CIRCUIT BREAKER. Why Indian consumers aren’t splurging

For India-watchers who are already puzzling over the dichotomy between what the GDP data says and what’s really happening on the ground, here’s a new mystery. Consumer price inflation has been falling for over a year now. But why are consumers not loosening their purse strings?

A recent report by CRISIL estimates that the sharp fall in fuel and food prices generated savings of ₹509 billion for Indian consumers in 2014-15 and that this will expand to a whopping ₹1.4 trillion by 2015-16. CRISIL expects this to deliver a big kicker to consumer spending.

But given that the fall in inflation rates has been underway for some time now, why isn’t there a pickup in consumption already? (CPI inflation fell below the double-digits in December 2013 and averaged 6.5 per cent for 2014).

Yet, anecdotal evidence from corporate India and macroeconomic data show consumers haven’t materially raised their spending in the last one year. Falling inflation should directly boost spending on essentials. Yet, FMCG giant Hindustan Unilever reported volume growth of just 3 per cent for the December quarter, growth decelerating from 5 per cent in September and 6 per cent in June. Its sales growth this fiscal was weaker than last year.

Similarly, Hero Motocorp saw its December quarter two-wheeler sales fall by 2 per cent after edging up in the single-digits for the previous two quarters. Its sales growth is nowhere near the 12-20 per cent it managed in the high-inflation years between 2008-09 and 2011-12.

Maruti Suzuki and other carmakers have been complaining of the lack of traction in rural sales in recent months too. Between April-February 2015, passenger car sales in India grew by a mere 5.2 per cent, compared to the 20 per cent-plus growth they logged between 2008-09 and 2011-12. Nor do consumer durable makers appear to be confident of better growth, with the festival season behind.

If these seem like one-off instances, macro-indicators also support the view that consumer spending has been losing steam recently. According to the new GDP series, the growth in Private Final Consumption Expenditure (PFCE) averaged 5.4 per cent in the first nine months of 2014-15 against 5.9 per cent in the first nine months of 2013-14. The growth in PFCE for the latest December quarter was in fact the worst logged in a decade, at a mere 3.5 per cent. In the high inflation period from 2008-09 to 2011-12, PFCE growth hovered at 7-9 per cent.

So, why is falling inflation making so little difference to consumer spending? One explanation could be that Indian consumers have been so thoroughly singed by the double-digit inflation rates of the previous six years, that they’re not loosening up their purse strings yet. This could mean that the additional disposable income in the last one year has been flowing into savings, rather than spending.

But that doesn’t provide an explanation for why consumption has been actually weakening in recent quarters. Nor does it explain why consumers were on a spending spree during the high inflation years until 2011-12. This leads us to the other explanation -- the state of the rural economy.

Most consumer goods makers admit that the great Indian consumption boom between 2007-08 and 2011-12 was powered mainly by aspirational rural consumers. This period not only saw rising rural demand for FMCG goods such as branded hair oils, shampoos and creams, but also brisk uptake of motorcycles, tractors, cars and consumer appliances. NSSO surveys of household consumption for part of this period also support the view that rural consumers spent much more than their urban peers.

There were three drivers of the rural income boom from 2007 to 2012. One, sharp hikes in the minimum support prices of key food crops by the pro-farmer UPA lent considerable support to farm incomes in this period, resulting in favourable terms of trade for agriculture for the first time in many years.

Two, the UPA regime also delivered another boost to rural prosperity by ushering in the MGNREGA. The programme didn’t just guarantee minimum employment to non-farm workers, it also set a floor on the wages they could earn. These two factors sharply bolstered rural incomes and actually resulted in a transfer of wealth from inflation-hit urban consumers to the growers of food products who benefited from higher prices.

A third, less-acknowledged factor was soaring global prices of agricultural products. Led by recurring shortages in global food and feed products and demand for bio-ethanol, global food crop prices vaulted by 137 per cent (in absolute terms) between 2002 and 2012, after falling by 8 per cent over the previous 10-year period.

This trickled down to Indian farmers as well, by expanding their realisations for cash crops such as cotton, corn, oilmeals, rubber, tea, coffee and so on. Contrary to popular perception, India’s agricultural sector does have significant global linkages both by way of imports (cereals, pulses, sugar, cooking oil) and exports. High realisations and rising demand saw the country’s agri-product exports vault four-fold from $10 billion to $40 billion between 2006 and 2012.

But it is worth noting that all the above drivers of rural prosperity listed above, have simultaneously lost momentum over the last three years. One, with a view to curbing food inflation, increases in the MSPs of key crops have been moderated.

The government has gone on record saying that food inflation will be kept under check through lower MSP increases and judicious releases of foodgrain stock. With the BJP government also keen to plug the leakages under MGNREGA, the contours of the scheme are being reworked and allocations have been kept under check (this year’s Budget has promised higher allocations, though).

Finally, with the global commodity super-cycle ending, global farm product prices have plunged too. The FAO Food Price Index has fallen 22 per cent from its 2011 peak and now languishes at a five-year low. Indian farmers are already feeling the reverberations of this crash, with many export-reliant agrarian sectors plunged into crisis due to dwindling realisations and surplus stock – cotton, rubber, tea and sugar are just a few examples.

Given this backdrop, it is clear that a serious crisis is unfolding in the agrarian economy, which will not automatically dissipate with a good monsoon. It seems to be fashionable to attribute any and all the problems of the agricultural economy to whimsical monsoons. Today, economists as well as corporate chieftans are attributing dodgy rural consumption to last year’s erratic monsoons. Everyone seems to be pinning their hopes on the upcoming South West monsoon to revive rural India’s animal spirits.

But if the rural economy is really to regain its mojo and deliver the much-awaited consumption kicker to growth, policy intervention that can shield rural incomes from the ongoing rout is essential.

How the Centre will manage this, while delivering on its low inflation target is, of course, the million-dollar question.