Written by Praveen Paramasivam and Shivangi Acharya
CHENNAI/NEW DELHI – India’s city-dwellers are cutting back on spending on everything from cookies to fast food as persistently high inflation strains middle-class budgets and threatens the country’s robust economic growth.
The slowdown in urban spending over the past three to four months has not only hit the profits of large consumer goods companies but also raised questions about the structural nature of India’s long-term economic success.
Since the end of the pandemic, India’s economic growth has been largely driven by urban consumption, but that now appears to be changing.
“There is a high end. It is unfashionable for people with money to spend like that.” nestle (NS:) India Chairman Suresh Narayanan said.
“The middle class, which was previously the segment in which most Fast Moving Consumer Goods (FMCG) companies operated, appears to be shrinking.”
Nestle India, which makes Kit Kats and other popular products, reported its first quarterly decline in sales since the June 2020 quarter amid the COVID-19 outbreak.
There is no officially defined income bracket for India’s middle-class households, but they are estimated to make up roughly a third of the country’s 1.4 billion people.
They are considered an economically and politically important demographic, and middle-class frustration is seen as a significant factor in Prime Minister Narendra Modi’s poor election performance this year.
Asia’s third-largest economy is expected to grow 7.2% in the fiscal year ending March 2025, the fastest among major economies.
But this rosy outlook signals a sharp slowdown in the household sector.
Urban consumption in India hit a two-year low this month, according to an index released by Citibank that captures indicators such as flight bookings, fuel sales and wages.
“Some of the decline may be temporary, but key macro drivers remain unfavorable,” said Samiran Chakraborty, chief India economist at Citibank.
Inflation-adjusted wage cost growth for listed companies in India, a measure of the income of India’s urbanites, remained below 2% for the entire third quarter of 2024, well below the 10-year average of 4.4%, data from Citi showed.
Chakraborty cites this, along with declining savings and stricter rules on personal lending, as key factors affecting consumption in the city.
Over the past 12 months, headline inflation has averaged 5%, but food inflation has remained above 8% as climate shocks have driven up prices of vegetables, cereals and other staples. Retail inflation hit a 14-month high of 6.2% in October, while food prices soared by 10.9%.
Anecdotal data suggests retail sales are up nearly 15% year-on-year during the 2024 festival season, which runs from August to November, Nomura said in a note last week. That’s about half of last year’s pace.
“We didn’t spend any money during this festival,” said Rajwanti Dahiya, 60, who lives on her husband’s monthly pension of 30,000 Indian rupees ($356.76).
“Savings are low. Almost none.”
‘Decreasing’ middle
The Reserve Bank of India expects GDP growth of 7.2% in the fiscal year ending March 2025, driven by improving rural demand and a strong services sector.
Rahul Bajoria, head of India and ASEAN economic research at Bank of America, said increased government investment may also support demand.
“Once government spending starts, there will probably be some multiplier effect on private consumption spending as well,” said Bajoria, who expects GDP growth of 6.8% for the current fiscal year.
Some are less optimistic about Citi and IDFC. First Bank (NASDAQ:) Economists expect GDP growth in the July-September quarter to miss the 7% expected by the central bank due to a slowdown in urban spending.
This pessimism has taken a toll on consumer goods stocks, with the Nifty FMCG index down 13% since October 1. On the other hand, the benchmark Nifty 50 fell 7.4%.
Only one of the 15 constituents of the FMCG index reported a rebound in sales growth in the September quarter.
Consumers in big cities are replacing branded products with cheaper non-branded products, from hair oils to teas. This is reflected in the first decline in sales in 11 quarters for the Food and Refreshments group. Hindustan unilever (NS:).
“Growth continues to be good in smaller cities and rural areas, but growth in larger cities is stagnating,” Rohit Jawa, CEO of Hindustan Unilever (LON:), said after reporting lower-than-expected profits last month. .
Consumers are also reducing eating out.
Fast food chains such as McDonald’s (NYSE:), Burger King, Pizza Hut and KFC posted lower same-store sales, earnings showed.
Rajeev Varman, CEO of Burger King operator Restaurant Brands (NYSE:) Asia, said people are still coming but opting for cheaper meals after quarterly same-store sales fell 3%.
“We prefer budget-friendly stores that offer good deals and discounts to manage our monthly expenses,” said Avinash Crasto, 37, a marketing and sales executive from Mumbai who has a family of four and identifies as middle class.
($1 = 84.0640 Indian Rupees)
