The Hindu Business Line : Consumers tighten their purse strings

There were clearly fewer people in malls and shopping arcades in the year-end festive season. A general atmosphere of relative thrift was manifest whether it was consumer durables or gold or even cars.

Most consumers are in the wait-and-watch mode.

Kamlendra Kanwar

If there was an iota of doubt that consumer spending has suffered significantly as a result of the current economic slowdown, it should have been set at rest by the year-end festive season across the country. There were clearly fewer people in malls and shopping arcades this time around and fewer tourists flitting around with consumer items peeping out of shopping bags.

A general atmosphere of relative thrift was manifest whether it was consumer durables or gold or even cars. How much then was the famed Indian middle class impacted? Was the relatively cautious attitude of this 300-million strong middle class so stark as to be justifiably seen as an index of the onset of recession? Had the purchasing power of most people suffered or were people in general being careful and prudent about spending to save due to fear of worse times?

The wealthy class

It would be wrong to make sweeping generalisations given the fact that the ultra rich at one end of the spectrum and those who have graduated to middle class status as a result of the recent economic prosperity and zooming salaries in some sunrise industries are governed by different considerations.

Interestingly, for the super rich, identified by the 2008 CapGemini Merill Lynch Asia Pacific Wealth Report as those with more than $1 million in assets, the credit crunch is hardly an issue because most of them generate a major part of their wealth in cash.

It is this parallel economy which is driving the growing market for luxury goods and by its very nature it encourages people to spend lavishly rather than save and risk being raided and hauled up for not paying tax on it.

These are the people who patronise global status symbols like Hermes, Cartier, Christian Dior, Louis Vuitton, Armani, Dolce & Gabbana and Versace, among other luxury brands, all of which have set up base in India to cater to this upwardly-mobile class.

Millions of investors in stock markets have suffered erosion in their stock values as a result of the sharp downturn in markets but the losses of those among them who have the financial means to hold on to their stocks till the market picks up are only notional. A section of the less affluent middle class does face a resource crunch especially if they are forced by circumstances to sell their stocks that have sharply dropped in value. That they would have tightened their belts and would bring their consumer spending to the essential minimum stands to reason.

The middle class is a mixed bag with some whose mainstay is the cash economy and others who have acquired wealth over the years and are not prone to taking impulsive decisions. At the other end of the middle class spectrum is a new section of society that, as a result of India’s economic boom, acquired the means to own cars and consumer electronics, bought designer clothes as a fashion statement, travelled by air taking advantage of attractive schemes of cheap fare airlines, ate in swanky restaurants and hung around malls.

It is this lower end of the middle class that has been hit hard by the economic slowdown. Since their numbers are huge their lack of enthusiasm for splurging on consumer goods is manifesting itself in thinning numbers of shoppers. Consulting firm KPMG, which tracks spending patterns, reports that sales of products such as cars and consumer electronics — the symbols of Indian middle class aspirations — have dropped more than 15 per cent between August and December last.

Credit growth slows

According to Reserve Bank data, consumer credit growth in August slowed to 17.4 per cent from 21.4 per cent a year ago. Housing loan growth slowed to 13.9 per cent in August from 17 per cent last year, while advances for consumer durables fell by 7.9 per cent from a year ago. These figures, though indicative of a trend, are not overly alarming considering the effect that the global slowdown is having on many other economies.

According to ratings agency Crisil, a unit of Standard & Poor’s, Indian banks’ consumer loans are now likely to be major risk areas as bad debts are expected to rise to four per cent of advances this year.

Perhaps that explains why banks are reaching out more discerningly to customers with offers of loans than they did a few months ago when there was a mad scramble to get people to take all sorts of loans.

As a manifestation of the impact of the slowdown, flight passenger numbers that were growing by 40 per cent until the first quarter of 2007 have been falling after that and the industry’s annual losses were predicted to exceed $2 billion in 2008. There is a tendency among executives to postpone taking a vacation with families or of setting out on train journeys to save on travel costs. Inevitably, hotels are also beginning to feel the heat.

Demand stimulation

There are conscious governmental efforts to stimulate demand and to relieve the credit crunch but it is perhaps too early to assess their impact. The recent cut in air fares and the drop in prices of petroleum products fall in this category.

With some airlines fares back to their attractive levels of being just above second AC rail fares, there is hope of some revival in demand for air travel but it is unlikely that levels that prevailed at the height of the consumer boom would return.

A combination of slashed car prices or attractive offers of gifts to buyers and reduced petrol costs is intended to revive the demand for cars but there again, there can only be a partial revival. It would be interesting to see what effect there would be on the low-priced Tata Nano when its booking opens. There would perhaps be many takers from among those who would have earlier gone in for bigger and more expensive cars.

Clearly, new jobs have become scarce and wage levels have been trimmed with increments and bonuses being slashed and this cannot but continue to hit consumer spending, especially of the neo middle class. Most consumers, indeed, are in the wait-and-watch mode as is borne out by the property market which has virtually come to a standstill with very few transactions taking place.

It remains to be seen whether, as the economic slowdown eases, the middle class tendency to splurge and make the most of high incomes will return with a vengeance or the new tendency for caution would continue in a limited way. For now, however, there is a sedate attitude in the consumer market that seemed alien to it only a few months ago when confidence levels were at their peak.

(The author is former Editor (Tamil Nadu), The New Indian Express, Chennai. blfeedback@thehindu.co.in)