The Reserve Bank of India (RBI) is expected to increase policy rates tomorrow based on high industrial output and high inflation, though there is one factor worrying policy makers: The subdued growth in consumer non-durables.
Analysts say consumer non-durables, which have shown an average growth of 1.6 per cent in the 11 months of 2009-10, reflect that inequality of income growth and food inflation are eating into consumption patterns of low-end consumers.
Though the Index of Industrial Production (IIP) has been rising in double digits in the last few months, the poor show by consumer non-durables has left many concerned.
In February, for instance, while IIP grew at 15.1 per cent (marginally lower than 16.7 per cent in January and 17.6 per cent in December), consumer durables grew 29.9 per cent and non-durables, only 2.3 per cent.
In January, consumer non-durables fell 3.6 per cent, pulling down the overall growth of consumer goods to 4.2 per cent. The average growth for consumer non-durables in 2009-10 was just 1.6 per cent, compared to 25.75 per cent for consumer durables.
D H Pai Panandiker, advisor, RPG Foundation, said the poor show by consumer non-durables is mainly due to lower agriculture output. Sugar output for the year ended September 2009 fell to 14.9 million tonnes from 26.4 million tonnes last year. Not just supply-side issues, a combination of demand and supply is also hurting consumer non-durables. Pronab Sen, former chief statistician, said low growth in consumer non-durables indicates that the rural economy may not be doing well.
Consumption of non-durable items is driven by low and mid-income consumers who spend a bulk of their money on food, and not so much on consumer durables like refrigerators or air-conditioners.
| # Though the Index of Industrial Production (IIP) has been rising in double digits in the last few months, the poor show by consumer non-durables has left many concerned # In February, for instance, while IIP grew at 15.1%, consumer durables grew 29.9 per cent and non-durables, only 2.3% # Consumption of non-durable items is driven by low and mid-income consumers who spend a bulk of their money on food, and not so much on consumer durables like refrigerators or air-conditioners # Consumer non-durables have a higher weight of 23.3% in IIP, while the weight for consumer durables is only 5.4% |
Rupa Rege-Nitsure, chief economist, Bank of Baroda, said the overall demand got hit due to economic downslide and then drought hit the rural economy, leading people to curtail spending on consumer non-durables, which is discretionary by nature. ‘‘Food inflation is eating into the purchasing power of lower-end consumers,’’ she said.
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“There has been some stress in the last few months in food articles like edible oil and sugar,” said Subhada Rao, chief economist, YES Bank. The growth in sugar manufacturing has been negative since October and has turned positive only in February.
In a recent report, credit rating agency Icra said, “inflation has affected the purchasing power of the lower income group especially food inflation and that is reflecting in the deceleration of growth in the consumer non-durables category.”
Jyoti Jaipuria, head of research at Bank of America Merrill Lynch, said the drop in rural spending is not as significant as was anticipated. As a good indicator: Hero Honda’s sales did not collapse or FMCG companies sales did not turn negative.
“Rural spending may have been lower than last year. If you look at it in relative terms (given the type of monsoon), rural spending did not come off as much as expected. It’s not fallen by ‘x’, but may have fallen by 0.5x or by 0.75x,” Jaipuria added.
Consumer non-durables has a higher weightage of 23.3 per cent in IIP, while the weightage for consumer durables is only 5.4 per cent.
Will low growth in consumer non-durables cast a shadow on the recovery? “The overall GDP growth is less dependent on consumer non-durables. So, it is unlikely to cast a shadow on the recovery,” said Shanto Ghosh, principal economist, Deloitte India. That’s because IIP represents on the agriculture and manufacturing sector; it does not include the service sector, which accounts for 60 per cent of GDP.
Analysts say the growth in consumer durables, which includes passenger cars and other white goods, was due to the stimulus measures and the Sixth Pay Commission which directly benefited this sector.
Economists like Ghosh expect growth in consumer durables to slow down to 17-18 per cent in the next three-four quarters as the base effect wears off, while demand for non-durables could go up 6-7 per cent during the same period, due to improvement in demand and benefits of financial markets.