Things are changing, ever so slightly. The story of the last 10 years has been that of an incredibly shining India and much of that shine has had to do with factors that aren’t Indian. But the result has been a rapid increase in consumption that has made for very profitable consumer facing industries like motorbikes, cars, FMCG, retail, mobile phones, pressure cookers and so on.
But is this growth stalling? There is both evidence and reasons to suspect that we might be headed in the other direction.
Much of the rapid boom in consumption over the last 10 years has been on the back of low interest rates (relative to inflation). Credit growth has been as high as 30% year on year, and people have borrowed to pay for consumer durables – from fridges to TVs to mobiles to what not. Manufacturers have been happy to provide interest rate subventions if people would actually buy – you might remember the days of "zero interest EMI" payments to buy TVs, and I’ve personally benefited from them.
But low interest rates, relative to inflation, have a cost, in the form of higher eventual inflation. To curb this inflation, the RBI will raise rates – as it has, to about 8% today. This has not dented inflation in any reasonable way, and it’s quite likely that interest rates will remain high. High interest rates make money expensive and slowly but steadily we’ve seen the zero-interest offers go away or reduce in tenure. In 2003, I bought a TV at a zero-interest EMI offer for 30 months. Today the best I can get is a 3 month deal on certain credit cards.
Another reason why credit growth slows is that banks are getting very jittery about NPAs. With large company defaults hurting their capital, banks loathe to lend where risk is higher, as it always is in a TV loan (the collateral is useless for the most part).
Inflation has another problem – when the "necessary" goods gets expensive, people cut back on the "nice-to-haves". When petrol and food get a higher percentage of spending because their prices went up, luxuries will takea back seat. Lower discretionary spending means lesser money spent at restaurants or on cars or on luxury travel.
Look also at the macro reason why India got so rich so fast. The west was printing too much. To save the US economy from the crises of 2000 and 2001, Greenspan kept interest rates too low for too long. Much of that money got into India as well, like an overflowing drum will spill in every direction. Now the quantitative easing is finally over, it seems.
And this will impact how much money comes into India. Again, to keep the dollar-rupee equation stable, the RBI has, in the last decade, bought the incoming dollars and printed rupees, an exercise with increased supply of rupees dramatically. Just since 2002, the total amount of rupees in circulation – "broad" money supply if you will – has grown from 14 lakh crores (1 lakh crore = 1 trillion rupees) to 76 lakh crore, a near 15% increase year on year. Much of that money supply increase comes from buying dollars, remember – and in the last one year, we have only seen an outflow of dollars. Money supply growth rates have fallen, to as low as 13% recently.
How does this impact consumption? If there’s more money to go around, more money will be spent. When money becomes scare and expensive, and inflation remains high, then people spend more on necessities and less on other things.
We have a deficient monsoon. Much of our farming still depends on the water provided by the south west monsoon rains, and till July 17, we lagged 22% behind "normal", and over 60% of the Indian area received less than normal rainfall. India considers it a drought when the full season rainfall is less than 10% of normal, and covers more than 20% of the area. A drought needn’t always be a problem; indeed, 2009 saw a deficit of 22% in rainfall, and it was a great year for the economy (visible in 2010). And much of the full season still remains; we’ll have to take a real call in September. The monsoon impacts rural consumption to a great extent.
Most FMCG stocks haven’t yet shown an impact but we have data that demonstrates a consumption slowdown. Car sales in July showed the biggest drop in 3 years. Real estate sales have flattened (though prices aren’t down yet). Air travel in January to July grew a mere 3.7% from a year earlier, and nearly all operators are bleeding. Mobile operator revenues and profits are at a plateau. Slowly, we hear about continued operating losses at e-commerce firms. There are whispers that many investments made on the basis of the great consumption story might have been too optimistic.
The turn of a consumption boom isn’t necessarily bad, of course. You might get some bargain deals when someone goes bust. Other firms get acquired by competitors who can now take advantage of a larger network. At the same time, that salary hike may not break into double digits. It also means lower income at the "poor" end of the economic chain, where the impact is felt the most. And finally it means lower stock prices. There are many ways to change the situation, and the government portion largely consists of the phrase: "Do not be paralyzed".
But before we get to solutions, it’s important to acknowledge that we have a problem in the first place. It would be a shame if it took the President of another nation to tell us.