Consumption prospects of different classes likely to be diverging

Recent remarks by senior management in various fast-moving consumer goods (FMCG) companies have brought to the fore a knotty problem: Is the Indian economy diverging? In other words, are two different Indias experiencing two very different economic paths? FMCG companies have emerged from the earnings-call season with two major shared narrative points: That demand is no longer as dynamic as it was, but that premium products may continue to do well. These companies, given their strong distribution and marketing reach, are often watched closely for the inferences they make about broader consumer demand. Talk of a “K-shaped recovery” from the pandemic has been around for years; but the question now is whether that is causing India to settle into a “K-shaped economy”. Are two different segments of the economy growing at different paces and through different mechanisms?

 

It is worth noting that, if this narrative is correct, it is considerably more complicated than the usual “Two Indias” story as put forth by politicians. If a division exists and is growing, it is not one of urban prosperity and rural distress. It is one between premium categories — the top decile or less of the Indian economy — and those much further down the income chain. Indeed, at this time, it appears that rural demand might be recovering, with a reasonably good monsoon behind it — and the weakness comes from urban demand. In fact, according to some of the companies, the weakness comes from metro cities in particular, not even from Tier-I or Tier-II towns.

 

This is a matter of some concern. In some sense, India’s policymakers have long assumed that urban growth will take care of itself, and it is rural poverty that needs to be addressed. But this dynamic, if it was ever true, does not seem to be reflected in the reality facing India’s largest companies. In fact, one of the FMCG leaders has gone on record recently, warning that India’ middle class was eroding. This is certainly an unexpected and troubling direction. A country in which the elite is growing and consuming premium products is not necessarily in trouble; when that is happening alongside a middle class that is stagnant or shrinking, it is quite another matter.

 

One concern that has been raised by some of these comments is that weakness in urban demand might have been around for some time, but is only now increasingly visible because government stimulus and support of various kinds are being removed. Certainly, the contribution of government spending to growth has ticked downwards on the whole in recent quarters. This only adds to the broader concern that there is a flaw at the heart of India’s growth engine. Urban prosperity should hardly be dependent upon government support, which is after all unsustainable over a long period. There is also the fact that urban poverty is not clearly understood or visible in India. As was experienced shortly after the first Covid-19 lockdown, the large transitory or migrant population of Indian cities is largely invisible to the state, and their welfare is difficult to provide for. More data on how urban prosperity and poverty are being experienced is needed.