Pay panel payout, welfare spending, commodity prices may stoke inflation
GDP data released last week caused much cheer. Among other
favourable numbers, private spending, the largest component of GDP,
showed growth acceleration in the December 2017 quarter, after being
subdued for the previous two quarters.
That consumers have
loosened their purse strings is corroborated by the December quarter
results of companies in the consumption space.
But higher
inflation ariding from the Seventh Pay Commission payouts, spending on
measures for rural upliftment announced in the Budget, as well as rising
global commodity prices and borrowing rates can play spoilsport for
consumption in the coming months.
Key constituent of GDP
Private
spending (Private Final Consumption Expenditure) accounts for 50-60 per
cent of GDP. Effectively, consumers play a vital role in determining
growth for both the economy and for India Inc. Despite the impact of
demonetisation, private spending showed an overall growth of 8.9 per
cent in 2016-17.
In fiscal 2017-18, consumption met with stumbling
blocks. For instance, the auto industry struggled in the beginning of
the fiscal due to a transition to BS IV emission norms. Following this,
the implementation of GST and the consequent de-stocking also affected
demand in consumer sectors such as FMCG, auto and consumer durables.
Also,
uneven monsoons and a crash in the prices of agricultural products hurt
rural India. Hence, year-on-year growth in private spending stood at
6.8 per cent in the quarter ended June 2017, and fell further to 6.5 per
cent in the three months ended September 2017.
However, in the
following quarter, private spending rose, growing 7.9 per cent
year-on-year. This is not due to a low base either, as in the
October-December 2016 period, private spending had grown by over 10 per
cent.
Consumer sectors heating up
The pick-up in
consumer spending seen in the GDP numbers is corroborated by the robust
sales growth in consumer-oriented sectors. For instance, the FMCG and
auto sectors, considered a proxy for non-discretionary and discretionary
spends respectively, have shown double-digit sales growth of 12.5 per
cent, and 16.8 per cent respectively in the December quarter. Other
consumer sectors such as building materials (paints, ceramics, cement),
hotels, entertainment and select consumer durable companies have also
seen good ramp-up in topline growth.
This performance cannot
entirely be attributed to the lower base of last year due to
demonetisation. For one, revenue growth since the June 2017 quarter
clearly shows a gradual pick-up, implying that consumers are resuming
their spends steadily as the economy stabilises from the twin shocks of
the note ban and GST implementation. Besides, for certain segments such
as FMCG, additional volumes in the past two quarters have been coming
from GST-induced price cuts.
What’s in store?
The
results of the December 2017 quarter show that demand from urban India
has been stronger than from the countryside. For instance, premium
products of FMCG companies such as Hindustan Unilever, Dabur and Marico,
as well as FMCG majors with an urban tilt such as Godrej Consumer, have
shown good volume growth. But most companies expect rural demand to
pick up in the months to come.
The key
tailwind to consumption arises from higher inflation expectations.
Rising prices of crude-based inputs and other raw materials have
pressured some companies to pass on this increase to customers,
partially or fully. Higher prices may squeeze demand if this trend
continues. Besides, Customs duties on import of various consumption
items of daily use have also been hiked in the Budget. Also, banks are
beginning to hike borrowing rates, which might dampen consumer
sentiments.
06 Mar 2018, 04:57 AM