TIGHTER WALLETS TOUGHER CHOICES

Rising inflation is taking the bite out of consumers' purchasing power

India’s domestic demand-driven economy has been a crucial factor in the country’s post-Covid rebound, making it stand out as a rare beacon of hope amidst a global economic slowdown caused by central banks tightening rates to curb inflation. Indian consumers played a vital role in this turnaround by supporting the country’s growth story.

However, recent data has raised questions about whether this growth engine is starting to lose steam. The non-discretionary staples sector, which is the largest consumer goods sector in India and includes fast-moving consumer goods (FMCG) companies, reported a significant gap between volume and value growth in the last quarter.

While inflation is squeezing consumers, it is boosting headline growth figures. It seems that FMCG growth in India is mostly price-driven, with gross margin recovery supported by cost-cutting measures such as reduced advertising and publicity expenses.

Despite the apparent enthusiasm of Indian consumers, there is a growing sense that the consumption story may be approaching a rough patch. This development calls for a closer look at the factors that drive India’s economy and a re-evaluation of the country's growth prospects in the face of inflationary pressures and changing consumer behaviour.

In a recent report, the World Bank lowered India’s 2023-24 GDP growth estimates to 6.3% as against 6.6% earlier. It stated that “rising borrowing costs and slower income growth will weigh on private consumption growth, and government consumption is projected to grow at a slower pace due to the withdrawal of pandemic-related fiscal support measures.”

As a result, the lower and middle-income groups could be the hardest hit, with inflation and increased interest rates impacting both urban and rural consumption in the coming months.