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Will consumers' spend? - Views on News from Equitymaster
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  • Mar 6, 2003

    Will consumers' spend?

    In our post-budget interview with Mr. Mahesh Vyas, Executive Director, CMIE, has said "I see nothing that is going to change in the foreseeable future (at least for a year) for investments to pick up. We first need to see consumption increase and only after consumption spending increases and current capacities get fully utilized, will we see an increase in investments". The views of Mr. Vyas underscores the woes of the India Inc. that has been reeling under demand slowdown.

    What is this consumption expenditure all about? This refers to the amount an average consumers spend in a particular year in various forms and manner like food, health, education and transportation. This, of course, is highly dependent on his earnings. Only if the consumer has the surplus, or in some cases if the need arises, will he shell out his money. Before going any further, it is important to consider the historical trend. Private final consumption expenditure, as it is commonly referred to, has had a volatile decade. This is evident from the graph below.

    Consumption expenditure has had two phases in the last decade. From FY91 to FY97, there has been a northbound trend in consumer spending. Post the liberalisation of the Indian economy, investments started to show healthy signs of recovery with manufacturing companies, specifically commodity majors, setting up fresh capacities. This resulted in significant employment generation and thus translated into demand for goods. Just to put things in perspective, during FY96 and FY97, Indian economy grew at more than 7%, which has been the record in the last decade. Evidently, a significant increase in investments did have a positive impact on the industrial sector, followed by higher consumption expenditure. To quantify the argument, the 7.9% rise in consumption expenditure that one saw in FY97 was the fourth highest in the last 30 years of Indian economy.

    A decade in snapshot...
    (% share) FY91 FY01
    Food, beverages and tobacco 54.0% 48.1%
    Food 49.1% 42.8%
    Cereals and bread 13.9% 10.6%
    Hotels and restaurants 1.0% 1.4%
    Clothing and footwear 6.2% 4.9%
    Rent, fuel and power 13.6% 11.4%
    Appliances 0.3% 0.3%
    Medical care and health services 3.8% 7.3%
    Transport and communication 9.8% 13.3%
    Recreation, education etc 3.1% 3.7%
    Personal care 1.8% 2.1%
    Source: CMIE

    Going a step further, where do consumers spend money? Obviously, food accounts for the bulk of consumer spending and as a result, accounts for a lions share. However, the share of food in total spending has fallen during the last decade (43% in FY01 as compared to 49% in FY91). One reason could be the fact that as income level increases in the hands of the consumer, with food spending remaining the same, the contribution tends to show a decline (the obvious argument is that the consumer will not eat more just because he earns more. May be the spending pattern may change). In the hierarchy of needs, as income level rises, consumers tend to spend on other goods. At the same time, four sectors have seen a marked improvement in the last decade. Spending in medical care & health services, transportation, recreation and personal care have increased. If one were look at the market capitalisation of companies pertaining to the aforesaid sectors on the stock markets, investor's have been well rewarded as well.

    Having looked at the historical trend, what will drive the consumer to spend more in the future? There are two factors to drive demand. First income in the hands of consumer has to increase. For this, investment should be given adequate attention. Since private sector is hesitant of committing significant sums, the government needs to concentrate a lot more on this factor. The effect the road construction project is there for everyone to see. As investments kickstart, it will have a positive impact on per capita income and thus boost consumption.

    Second, companies also have to have the right products keeping in mind the value proposition. This is of significance. As Mr. C. K. Prahalad puts it, Indian companies have not been innovative enough in the past. If consumers are willing to buy motorcycles, which are ten times costlier than a soap, then why is the demand for FMCG products lacklustre? To sum up, the long-term growth potential of the Indian economy is promising in light of poor penetration level across categories. Though there are challenges in the interim, a number of companies have learnt a lesson or two from foreign competition and thus are well poised to capitalise on the growth opportunity.



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