Car sales fell as much as 10.56 per cent in July. With interest rates on the boil, Indians, unstoppable car buyers till recently, seem to have deferred purchases till loans become inexpensive. Some may also have held back in July so that they can buy new cars like the improved Maruti Suzuki Swift or the diesel Chevrolet Beat in the months ahead. Three of the four large car producers (Maruti Suzuki, Hyundai and Tata Motors) saw their sales decline in July; only Mahindra & Mahindra gained volumes. However, motorcycle sales climbed 13 per cent during the month. Market leader Hero MotorCorp sold close to half a million. So, have Indians begun to down-trade? That seems to be the inescapable conclusion.
This is the third wave of down-trading in recent years. In the first, which began in the early years of the previous decade, people saved on staples like toothpaste and edibles so that they could buy lifestyle products like mobile phones and readymade garments. The next time it happened was in the 2008 slowdown. Salaries were frozen, companies downsized and the fears of joblessness were all-pervasive. Buyers, especially in the urban markets, settled for lesser and stripped-down products. But it didn’t last long. The stimulus provided by the government, through tax cuts, enhanced salaries to all government servants and the directive to banks to step up retail loans brought buoyancy back to the market by the middle of 2009.
This time, consumers have started to down-trade because of the two inter-related issues of inflation (food and fuel) and high interest rates. As incomes rise in any emerging economy, people eat better. This is stoking food inflation in the country. The Reserve Bank of India wants to tame it with a tight monetary policy. But there is nothing to indicate when the food supplies will improve.
Retailers have started to say that those consumers who spend a significant part of their disposable income on food now find it hard to maintain their discretionary spending at the old levels. This means, they are now buying cheaper soaps, biscuits, hair oil and so on. This could also show up in people buying lesser talk-time for their mobile phones or smaller life insurance. In fact, the first-year premium collected by life insurance companies (state-owned Life Insurance Corporation as well as 22 private insurers) has slumped 28.36 per cent in the first quarter of 2011-12 compared to the same quarter of the previous year. While one reason is the cut in the commission to agents instituted last September, insurance companies admit that some bit of it is also because of people being left with lesser money after paying their food and fuel bills.
Nielsen’s Global Online Consumer Survey for the second quarter of 2011 notes that though Indians continue to be the most confident consumers in the world and are upbeat on their job prospects and finances, “a host of factors are weighing heavily on their minds” — inflation, fuel price rise and the bleak prospects for the world economy. “We are likely to see adjustments to the purchase baskets in terms of greater value-consciousness,” it says. Of course, there are no indications so far that employers may roll back salaries or cut jobs. But the situation could change if the next couple of quarters turn out to be bad.
In the car market, down-trading is happening in two ways. One, people are buying cheaper cars. Two, for any particular car, the lesser models are selling more. There is another shift in the market — it has moved rapidly in favour of diesel cars. The recent sharp increases in petrol prices have made diesel cars a better option for buyers, especially for those who drive over a thousand kilometres in a month. Till a few years ago, petrol was 65 per cent of the car market and diesel 35 per cent; the situation today is just the opposite. Those car makers who don’t have diesel cars – like Honda – are now in a scramble to develop one.
High interest rates have not impacted sectors where consumers do not make purchases on installments. One example is consumer electronics — the incidence of consumer finance here is not more than 10 per cent; so high interest rates don’t really matter. Companies say sales are robust. Television sets continue to do well. Sales of washing machines have grown 12 per cent so far this year, while that of refrigerators have grown eight per cent. Air-conditioner sales are down, but companies say that’s because of the late onset of summer in large parts of the country and not because of tight consumer budgets.
Going ahead, most of them expect to do good business in the coming festival season that starts with Onam in Kerala in less than a month. Monsoon rains, they say, have been adequate in large parts of the country, and they expect sales to gain momentum soon. Will the rural markets be strong enough to counter the slowdown in the urban markets? Though there are signs of convergence between the two markets, it is clear at the moment that those who touch lower price points will have the last laugh.