Diwali is a festival of lights and colors. Traditionally the festive season is when most people concentrate their purchases. In fact, 30-40% of the annual sales for most retailers and consumer electronics manufacturers happen in this period. However, this time around the situation appears to be grim. Sales figures of top retail chains are faltering resulting in huge inventory pile ups. In fact, in some segments growth has even halved compared to the last year!
So, why is the urban middle class reluctant to spend this time around? Rising food inflation and interest rates has lowered the disposable income in the hands of consumers. And this is precisely the reason for slowdown in discretionary spending. Even freebies and discounts are unable to lure customers to shop.
It is important to note that a large part of the India growth story has been based on the consumption theme. However, considering that consumers have become more circumspect in spending on discretionary purchases the growth story has again come under the scanner. It should be noted that consumption is an important component of GDP growth. Hence, if consumption suffers, so will growth. Now we all know that India's FY 13 growth of 5% was decade low. With slowing consumption one would not be surprised if growth figure again comes under pressure in the coming years.
So, if the growth story has to be revived, consumption should pick up. And in order to boost consumption, disposable income should be increase. This happens when inflation is under check and there are strong employment opportunities. But unfortunately India is struggling on both counts.
The ugly truth is that inflation, especially food inflation, is hurting the common man. Also, with most businesses slowing down due to non-conducive operating environment like high interest rates and red tapism, employment opportunities have narrowed as well. All these factors have made consumers circumspect over their spending habits.
While cut in discretionary spend is a natural phenomenon during slowdown. However if it persists resulting in delayed consumption, India story is likely to suffer in the long term.