As discretionary goods exhibit slump, demand for necessity items growshttps://indianexpress.com/article/explained/indias-consumption-slowdown-as-discretionary-goods-exhibit-slump-demand-for-necessity-items-grows-5774171/

As discretionary goods exhibit slump, demand for necessity items grows

In the hinterland, the consumption breakdown is visibly stemming from the non-agricultural segment in rural areas even as agriculture is largely holding up in terms of physical volumes.

Indian economy, economy slowdown, indian GDP growth, India consumption trends, India purchasing capacity, Indian express
Consumption breakdown is visibly stemming from non-agricultural segment in rural areas while agriculture is largely holding up in terms of physical volumes.

Even as most indicators point to a slowdown in the economy, a closer look at consumption trends paint a more layered picture of the sluggishness. discretionary goods , for instance, are seeing a pronounced dampening of demand, while necessity items have continued to grow either in terms of sales or output.

In the hinterland, the consumption breakdown is visibly stemming from the non-agricultural segment in rural areas even as agriculture is largely holding up in terms of physical volumes. In the urban areas, on the one hand, the mainstay of online commerce — smartphones — are witnessing lower than expected growth, on the other hand fashion and grocery goods have posted significant increase in demand.

Within the consumer durables segment too, while there is slump in output of discretionary goods such as air-conditioners and televisions, necessity items such as refrigerators, washing machines, cooking appliances have posted positive output trends.

This could call for multi-dimensional approach from policy makers to tackle this.

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Mobile phones, which comprised the lion’s share for online retail, have started to see a decline in share of e-commerce sales after at least four years. The share of mobiles, which was at 45 per cent during the first quarter of calendar year 2018, fell to 38 per cent in January-March period this year, according to data provided by RedSeer Consulting. The trend has shifted mainly fashion and grocery, which command a lower ticket size and gross merchandise value (GMV) than the high-value products such as smartphones and consumer durables.

“The Indian e-tailing ecosystem always had a high share of mobile devices category, with the figure often exceeding 50 per cent of all GMV in certain quarters. Despite all efforts from e-tailers to wean customers off mobiles, seemingly nothing could end the love affair between Indian consumers and online purchase of mobile devices. Yet it finally seems like things are changing, as the mobile category share started dropping below 40 per cent since 2018 and likely to stay at around 35 per cent for 2019 as a whole,” the consultancy firm noted in a recent research note.

In addition to online sales, smartphone shipments in India saw a slower than expected on-year growth of 4 per cent in first quarter of 2019. “The overall growth was slower than expected as some of the major brands were sitting on inventory after a stock build up during the festive period last quarter,” said Anshika Jain, research analyst at Counterpoint Research. However, this was against global smartphone shipments declining 5 per cent year-on-year in January-March 2019, which was the sixth consecutive quarter of shipments falling in the global smartphone market.

Despite a drop in online sales of electronic goods online, the consumer durables segment’s output during 2018-19 grew 5.3 per cent – the highest in last five years led primarily by products such as washing machines, cooking appliances, electric heaters and refrigerators. As per a research report by CARE Ratings, while refrigerators saw 15.7 per cent on-year output growth, washing machines saw a growth of 10.3 per cent.

“However, output of TV sets and air conditioners (ACs) has been on a decline recently. TV sets show a downward trend since the past four years, where 2018-19 saw the sharpest fall of 37 per cent. ACs production fell in FY19 by 7 per cent, after a marginal growth of 2 per cent in FY18. The fall in production of some consumer durable products can be attributed to the very nature of such products, which are purchased with a gap of 3-7 years. Along with this, the drop in consumer demand owing to lesser purchasing power can be evidenced from the fall in outstanding loans growth for this segment, which reduced by Rs 13,400 crore year-on-year in FY19. Further, washing machines and refrigerators are considered to be more of necessities than TV sets and ACs which are considered to be ‘comfort’ goods,” CARE Ratings said.

The fast-moving consumer goods (FMCG) segment, which showed overall moderate production growth of 3.8 per cent during 2018-19, significantly lower than 10.5 per cent in the previous year witnessed the slump mainly due to slower sales in rural parts of the country.

“Slowdown in sales volume in the FMCG sector was credited to lower demand mainly from rural segment. Usually, the growth numbers posted by rural segment are higher compared with urban, due to inherently lower penetration levels in rural. However, in Q4-FY19 (January-March), rural growth lowered to reach same level as urban,” the ratings agency said. It added that average realisation by farmers being lower than the minimum support price announced for kharif crops in August last year has led to lower income for the rural segment and affected consumption growth and demand pickup in the hinterlands.

Another key reason for the slowdown in consumption demand, especially outside of the metropolitan centes, is the slowdown in loan growth for India’s NBFCs. NBFCs have been an important channel for extending credit to the wider economy, given their wide distribution networks, which are often more extensive across rural India than those of banks. The sector’s role as a credit provider became outsized as the banking system, especially PSBs, was forced to deal with its weak asset quality. According to Fitch, NBFCs now account for nearly 20 per cent of credit to the economy compared with about 15 per cent five years ago. The funding squeeze for the NBFCs sector, alongside the resultant cascading impact of the IL&FS and unfolding DHFL crisis, could spell further bad news for the already dismal consumption story.