The coming long spell of demand drought

Looks like India's demand curve has shifted downwards for a couple of years at least, writes Shailesh Dobhal

As far as demand for consumer goods and services go, is the once-in-a-century pandemic, though currently serious in terms of its toll on lives and livelihoods, be merely a passing phenomenon? Once everyone, or at least enough people, have been vaccinated to create genuine herd immunity, will it all be hunky dory on the demand side?

After all, after every big crisis in the last two decades, whether it was the slowdown of early 2000s, the global financial crisis of 2008-09 or the self-inflicted demonetisation debacle of 2016, demand for anything from cars to colas had sprung back with a vengeance.  

Already, one is reading or listening to sanguine voices from some big marketers who surmise that the second Covid-19 wave-led slowdown is a temporary phase where demand is suffering due to low mobility, low pickup of discretionary goods and services, or because supply is impacted due to lockdown reasons. True, everyone admits that jobs have been lost, and reverse migration has changed demand demographics somewhat, but if the experience of past crises is that things quickly come back squarely where they were pre-crisis, and often for the better, so why should it be any different this time around?

There are reasons to be less sanguine because the pandemic and its aftermath has upended the edifice of consumption like never before. In industry after industry — from aviation, autos, hotels to apparel — sales volume are back to levels seen two to five-six years ago. Surely, this huge gap won’t be bridged in a hurry, and that is if at all. Writing for this newspaper earlier this week, Sajjid Chinoy, Chief India Economist at JP Morgan sounded a note of realism when he said that everything considered, quarterly gross domestic product (GDP) at the end of the ongoing fiscal would be almost 8 per cent below the level forecasted pre-pandemic.

The middle class has shrunk by 32 million people, and there are 75 million more poor people now compared to early 2020, according to a recent report by Pew Research Centre based on World Bank data. Pew defines poor with an income or consumption of under $2 per day and middle class between $10.01 and $20. All dollar figures are expressed in 2011 prices, on purchasing power parity terms.

Though undoubtedly the blue-collar and unorganised workers have borne the brunt of job losses, as many as 4.3 million white-collar ones too lost theirs in the last one year according to Nikore Associates, an economics research group. Gross enrolments with the Employees’ State Insurance Corporation during 2020-21 dipped nearly 24 per cent compared to pre-pandemic year in 2019-20. Hiring by the central and state governments too was anaemic, down 27 per cent and 21 per cent, respectively, in FY21 compared to FY 20 according to latest payroll data of the National Pension System.

A recent study by management consultant KPMG showed that an overwhelming majority of younger working millennials are insecure about their financial future and this is shaping their long-term approach as consumers. They are unwilling to cut savings in spite of suffering a 10 per cent income loss. Not exactly music to any marketer’s ears.   

The big growth hope of the last few years, the rural hinterland, too is facing fresh headwinds. Coronavirus is raging in the villages, and in almost a dozen states the rural share of active cases is far greater than in cities and towns.

Many of the tens of millions of migrant workers who returned to their village homes in the wake of the first Covid-led lockdown last year are yet to return, and with fear mounting because of a raging second wave in many urban centres, big employers have started reporting exodus of informal workers. According to one report, construction major L&T alone witnessed around 75,000 workers leave its project sites in the last month or so.

Persistent reverse migration is denting remittances to hinterland, with firms here reporting big hits from source-markets like Maharashtra, Gujarat, Karnataka and Delhi. Reports also point to hiring of blue-collar workers coming to a grinding halt at tens of smaller tier-2 and tier-3 towns like Aurangabad, Kanpur, Kota and Coimbatore in the last month or so.  

With surfeit of workers in rural areas, no wonder unemployment has again crossed double digits in villages and is growing faster there compared to urban areas. No wonder real, or inflation-adjusted, wage for March 2021 is lower compared to March 2019 (pre-pandemic year) in rural areas for both agriculture and non-agriculture workers.

Official figures on household level debt come with a huge lag in India, but the Reserve Bank of India’s latest available number shows household debt to GDP ratio steadily increasing from 35.4 per cent in June 2020 to 37.1 per cent in September 2020.  Important to note that this official indebtedness figure does not include non-institutional sources of debt like friends, relatives and moneylenders. One estimate pegs Covid-related out-of-pocket medical expenses of Rs 75,000 crore to Rs 1 trillion so far in the second wave, almost a third of it incurred by rural folks. Surely such indebtedness will become a mid to long-term consumption dampener.   

Classical marketing theory says a market expands if it finds new consumers or new usage or if existing ones consume more. Today, it is clear that there are lesser number of consumers in most rungs of the consumption pyramid compared to pre-pandemic levels. And even those who managed to hold their station, have less to spend. Looks like India’s demand curve has shifted downwards for a couple of years at least.