Now that there’s a fair bit of agreement that India’s GDP will shrink this fiscal, the debate has switched to the shape of the subsequent recovery. Will the recovery be V-shaped or will it be a U-shaped bathtub with slippery sides, to quote former IMF economist Simon Johnson?
This will depend overwhelmingly on just one thing — how soon the Indian consumer can be expected to loosen her purse strings. Private consumption, pitching in with 57 per cent of India’s GDP, has also been its most hardy component, rebounding quickly after shocks such as the global financial crisis and demonetisation. But the Covid crisis is materially different from previous crises owing to its twin assault on consumer sentiment, inflicting not just income losses, but also the primal fear of whether one will survive.
Job and income prospects
While the dearth of official employment data makes it hard to quantify how Covid has impacted income prospects, CMIE has shared some alarming statistics on the unemployment situation. After surveying a sample of 43,600 households in its Consumer Pyramids Household Survey, it estimated that total employment numbers in India dropped by about 122 million in April after the lockdown on a base of about 404 million.
The composition of jobs lost suggests that self-employed folks have borne the brunt of job losses, while the salaried were less affected. CMIE estimates that 71 per cent of the 128 million small traders/daily wagers and 26 per cent of the 68 million entrepreneurs lost jobs in April, while 23 per cent of the 86 million salaried folks dropped out.
While a good proportion of the job losses in the self-employed category may be temporary (trade will resume as the lockdown is eased), there’s no doubt that the pandemic has forced some folks out of employment for good, even as it has reduced pay for the salaried. This suggests that overall consumption pie is likely to shrink post-Covid.
If income prospects decide the consumer’s ability get back to her usual spending habits, sentiment will decide her willingness to do so. On this count, Deloitte’s ‘State of the Consumer Tracker’ suggests that the pandemic has battered Indian consumer sentiment far more than elsewhere in the world. In the latest instalment of its survey on May 16, Indians topped Deloitte’s Global Anxiety Index, with 33 per cent of them saying they felt more anxious than the previous week. Anxiety levels in other nations, some far worse-hit by Covid, were significantly lower at a negative 33 per cent to plus 17 per cent.
India also had a high proportion of consumers who worried about making upcoming payments (46 per cent), losing jobs (53 per cent) and were putting off large purchases (63 per cent). Strangely, consumers in the US, which has reported six-figure Covid fatalities, are more sanguine, with only 27 per cent worrying about payments, 37 per cent about job losses and 43 per cent deferring big purchases.
Shape of the revival
This offers two pointers on the shape of the consumption revival in India.
One, even if the unemployment situation improves with easing of the lockdown, consumers will be looking for evidence that the Covid menace is behind them, before loosening their purse strings. Here, Deloitte numbers on Japan are eye-opening. Japan’s Anxiety Index, which was neck-and-neck with India in mid-April at 39 per cent, had slumped to minus 5 per cent by May 16, as new cases dwindled and the country lifted emergency measures. This makes the timeline of the revival hard to predict.
Two, with less of a blow to sentiment, consumers in Bharat may be quicker to recover than those from urban India. Virus hotspots are presently clustered in the metros, with little impact on the hinterland. Agricultural incomes are somewhat insulated from demand pressures, especially after a good monsoon and rabi harvest. Most of the Centre’s direct stimulus measures also target rural rather than urban India (Doubling of MGNREGA outlays, PM-Kisan payouts).
While rural sentiment may make a quick comeback, incomes are unlikely to. The drying up of repatriated incomes from cities and more folks competing for low-paying farm jobs will likely rein in spending.
Right, if we have to brace for a U-shaped recovery with more Scrooge-ish consumers, what are the likely changes in spending behaviour? Here are a few, based mainly on anecdotal evidence:
Health, hygiene and nutrition
With consumers confined to their homes and worried about their future, the basics such as nutrition, health and hygiene products are taking priority over more discretionary buys, and this trend may last post-Covid. FMCG companies from Hindustan Unilever to Dabur have, in their recent quarterly commentaries, highlighted resilient sales of food and home-care products while indulgences such as ice creams and grooming products have taken a knock. While a 3-6x surge in categories such as hand sanitizers since March is no surprise, an interesting corollary is the jump in the offtake of perceived wellness and immunity-boosting products such as Chyawanprash and honey, malted drinks such as Horlicks and Boost, oats and nutritional supplements. The shift from eating out to home cooking seems to have sparked demand for ready-to-cook packaged meals, kitchen staples and sauces. With FMCG-makers rolling out new products in these segments, they clearly expect the shift to last beyond Covid.
Making room for these spends may entail cutbacks elsewhere. Deloitte studies say that since April, India have consistently featured a high proportion of consumers looking to increase spends on non-discretionary items such as groceries, household goods, healthcare while slashing them on travel, restaurants, home décor, apparel and alcohol.
As Covid recedes, bruised consumer sentiment may mend enough to permit smaller indulgences such as ordering in, visiting salons, buying grooming products or restocking lingerie (thanks to the ‘lipstick effect’ — lipstick sales are said to go up after economic shocks because women want to treat themselves). But big-ticket purchases of consumer durables, automobiles or homes may take much longer to come back, not just due to the consumers’ frugal mood, but also debt aversion. Where consumers perceive an urgent need to make a big purchase for safety considerations, such as personal transport, they may downtrade to limit outlays — opting for two-wheelers instead of cars or hatchbacks instead of SUVs. They may also prefer to reuse and refurbish, gravitating towards refurbishing their vehicles and homes or buying pre-owned cars and electronics.
As Covid was wreaking havoc in China, market researcher Nielsen noted the emerging ‘homebody economy’ where more folks preferred to shop, study, work and entertain themselves at home. This resulted in a surge for health products (air purifiers, fitness bands) and home entertainment (home theatres, gaming equipment), even as folks were more than willing to upgrade to 5G phones and bigger data plans.
April data on Internet usage in India certainly indicates that Internet bills have proved a notable exception to ongoing spending cuts, with Airtel noting strong demand for new broadband connections. Home Internet, mobile phones, entertainment and cable TV are also among the few discretionary items in the Deloitte study, where Indians have vowed to increase spends despite Covid.
It is also clear that the ‘couch potato’ lifestyle has appealed to many Indians, which will render them willing to shop online even for unconventional categories such as alcohol, footwear and electronics.
In the US, a version of Nielsen’s homebody economy is leading to a surge in sales of eclectic kitchen appliances, from electric pasta-makers to bread and soda-makers. In India, this may augur well for sales of pressure cookers, cookware, roti -makers, wet grinders, microwaves etc, apart from home-cleaning equipment.
Overall, the shape of India’s consumption revival will depend not just on how quickly consumers regain their mojo, but also on how nimbly consumer firms adapt to these behavioural shifts.