Economic boom for the top 10%, slowdown for the rest

Bengaluru/New Delhi: In its latest monthly economic report in October, the Ministry of Finance had said that India’s growth prospects remain ‘robust’, primarily on the back of strong private demand and consumption. The official gross domestic product (GDP) growth projection for the current financial year (FY24) is at around 6.5%. Most independent agencies also project a similar figure. This would once again make India the world’s fastest-growing major economy.

There is credible data to show a boom in demand. Goods and Services Tax collection for October was the second-highest ever and most car makers saw record sales in the same month. Infrastructure spending by states and the Centre is at an all-time high, and private sector capital formation is also picking up.

However, further examination shows that there are still some weaknesses in the demand story, in that most of it is driven by those in the upper middle-income bracket and above. While not uniform across the country, the financial year so far has seen undercurrents of slowdown in rural India, and even in some sections of salaried classes in urban areas.

Recovery since the Covid-19 pandemic has been ‘K-shaped’. The number of millionaires in India is expected to double by 2026, and its luxury market is expected to triple in size by 2030. However, consumption and wages in rural markets are stagnant. Even urban incomes have not kept pace with inflation.

“India's GDP is growing well but it is all going to the top. We must correct this. The World Inequality Report 2022 shows that India has "one of the most extreme increases in income and wealth inequality observed in the world," India’s former Chief Economic Advisor Kaushik Basu said on X on Friday.

The World Inequality Report 2022 calls India one of the most ‘unequal countries’ in the world, a phenomenon which has been exacerbated especially since the Covid-19 pandemic. 

The income gap between the rich and the poor has been increasing. As per the report, the top 10% of India’s wage earners currently have an income that is 20 times more than the bottom 50%.

The report states that while the top 1% holds 22% of the total national income, only 13% rests with the bottom 50%. And it is the top 10% of wage earners, holding about 57% of the country’s income, who seem to be driving demand and consumption.

Entry-level woes

Two segments where the demand disparity is most evident are the automotive and real estate sectors.

Passenger car sales are booming, and the current financial year is on track to be the best ever for four-wheelers, with sales volume expected to comfortably cross 4 million units. However, these sales are being driven by SUVs, and by cars priced around Rs 10 lakh and above.

As per data by research and credit ratings agency ICRA Ltd, the all-time high for passenger cars was reached in the financial year which ended March 31, 2023 (FY23), at 3.9 million units. That will be surpassed this year. The previous high of 3.4 million units was in FY19.

For two-wheelers as well, FY19 was a record high, with the sale of 21.2 million units. However, that pre-pandemic record is yet to be breached. Sales in FY23 were 15.9 million units, a deficit of 5.3 million units from the all-time high, ICRA data shows.

In fact, in the first half of the current financial year (April-September or H1FY24), car sales were up 7% year-on-year, while motorcycle sales were down 1% for the same period. The worst impact has been on the entry-level motorcycle segment (75-100 cc), a surefire indicator that rural customers have been holding back on purchasing decisions.

Even for cars, the boom hides the painfully slow sales of entry-level hatchback cars. In H1FY24, entry-level car sales actually fell by 41%, as per ICRA.

“Prices of cars have risen over the past few years across categories due to stricter regulations, increased input costs, and states increasing road taxes. However, income levels among salaried classes may not have kept pace with the increase in prices,” said Shashank Srivastava, senior executive director, marketing and sales, Maruti Suzuki.

Speaking with DH at the south Delhi headquarters of the country’s largest car maker, Srivastava said that while the cost of meeting increasingly tougher safety and emission norms is the same across car categories, the price increase would be felt more in cars costing below Rs 10 lakh.

“The customer looking for entry-level cars will be more price conscious, and their spending decisions will be determined by factors such as inflation more than those buying premium cars,” he said.

In fact, major automakers are all in agreement that middle-income customers, the ones looking to graduate from two-wheelers to cars, have been impacted by the rise in inflation and the effect it has had on their household budgets.

“We do not see the entry-level car market picking up any time soon. The paying customer prefers bigger, more premium vehicles, and that also leads to greater margins per car, for companies,” said a representative of one of Maruti Suzuki’s biggest rivals, who did not wish to be named.

Late last month, R C Bhargava, chairman of Maruti Suzuki, said that unless small car demand comes back, the overall growth of the industry will remain slow.

As recently as July, headline retail inflation hit a 15-month high of 7.44%, as a deficient monsoon wreaked havoc on food prices. Though inflation is now within the Reserve Bank of India’s (RBI) target band, RBI Governor Shaktikanta Das said on Thursday that India remains vulnerable to recurring and overlapping food
price shocks.

