economy rebounding without heating up despite sprinting crude oil prices is a recipe to spur domestic consumption. To top it up, the approaching festive season is set to step up buying of consumer durables, staples and other companies dependent on discretionary spends by urban and rural consumers.

The fading of the twin shocks of demonetization and goods and services tax is working in tandem with the third consecutive normal monsoon and minimum support prices (MSP) for kharif crops pegged at 1.5 times the cost of production. The contagion of farm loan waivers has spread across states.

These factors in culmination should help prop up the aggregate consumption in coming months. A rather tepid base effect given the poor consumption spending in the last fiscal year, is also likely to support the pent-up demand. Besides, a slew of state elections preceding the general elections mid 2019 are spurring spending on infrastructure and social schemes. The cascading effect will lift a host of consumption-related sectors.

Besides, the household financial savings rate increased 40 basis points to 7.2% in FY 2018, the highest in two years. Such a strong savings narrative will likely shape up well in the coming quarters for a wholesome shift in consumer spending.

According to the Ministry of Rural Development, the financial year-wise national-level expenditure on the Mahatma Gandhi National Rural Employment Guarantee scheme stood at Rs 64280 crore in the fiscal year ended March 2018 (FY 2018), up from Rs 58063 crore in the previous fiscal year. The amount spent on wages rose to Rs 43418 crore from Rs 40751 crore.

Recent GDP data are transmitting signs of revival in domestic demand and investments. Growth came in at a nine-quarter high of 8.2% in Q1 of FY 2019 over a year-ago period after expanding 7.7% in Q4 of FY2018. The employment-oriented construction sector spurted 8.7%. The government's thrust on rural economy resulted in 5.3% increase in the output of agriculture, forestry and fishing. The buoyancy in demand for electricity, gas, water supply and other utility services, up 7.3%, indicates the broad demand trends.

India's industrial production (base year 2011-12=100) was slightly down, but healthy, at 6.6% in July 2018 compared with the 6.9% growth in June 2018. The output of the manufacturing sector accelerated to 7%. The cumulative industrial production increased a sharp 5.5% in April-July FY2019 from the 1.7% growth a year ago. The output of the manufacturing sector as a whole improved to 5.5% in April-July FY2019 from 1.2% growth in the corresponding period last year.

Though the Nikkei India Manufacturing Purchasing Managers' Index dipped to 51.7 in August from 52.3 in July, it extends the period of expansion to 13 months. New orders placed at Indian manufacturers rose for the 10th month in succession in August.

The higher output of consumer durables in recent months indicates that production is being ramped up to meet demand that is expected to pick up further in the festive season. The index of industrial production (IIP) for consumer durables goods surged 14.36% to 133.80 in July 2018. The index had jumped 13.35% in June as well. Though a part of the radical upswing is linked to the low base effect of the June and July 2017 quarters due to the roll-out of GST, the undertone in the sector is positive as the index has managed to stay above the 133 levels for the last three months. The growth in the sector is clearly consolidating after a dip in April 2018.

The increase in activity is not accompanied by retail inflation. The all-India general Consumer Price Index (CPI) dipped to a nine-month low of 4.17% in July 2018 over July 2017 and compared with 4.92% in June 2018. The softening price trend was visible in both the urban and rural areas. The core CPI inflation was flat at 6.29% though the cumulative CPI inflation nearly doubled to 4.63% in April-July FY2019 over a year ago, signalling the acceleration of consumption.

The S&P BSE Sensex galloped nearly 16% in the previous year, with the S&P BSE Consumer Durables index hitting an all-time high near 23,800 in January 2018 before correcting amid a rout in NBFC stocks and soaring fuel prices. The index fell to a nine-month low under 19,500 mid July 2018. The S&P BSE Fast Moving Consumer Goods index has also come off 8% from its all- time high of 12,500 in August 2018. The latest tumble has made stocks in the consumer discretionary space attractive in comparison with the broad market.

The FMCG sector is expected to grow at 12-13% in the July to December period, according to a latest Nielsen India update, due to the strength of the GDP, rising rural income, uptrend in private consumption and increase in consumer confidence. The FMCG industry grew 11% by value and 8% by volumes in the April-June 2018 quarter on the back of better consumer off-take, rate cuts due to the implementation of the goods and services tax (GST) and also a low base. 

Continuous shift to premium products and focus on providing superior customer service are likely to be key the business drivers for the players in the FMCG sector. From a medium-term perspective, the FMCG market continues to offer sizeable headroom for growth by increasing penetration as well as consumption, according to HUL's annual report for FY 2018. India continues to be one of the fastest-growing economies in the world and the trajectory is expected to be maintained in FY 2019, as per the latest economic survey. With GST having been successfully implemented, trade conditions have stabilized and there is a gradual improvement in demand. The company expects government spending plans such as increases in the MSP and provision of health insurance coverage to bolster rural development and drive consumption.

The penetration of major consumer durables has been on ascend in the past decade, according to data from successive rounds of the National Family Health Survey. The reach of refrigerators has nearly doubled over the past decade to reach 30% in FY 2016. The share of households owning a television has increased 20 percentage points over the past decade to hit 66%. More than six lakh households were surveyed in FY 2016. The previous round in FY 2006 had covered more than one lakh households.

An expected push to demand is coming from Kerala, following the recent floods. As the situation crawls back to normalcy, households are expected to incur heavy spending on refurbishing their homes. Most of them will need to replace major consumer durable items given the intensity and the impact of the destruction caused by the flood.

 

Outlook

The outlook for kharif harvest is not yet clear, with the total acreage 1.3% lower on 21 August than the same period a year ago. Cumulative rainfall was 6.3% below normal till 29 August. On a regional cumulative basis, central, south, and west India had favorable rainfall, while the east and north-east parts of India remain deficient.

Moreover, the water storage available in 91 major reservoirs of the country was 63% of the total storage capacity of these reservoirs in the week ended 23 August 2018 as against 128% of the storage in the corresponding period of 2017 and 107% average of last 10 years.

Strong volume growth of FMCG companies in recent months is likely to continue in the near term, though a sharply depreciating Indian rupee and surging crude oil prices are intensifying the cost pressures right into the festive season. The currency dropped to an all-time low above 73 per US dollar in the last week of September 2018, shedding around 12% of its value in 2018 so far. Crude oil is quoting at above US$ 80 a barrel level as against US$ 55 in September 2017.

The June 2018 GDP figures, however, are likely to act in favor of price hikes as suppliers will be confident that a boom economy will be ready to absorb the pass-through of rising input costs.

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