The domestic consumer economy of India appears booming again, recovering fast from a world that was struggling to cope with the Covid pandemic. Once the government withdrew all restrictions it had imposed to contain the contagion, Indians turned upbeat.
High-frequency indicators such as automobile sales, air and rail passenger traffic and anecdotal evidence from different consumer goods sectors show that Indians are increasingly willing to spend, especially, in urban areas.
“From a cyclical perspective, the full reopening of its economy, which took place earlier this year, is enabling the recovery. Mobility has remained above the pre-Covid levels, supporting domestic demand,” brokerage firm Morgan Stanley said in a statement.
Foreign investors believe that the consumption economy, which accounts for nearly 60% of India’s annual GDP, will see high growth. In August, as foreign investors pumped in a record $ 6.1 billion in Indian stocks, their favoured destination was consumer-facing sectors.
Foreign investors had in all purchased stocks worth nearly Rs 15,000 crore in August in automobiles, consumer durables, consumer services and fast-moving consumer goods. Consumer-facing sectors accounted for nearly 29% of the total investments made by FPIs in August.
The consumer services sector witnessed the highest buying from foreign investors as it attracted inflows of Rs 5,500 crore in August largely driven by the optimism for hotel companies, who are enjoying their best purple patch in years.
Automobile companies got the second highest allocation among consumer-facing sectors of Rs 3,736 crore on optimism that the sector’s four-year slump was over and a new cyclical upturn has begun. “We are at the beginning of the automobile cycle and if it lasts 3-4 years, then clearly there is a lot of upside left,” Anshul Saigal, the portfolio manager and head of portfolio management services at Kotak Mahindra Asset Management Company.
Rural Indians spending big too
In January-March, investors were concerned over the prospects of the rural economy, a key driver of domestic demand, given that high inflation and unseasonal rains had eaten into the rural consumer’s spending power.
The pain was easily visible in the volume performance of FMCG companies that were concerned about downtrading among rural Indians, pinched by rising prices.
However, a normal monsoon and the recent improvement in crop sowing patterns have made indigenous companies and investors optimistic that the rural demand will recover in time for the crucial festival period. “While monsoon rains are mean reverting to normal levels, an increase in sowing activity has improved the outlook for agriculture production,” Rahul Bajoria, the managing director and chief India economist at Barclays, said.
In addition, the Reserve Bank of India has argued that retail inflation in the country is likely to have peaked in the June quarter with the Consumer Price Index showing signs of softening in the past two months.
The RBI’s interest rate hikes as well as the government’s interventions are expected to bring inflation further down in the coming months, although a return to sub-5% inflation rate may remain hard to achieve for the time being, experts say.
Saigal said that conversations with several consumer-facing companies showed that the revival in domestic consumption was likely to be strong going ahead as the rural economy makes a comeback post monsoons.
“This (consumption) is a space that looks very interesting for the next three to five years,” Saigal said.