Is India’s Consumption Story FICTION?

Surely it is not, but was the outsized growth of the last 3-4 years goosed by a very loose fiscal policy and large capital inflows? If so, what would that mean for the stock prices of all these very richly valued consumer product companies?

At the outset, let’s make it clear that the argument is not whether 1.25 bn. people will consume or not. Of course they will. So what is the title all about? By the end of this article, attempt will be to at least convince you about the meaning and validity of the question. And the question will probably be best answered only as time goes by. Let us start off with a few data points.

       

Above is a random collection a few of the consumption stocks with their growth numbers over the years. These companies are by no means an exhaustive representation of the consumption basket, but are being used as indicators.

Depending upon their existing size and positioning within individual markets, companies had different growth rates before 2009. In some cases the growth rates were steady and in others trending down slowly. These stocks could have been part of various portfolios, but hardly the favourites.

At the same time, the absolute fiscal deficit number was stagnant and thus was trending down as a % of GDP, which basically meant that government financial health was in a very good shape.

But then as we all know came the global crash in 2008 and Indian government resorted to fiscal pump priming through tax cuts and humungous spending/ subsidies of its own. And that is reflected in the step up jump in fiscal deficit number in 2009.

Broadly in sync with what the government did, growth rates for most consumption companies picked up, dramatically in some cases. As government put more money in the pockets of consumers, a lot of it one time in nature, consumption boomed. While in Indian context, 20% growth of some companies may not look that huge, but at their size and segment domination, that itself is a huge number. Smaller companies benefitted disproportionately. Effect on profitability of all these companies, big or small, was even more disproportionate. All these companies have now become darlings of the investor community, with valuation multiples going up dramatically and through the roof in some cases.

But now as the fiscal chickens come home to roost, government spending is being rolled back wherever possible and tax authorities are pursuing every possible lead to recover as much in taxes as they can. And as government tries to control the absolute number of the fiscal deficit, inflation eats away at the real purchasing power of the spending that it is still managing to do. We are still running huge petro-product subsidies, not fully accounted for in the budget. Sooner than latter, they will be needed to be unwound.

And as this happens, growth rates of most of these companies have started to slowdown, in some cases dramatically. Coincidence?

What is not reflected in the government numbers is the effect of the 6^th Pay commission on PSU companies. With schemes like NREGA etc, wage inflation was into double digits for better part of last three years. That added another engine to the consumption story, which was clearly not visible in the government fiscal numbers.

Stagnating capital expenditure could also mean casual labour may find wage hikes not coming through, not at least at the same rate with inflation still not having subsided yet. It could also mean that job generation will also be tough in the foreseeable future.

As the fiscal boost and its side effects wane and in fact inflation eats into them, are there other drivers in place to sustain the consumption demand?

Inward remittances also may have contributed to the consumption binge. They have gone up from around 40-45bn USD in 2008 to around 70bn USD. While that may look like 60-70% rise, in Rupee terms it may have more than doubled in this short time frame of 4 years. Countries in Middle East trying to spend their way out of internal strife and developed countries continuing to prop up asset markets may have had something to dowith this steep rise in remittances. How these remittances shape up in future is anybody’s guess.

If the above analysis is reasonable, most drivers of the “consumption growth story” in India are basically derived out of the fiscal profligacy of the government, mostly Indian but partly foreign. Ideally fiscal boost should have been a temporary measure with government getting its act together to replace it with sound economics. That has clearly not happened.

While the structural India demographic story is debated very often, how does that convert into a structural consumption story without sound economic foundations?

There is an argument that the high interest rates are one of the big factors behind this slowdown. But interest rates were similarly high even in FY11 and FY12 and growth rates were good in those years. Good monsoon and upcoming elections may provide some relief but can they be source of sustainable demand is a big question mark.

So is the current slowdown in consumption is just a blip or was the outsized growth, in both revenues and profits, that we saw last 3-4 years a blip itself and we are likely to go back to much more sedate rates going ahead? And, if it is the latter, then what would that mean for the stock prices of all these very richly valued companies?

Coming back to the title, let me put all doubts and questions asked in the article in short, is the Indian consumption growth story just a “Fiscally Induced Consumption Tale InOverpopulated Nation”(FICTION) and can this FICTION now face reality successfully?

 
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