Optimism among businesses, but India's consumption story has cracks

The Great Indian Festive Spending Season has been going great guns, with the Indian consumer purchasing 39 percent more online in volume terms and 22 percent more in value terms compared to last year, according to SaaS technology platform Unicommerce.

Surveys too paint a robust picture of businesses' hopes and expectations, with the National Council of Applied Economic Research's latest Business Confidence Index - which covers 500 companies - showing "all-round improvement" to 140.7 in July-September 2023 from 128 in the previous quarter, reflecting optimism about the performance of the economy.

Other surveys seem to be saying something similar, with Dun & Bradstreet's Composite Business Optimism Index up 0.4 percent to 70.3 in the last quarter of 2023.

"While the global economic slowdown has affected consumerism, businesses anticipate higher profitability with easing inflation and increased industrial production, even though sales volumes remain relatively stagnant, and order books show modest growth," Arun Singh, Dun & Bradstreet's global chief economist, said on November 8.

Consumers, however, seem to be feeling a bit differently.

Cracks in consumption story

India's industrial growth cooled to a three-month low of 5.8 percent in September, data released on November 10 showed, well below economists' expectations of 7.4 percent. Driving growth lower were consumer goods.

While production of consumer durables rose a mere 1 percent year-on-year in September – down from 5.8 percent in August – output of non-durable goods rose 2.7 percent as against 9.6 percent the previous month.

For the first half of 2023-24, production of consumer durables was 0.7 percent lower than in the same six-month period last year, while output of consumer non-durables was 6.8 percent higher.

According to Nomura economists, the weak industrial production growth numbers for September reflect "cracks in consumption story".

The Nomura India Normalisation Index for industrial production, which removes base and seasonal effects and sets the pre-pandemic level at 100, shows the consumer durables sector is not just a laggard but also trending below pre-pandemic levels.

"This speaks to weaker discretionary demand among consumers," Nomura economists Aurodeep Nandi and Sonal Varma said in a note on November 10.

QuantEco Research's economists agreed, saying consumption-oriented activity "remains sluggish".

"So long as these segments do not revive comprehensively, a broad-based and sustained pickup in IIP (Index of Industrial Production) growth will remain elusive," India Ratings and Research's Sunil Kumar Sinha and Paras Jasrai said.

Consumption moderation ahead?

The future of India's consumer story remains uncertain. According to ratings company CareEdge, while falling inflation is a positive, "pain points in the form of elevated prices of select food items continue to persist". In the near term, rural consumption could get a leg-up from government "relief spending" due to the ongoing and upcoming elections.

"The recent substantial reduction in LPG price, promised increase in coverage of food subsidy, and the speculated augmentation of PM Kisan Nidhi Scheme will support rural consumption to some extent," QuantEco Research added.

However, urban consumption – which has driven spending on premium goods over the past couple of years – faces a difficult future, with Tanvee Gupta Jain, UBS' India economist, predicting normalisation of household consumption growth in 2024-25.

"We expect consumption growth to gradually normalise on softening corporate wages, flattening personal loan growth, peaking post-election welfare spending by the government, and the lagged impact of monetary tightening on households' disposable income," Jain said on November 8.

India's post-pandemic recovery has been K-shaped. If urban consumers were to also tighten their purse strings due to the aforementioned factors, the perfect storm might just be brewing for the economy.