What is changing among Indian consumers

With some consumer companies reporting poor September quarter numbers, stock market investors are being fed a lot of interesting theories about the state of the Indian economy and consumers.

Do rising rents encourage people to save on their daily bread and biscuits? Are the weak sales of Maggi and Kitkat a sign of a shrinking middle class? Should unequal sales of salt and tea be attributed to a late monsoon? Some consumer product companies would have us believe this.

But what if declines in certain product categories were the result of changes in consumer preferences?

An analysis of macroeconomic consumer data from the past 10 years shows that many of the recent setbacks for FMCG companies could be the result of a change in purchasing habits. We highlighted these changes in consumption using macroeconomic data.

From goods to services

Counting your family bills, have you noticed that your expenses on travel, entertainment, healthcare and education take away a larger share of your income than the basic expenses on roti, kapda and makaan? This goes without saying as incomes increase.

National income data shows that consumer services are increasing their share of household budgets, thereby reducing allocations to basic goods. National accounts data recently released by MOSPI captures household private final consumption expenditure (PFCE) between FY2012 and FY23. Exploring this data reveals a notable shift in consumption expenditure from goods to services.

Between FY13 and FY23, India’s overall PFCE in nominal terms grew at the rate of 11% per annum from ₹56.5 lakh crore to ₹164.2 lakh crore. This period saw spending on consumer services increase much faster than spending on goods.

In fiscal year 2013, goods such as food and beverages, clothing, shoes and appliances accounted for the lion’s share of the CCTB at 53.3 percent, while services such as rent , healthcare, education and financial services accounted for a lower share of 46.7 percent.

However, in FY23, services including rent, healthcare, education, communication, financial services, etc., had reached 49.1 percent of the CCTB, while goods had reduced their share to 50.9 percent.

This subtle shift in wallet share has resulted in very large differences in the growth rates of services relative to goods. Consumer spending on services increased by 212 per cent in absolute terms from over ₹26 lakh crore to nearly ₹81 lakh crore during these 10 years, while that on goods increased by 180 per cent from ₹30 lakh crore to ₹84 lakh crore. .

Transportation and communications services (18.1 percent of PFCE in FY23) now account for almost two-thirds of food and beverage spending (29.5 percent). Consumers spend more on healthcare (5.1 percent) than on gas, electricity and water (4.1 percent). Education takes a larger share of the portfolio (3.7 to 4.5 percent), while clothing and shoes get a smaller share (6.3 to 5.4 percent).

This is expected to lead listed consumer services companies to experience better growth rates than sellers of core products such as FMCGs.

Covid changes habits

Post-Covid, have you shifted to cooking more at home and splurging on entertainment? This is also a nationwide trend.

Breaking down PFCE data (in real terms) between the pre-Covid years of FY13 to FY20 and the post-Covid years of FY20 to FY23 shows that Covid has triggered major changes in consumption habits.

Some of them are related to food preferences. Consumers appear to have reduced their purchases of packaged goods such as jams, processed foods and soft drinks in favor of vegetables, dairy products, cooking oils and seafood. Redoubled focus on health led to a sharp reduction in tobacco consumption.

Lockdowns appear to have created an appetite for entertainment, as well as ownership of personal vehicles, household appliances and home beautification (see table). This likely led to some spending categories (and listed companies) losing while others gained at their expense.

Comfortable with borrowing

The YOLO (you only live once) philosophy that has seen Indian consumers splurging on services has also made them feel quite comfortable with loans.

National income data shows that as Indian households increased their current spending at a nominal rate of 11% between fiscal years 2013 and 2023, they also acquired homes and invested significant amounts in financial assets.

Between FY13 and FY23, Indian households managed to almost triple their investments in financial assets from ₹10.6 lakh crore to ₹29.7 lakh crore and while doubling their investments in physical assets, primarily residential houses, from ₹14.6 lakh crore to ₹34.8 lakh. crore.

Household income and savings (which rose from ₹22 lakh crore to around ₹50 lakh crore during this period) were simply not enough to finance this buying spree, prompting them to contract loans. Household debts have thus galloped much faster than assets over the past decade, increasing five-fold from ₹3.3 lakh crore in FY13 to ₹15.6 lakh crore in of FY23. The rise in loans was particularly strong post-Covid.

The small minority of people who borrowed to invest in stocks or mutual funds may be in a good place today, as the value of stock markets has tripled since Covid. But for most others, the borrowing spree will have resulted in significant EMI (Equated Monthly Installment) expenses which will not be accompanied by growth in assets.

Given that this borrowing spree is of recent origin (household loans doubled from ₹7.4 lakh crore in FY21 to ₹15.6 lakh crore in FY23 ) and coincided with the RBI’s rate hike, EMIs would have started pinching households only recently.

This seems to be a more plausible explanation for the recent slowdown in urban consumption than vegetable inflation or the decline of the middle class.