What is the shape of India's economic recovery?

Many who had their jobs, incomes, and savings ravaged by the pandemic are still trying to recover. Retail inflation, which was making their lives a tad more difficult, eased marginally in May after touching an eight-year high of 7.79% in April. But it is still above the RBI’s tolerance band of 2-6 per cent for a fifth month in a row.

Most companies too are feeling the heat of soaring input costs. Hindustan Unilever Chairman Nitin Paranjpe last week said that India is currently going through “probably the most difficult economic situation”. He also said that the company would continue to increase prices even as FMCG market growth rates moderate and volume growth rates become negative in the short term.

A closer look at the sales of products across different price ranges throws a disturbing trend. HUL, Dabur India, Asian Paints, and Parle Products have all seen consumers buying cheaper and smaller packs. Meanwhile, according to Bloomberg, HUL saw its premium portfolio grow at twice the pace as the rest of its portfolio in 2021-22. Marico Ltd's premium personal care range also grew in high double digits in FY22.
 

HUL, Britannia, and Parle Products get 30 per cent, 55 per cent, and 70 per cent of their business, respectively, from one, five and 10 rupee packs. As a result, FMCG firms have opted for making products smaller while still maintaining the same price -- a phenomenon called 'shrinkflation'.

A NielsenIQ report has also found that the FMCG industry saw a decline in volume in the January-March period. In fact, rural India witnessed a 5.3 per cent fall in volume, the highest consumption slowdown in the last three quarters. The report said that a decline in consumption was echoed across all zones and the town classes, but was more prominent in rural markets.

Meanwhile, a national daily reported that 12 million passengers took domestic flights in May, almost six times the number for the same month last year that was hit by the second wave of Covid-19. ICRA said that domestic air travel in May was only 7% lower than pre-Covid levels. ICRA also said that international air traffic has surpassed pre-Covid levels by around 24 per cent, with fares seeing a spike. The number of domestic and international flights operated by Indian airlines is also back to pre-Covid levels. All of this has come against the backdrop of several rounds of airfare hikes due to all-time high jet fuel prices.

Let us now gauge the trend in auto sector. The Federation of Automobile Dealers Associations has said that passenger vehicle retail sales in May 2022 were 11 per cent higher compared to the pre-Covid month of May 2019. But, two-wheeler sales in May 2022 were down 13.91 per cent compared to May 2019. However, according to FADA, the two-wheeler segment has seen a slight improvement in overall sales when compared with April this year. According to Maruti Suzuki India Executive Director Shashank Srivastava, the sale of SUVs and MPVs is expected to jump 63.93% in FY23 from FY19.

The real estate segment also showed a divergent trend. According to ANAROCK Research, there has been a 230% jump in new launch supply in the luxury real estate segment, priced over 1.5 crore rupees, across India’s top seven cities in Q1 2022 as against Q1 2020. Out of the overall housing sales in the top seven cities in Q1 2022, the luxury segment's share was nearly 12 percent compared to about seven per cent back in the pre-Covid period of 2019. ANAROCK Research added that before Covid, the affordable and mid segments were the most in-demand categories. However, given that the pandemic affected the affordable buyer-class the most, sales in the category went down from their earlier peak.
 

Clearly, the divergent performances in various sectors is betraying the K-shaped recovery in the Indian economy. The pandemic seems to have no effect on the affluent class, which continues to splurge. While those at the bottom of the pyramid don’t have much to spend. A good monsoon, enhanced subsidy and the excise duty cuts on fuel might help.  But, the war in Ukraine might not end anytime soon. And RBI Governor Shaktikanta Das has said in a recent article that the retail inflation rate is likely to remain above the top end of the central bank’s mandated target band until December. This begs the question -- how quickly will the shape of economic recovery change for the better?