Industries on similar crossroads

The real estate sector, which is the second-largest employment generator in India, accounting for a nearly 7 crore workforce in 2022, has embarked on a pick-up trajectory after a lull between 2014 and 2019, and is slated to surpass $1 trillion in market size by 2030.

This bull run, however, is spearheaded by the luxury housing segment, as the share of affordable housing continues to decline sequentially in FY24. Data from property consultant Anarock showed that the sale of luxury homes, priced at Rs 1.5 crore and above surged 115% in the first nine months of 2023, compared to the corresponding period last year. In contrast, the share of the affordable segment (Rs 80 lakh and below) in the overall housing market plummeted to 51% in 2023, from 68% in 2022. 

Remarkably, “the share of the housing bracket inclusive of units priced at Rs 50 lakh and below, was at a decadal low during the January-September 2023 period,” property consultancy Knight Frank India revealed. 

Industry experts attributed the segment’s shrinking share to surging prices, increasing home loan rates and the lingering effects of the Covid-19 pandemic. Some also blamed an aggregate decline in supply of affordable housing units, owing to increasing land and input costs. 

Those in other industries echoed similar sentiments. “Post Covid-19 what we have seen is that products at economical pricing are reducing, while medium and premium products are growing. For the first time we are seeing the super-premium category also growing,” said Nilesh Gupta, director of Vijay Sales, an electronics retailer. He attested to a higher growth rate in the premium and super-premium product categories, as entry-level prices by most brands in the white goods (large electrical appliances) industry surged simultaneously.

Even for essential daily use items, fast-moving consumer goods (FMCG) companies are feeling the pinch. For its July-September quarter, FMCG giant Hindustan Unilever posted slightly lower consolidated net profit compared to the same period last year. 

Rohit Jawa, chief executive officer and managing director of the company, said that part of the reason for what he called a ‘challenging environment’ was subdued rural demand. HUL’s product portfolio includes daily-use brands such as Kissan, Rin, Vim, Surf Excel, Horlicks, Lux, Lifebuoy, Closeup and others.

In an interview with DH in September, Nestle India Chairman and Managing Director Suresh Narayanan had said that inflationary pressures this year would lead to consumers being more careful about their spending choices this festive season. Nestle reported a much better July-September quarter, primarily because 80% of its business is urban-focused. 

“Rural demand has been stable, but the pace of growth has definitely come down. And I look to the future with cautious optimism, because if the impact on agriculture from El Nino and other global factors is really minimal, then we could be into a period of relatively more modest inflation. But if not, then clearly both availability and price will become constraints for the industry,” Narayanan had said, adding that people are looking more carefully at discretionary spending in an environment of higher inflation.

Festive cheer?

After a relatively dry August, September brought some relief. However, the monsoon ended this year 6% below normal, and its distribution was highly uneven. In some districts, the rainfall deficit was as high as 60%. Karnataka has been one of the worst-hit states this year, in terms of drought-like weather conditions.

Conversely, this also means that in districts where rainfall was normal or close to normal, rural spending has picked up.

“When one looks at the overall picture, monsoon was slightly deficient. However, some districts saw better rainfall than others, and in some districts, crop output was impacted severely by lack of rain. So, one cannot say that there is a blanket demand slowdown across rural India. It differs from region to region,” a top central government official told DH.

“FMCG and two-wheeler companies may have seen a slow pickup in sales from some regions, but not all. It may be wrong to say that there is no lack of demand from rural India, but it would also be wrong to say that there is no demand,” the official said, on the condition of anonymity.

The festive season started late this year, as the traditional month of Shradh (Pitru Paksha) — when new purchases are rare in Hindu households — continued till mid-October. But companies are increasingly becoming optimistic.

“We see double-digit growth in India this year. In spite of a short summer, we are seeing a boost from rural India, especially as the festive season has begun in full swing,” said a representative from another FMCG behemoth, Coca-Cola India. Apart from the festive season, the company is also betting big on the ongoing Cricket World Cup.

Earlier this week, Amazon said it had witnessed a record 110 crore customer visits and 40 lakh new customers making their first purchase during its month-long Great Indian Festival, which ended on November 10.

After weak rural demand due to uneven monsoon, FMCG and two-wheeler companies now expect rural, urban middle and low-income demand to improve gradually but steadily. 

Corporates are cautiously optimistic about these segments of the population going into the calendar year 2024. They all hope that while demand from the top 10% continues to boom, other parts of the income demographic will also hit their stride and increase their purchases, as India continues its post-pandemic recovery.