beyondbrics

By Samiran Chakraborty of Standard Chartered

Indian consumers are gearing up for a mega-shopping spree on the eve of the Diwali festive season, braving the inflationary heat. If recent trends are anything to go by, we could see record sales of various consumer durables over the next couple of months.

Data from the Confederation of Indian Industries (CII) shows stupendous growth in some of these products for the quarter ended in June. High production growth in cars (34 per cent), refrigerators (32 per cent), air conditioners (50 per cent) and microwave ovens (40 per cent) demonstrates that the Indian consumer is waking from the slumber induced by the global financial crisis.

What has brought Indian consumers back to shopping malls in such large numbers that getting a weekend parking spot is a tough task? The most obvious answer is rapid income growth. The scale of this growth becomes clear when we consider that it took 33 years for India to increase its per-capita income from $100 to $500, but only five years to double it from $500 to $1,000.

True, the rapid rise in incomes briefly paused during the financial crisis. But the slowdown in consumption during this period might have resulted in pent-up demand for consumer durables, which is now being unleashed.

In addition, the V-shaped industrial recovery has ensured that the labour market is tight again. Wage growth in the formal economy is back on track, and consumers are feeling confident enough to make impulsive purchases. Lower interest rates have helped retail credit demand to creep up from the depressed levels, and buoyant asset prices over the last 16 months have fueled consumption via the wealth effect.

The consumption story is not just about these near-term cyclical factors. It is equally important to understand how it will unfold over a longer period. Penetration levels of most consumer goods are still very low in India – there are 12 cars per 1,000 people, while only 18 per cent of the population owns a refrigerator and 56 per cent owns a TV.

India has plenty of spending to do to catch up with even China, where there are 128 cars per 1,000 people and 80 per cent of the population owns a TV.

Based on the development experiences of other countries, demand for various consumer durables shoots up exponentially once a particular threshold of per-capita income is reached – the threshold is estimated at about $5,000 for cars, for example. As India’s per-capita income breaches these thresholds, it is not hard to imagine the impact on consumer demand.

These inflexion points might actually be reached earlier in India because the cost of these goods will generally be lower, and wide income disparities mean that some urban areas may already be approaching these income thresholds.

This probably explains the four-fold jump in passenger vehicle sales to more than 2m units per year in less than a decade and the jump in monthly mobile-phone subscriber additions from 100,000 to more than 12m. From this perspective, it is not surprising that the IMF projects that 34 per cent of Indian households will own a car by 2050, and that India will be home to 367m cars by then – higher than the number in the US.

While income inequality has been persistent, India has been characterised by a high degree of income mobility. A recent ADB study found that between 1990 and 2008, almost 205m people (12.8 per cent of the population) moved into the middle-income class (defined as earning $2-20 per day), and projected that the middle class as a share of the total population would double by 2030.

Given the fact that China was able to lift 61 per cent of its population into the middle class between 1990 and 2008, it is not unreasonable to think that India can achieve a similar feat over the next two decades. India’s shifting income profile has meant that in the last 20 years, food as a share of total spending has declined from 58 per cent to 35 per cent, while the share of cars and mobile phones has doubled from 10 per cent to 20 per cent.

India is also much better placed demographically than China. Its dependency ratio will fall until 2035 (while China’s is very close to hitting its trough), and India will provide almost one-third of the incremental global working-age population in the next two decades.

As a result, the aspirations of the population will evolve rapidly. The penetration of retail credit will bring affordable indulgence to the consumer. If only Indian consumers had decent roads on which to drive those cars and an uninterrupted power supply to charge those mobile phones.

Samiran Chakraborty is Head of India Research at Standard Chartered Bank in Mumbai

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