By Invitation. Consumption is set for a revival

It is common knowledge that consumption is the mainstay of the Indian growth story because nearly 60 per cent of the GDP is driven by private consumption; 67 per cent of the GDP growth in the last four fiscal years was contributed by it. Almost everybody who tracks India would appreciate the demographic dividend the country enjoys.

At the current pace of growth, India will be the most populous country in 15 years. The median age of 27 years makes India the youngest country. Its working age population will rise until 2035 while it is declining for most other countries. The urban population too will rise. All these point to a continuously evolving consumption landscape.

In the last two years, consumption has lagged. Private consumption, which grew at 16 per cent during FY10-14, was at 11.7 per cent in FY14-16. Both urban and rural consumption went down due to an economic slowdown, monsoon failures, small MSP hikes and slowdown in construction. In FY16, urban consumption picked up due to a rise in real wages, lower interest payments and increased job security. However, steps taken by the government through the Budget and outside of it could revive consumption, particularly in rural India, in FY17.

The biggest fillip to consumption would come from the implementation of the Seventh Pay Commission recommendations and the new pension formula for defence pensioners. According to the recent Budget, with a 22 per cent increase in compensation and implementation of the Pay Commission recommendations, salaries of employees and pensioners would go up by about ₹1 lakh per annum. For defence pensioners, it will be an increase of ₹75,000 a year per person. Apart from this, there would be various State Pay Commission payouts staggered over the next two years.

This will provide the economy with a massive consumption stimulus — 0.5 to 1 per cent of GDP and even more if the State Pay Commissions also implement hikes.

As in case of the Sixth Pay Commission, the consumption of consumer goods, such as air-conditioners, air-coolers, cars, two-wheelers and electronics will go up. But, unlike last time, the demand for housing may not increase, given the small arrears pay.

Statistically, India has never had three monsoon failures in a row and hopes the odds to turn in its favour. Additionally, the meteorological agencies of Australia and the US are predicting El Nino weakening and La Nina gaining strength. The latter is known to cause sufficient rainfall. So, the hand of God has a major role to play. Meanwhile, the government is targeting 50 per cent of the total crop area to be brought under crop insurance.

This will uphold farmers’ consumption even in the worst times of farm produce. The revival in agriculture could see strained wages in rural areas revive as well — at less than 10 per cent year-on-year growth over the last two years, compared to over 20 per cent growth in the previous five years.

Rural consumption, especially from labourers, has been hurt by the slowdown in construction activity. Higher budgetary allocations for MGNREGA (up 24 per cent) and rural roads (up 33 per cent) will revive not only construction but also boost the consumption spend of labourers.

The government has already passed the Aadhaar Bill, which will help pay subsidies through direct cash transfers into beneficiaries’ bank accounts for almost all schemes. This will help in minimising leakages in the system and ensure targeted assistance. Further, savings from direct benefit transfer (like the savings of ₹14,000 crore from direct transfer of LPG) can be utilised in other areas.

How does this augur for listed companies? The analysis of the top 20 consumer companies (staples, paints, and liquor, among others) shows that the consumption slowdown has brought down sales and profit growth severely even while expanding margins. For instance, the sample set has seen a topline growth of 16.6 per cent on an average for the last 10 years, which has come down to 4.7 per cent this year.

This was due to a combination of deflation and volume de-growth. The EBITDA and PAT growth rates are off by 6.7 per cent and 5.6 per cent, respectively. With the push from the government and normal monsoon, we hope to see aggregate demand in the economy pick up. This, in turn, should help consumer companies post good numbers, going forward.

There is a growing conviction that the consumption part of the economy will pick up faster than the investment part. Hence, the investors have to be cognizant of this to participate in the consumption part.

The writer is Co Chief Investment Officer, Birla Sun Life AMC

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