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India's Third Giant Leap
This Could be One of the Biggest Opportunities for Investors
- Home
- Todays Market
- Indian Stock Market News September 14, 2012
IIP data confirms slowing consumption Fri, 14 Sep Pre-Open
India's economic output is primarily driven by private consumption demand. In other words, expenditure incurred by people on food, clothing, rent, education, vacations and all other activities that support living. These collectively add up to almost 60% of Gross Domestic Product (GDP). Despite the 2008 crisis, private consumption continued to grow steadily at 7-8% until 2010-11. This helped to set-off the negative impact of a slowdown in investment and government spending on GDP.
The Indian economy's sagging performance has been the result of a collapse in private-sector investment. The fear has long been that the problem will spread from the country's board rooms to the streets, with consumption faltering. The latest IIP number might make these fears come true.
The consumer durables index moved up a mere 0.8% between April and July, while it gained 4.9% over the same period last year. That's a clear sign that consumer discretionary expenditure is taking a hit, seen also from the June quarter results of paint and watch companies and from auto sales.
The picture on consumer non-durables is bleak. This index moved down 4.9% between April and July. It went down 2.8% over the same period last year. We shouldn't read too much into the percentages since the flaws in the data are well-known, but the numbers do suggest that inflation has taken a toll on basic consumption, which means that the poor are getting hurt.
There are concerns that households may react to persistent inflation and declining incomes by cutting back on non-essential expenditure. The less than normal monsoon, though its impact is not fully certain yet, may further curtail rural incomes and spending capacity. For manufacturers of FMCG goods, some of whom derive half their revenues from rural markets, this may signal a lower earnings outlook.
Overall, India is a good consumption story. And even as early as 2009-10, rural consumption demand was rapidly catching up with urban demand. Consumption demand has been the most reliable contributor to growth: that is why signs that it may be slowing down are worrying for policy makers and manufacturers.
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