GDP data released last week caused much cheer. Among other favourable numbers, private spending, the largest component of GDP, showed growth acceleration in the December 2017 quarter, after being subdued for the previous two quarters.

That consumers have loosened their purse strings is corroborated by the December quarter results of companies in the consumption space.

But higher inflation ariding from the Seventh Pay Commission payouts, spending on measures for rural upliftment announced in the Budget, as well as rising global commodity prices and borrowing rates can play spoilsport for consumption in the coming months.

Key constituent of GDP

Private spending (Private Final Consumption Expenditure) accounts for 50-60 per cent of GDP. Effectively, consumers play a vital role in determining growth for both the economy and for India Inc. Despite the impact of demonetisation, private spending showed an overall growth of 8.9 per cent in 2016-17.

 

 

 

In fiscal 2017-18, consumption met with stumbling blocks. For instance, the auto industry struggled in the beginning of the fiscal due to a transition to BS IV emission norms. Following this, the implementation of GST and the consequent de-stocking also affected demand in consumer sectors such as FMCG, auto and consumer durables.

Also, uneven monsoons and a crash in the prices of agricultural products hurt rural India. Hence, year-on-year growth in private spending stood at 6.8 per cent in the quarter ended June 2017, and fell further to 6.5 per cent in the three months ended September 2017.

However, in the following quarter, private spending rose, growing 7.9 per cent year-on-year. This is not due to a low base either, as in the October-December 2016 period, private spending had grown by over 10 per cent.

Consumer sectors heating up

The pick-up in consumer spending seen in the GDP numbers is corroborated by the robust sales growth in consumer-oriented sectors. For instance, the FMCG and auto sectors, considered a proxy for non-discretionary and discretionary spends respectively, have shown double-digit sales growth of 12.5 per cent, and 16.8 per cent respectively in the December quarter. Other consumer sectors such as building materials (paints, ceramics, cement), hotels, entertainment and select consumer durable companies have also seen good ramp-up in topline growth.

This performance cannot entirely be attributed to the lower base of last year due to demonetisation. For one, revenue growth since the June 2017 quarter clearly shows a gradual pick-up, implying that consumers are resuming their spends steadily as the economy stabilises from the twin shocks of the note ban and GST implementation. Besides, for certain segments such as FMCG, additional volumes in the past two quarters have been coming from GST-induced price cuts.

What’s in store?

The results of the December 2017 quarter show that demand from urban India has been stronger than from the countryside. For instance, premium products of FMCG companies such as Hindustan Unilever, Dabur and Marico, as well as FMCG majors with an urban tilt such as Godrej Consumer, have shown good volume growth. But most companies expect rural demand to pick up in the months to come.

The key tailwind to consumption arises from higher inflation expectations. Rising prices of crude-based inputs and other raw materials have pressured some companies to pass on this increase to customers, partially or fully. Higher prices may squeeze demand if this trend continues. Besides, Customs duties on import of various consumption items of daily use have also been hiked in the Budget. Also, banks are beginning to hike borrowing rates, which might dampen consumer sentiments.

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