Shrinking Consumer Appetite

Adit Jain

The hikes in interest rates, in quick succession by the Reserve Bank of India, amounting to a little under 100 basis points, is clue enough that the central bank sees price instability as a troubling factor. We have previously argued, many times over, that in our view the RBI was behind the curve and misjudged the fact that inflation was likely to become sticky, having previously viewed it as a transitory phenomenon. However, more recently, with numerical evidence it is clear that inflation is systemically ingrained and hence the hardening of monetary policy. The fact is, a lot of inflation is imported, with the war in Ukraine being the primary culprit. Commodity prices, both with respect to food and energy, have zipped upwards in a matter of months and it seems quite unlikely, at the present time, that they will correct in the near future. On the contrary, oil prices will remain stratospheric as European countries clamp down on Russian supplies, leading to greater demand pressures from other OPEC producers.

The RBI initially misjudged the fact that inflation was likely to become sticky, having viewed it as a transitory phenomenon. It is now playing catch up by raising interest rates rapidly.

High inflation is the biggest impediment to consumption. In India, demand has stagnated or fallen over the past two years. Certain industries, such as two wheelers, which are accurate indicators of both urban and rural appetite, have been weak for some time. Between 2020-21 and 2021-22, India’s GDP grew by Rs 11.8 trillion, an increase of 8.7%. (Effectively, though, GDP was only Rs 2.2 trillion, or 1.5%, above pre-pandemic levels.) But it’s really the data on consumption that is disturbing. Private consumption expenditure accounted for 56.9% of India’s GDP in 2021-22, down from 57.3% the previous year, and just 1.4% higher than before Covid hit. This is despite the efforts of the government in providing fiscal stimuli targeted precisely to those sections of society that needed support the most.

The moderation of growth is a fact not limited to India. Most advanced economies are grappling with high inflation and falling demand. In fact, central banks with heavily bloated balance sheets are in a precarious position. The United States Federal Reserve has begun the process of quantitative tightening together with raising the cost of funds, a double whammy of sorts. Consequently, private consumption in America is likely to fall, affecting the growth prospects of emerging markets in general. India’s government and central bank will have to contend with a rising deficit on the current account with higher import costs for basic commodities. This coupled with the fact that fund managers have been scurrying to the safety of the US dollar, leading to capital outflows, will put pressures on the balance of payments. The rupee will consequently remain under downward pressures for the coming 18 months.

A lot of inflation is imported, with the war in Ukraine being the primary culprit. Commodity and oil prices have zipped upwards are are unlikely to correct in the near future.

So, what should business managers do? Clearly, risks are weighed heavily on the downside and consequently managers must prepare for this prospect. With consumption moderating, the greatest impact would be felt on those industries whose products are not ‘essential’. Consequently, consumer electronics, luxury products and perhaps even household appliances and the like, will see a temperance in demand over the coming 12 to 18 months. The hardening of interest rates, particularly in America, will impact the flow of funds and the provision of liquidity within the Indian financial markets. This may affect start up industries in particular, but also well-established ones as the cost of borrowing will rise. These economic developments are really beyond the control of business managers. All they can do is manage their operations in a way that minimises risk and exposure. Many industries have been complaining about rising input costs. They may now have the additional worry of falling demand. As investors and markets value margins as much as growth, CEOs must keep an eye focussed on this indicator.

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Adit Jain, Editor



For the CFO, the significance of day-to-day ‘Finance’ work is diminishing relative to new demands around business leadership. Apart from a basic technical/accounting background, the key skills and competencies today’s CFO must possess rest on four fundamental pillars: leadership, operations, controls and strategy. Sumendra Jain, CFO (India & Asia Pacific) at SMS India, believes that for Finance leaders to be effective business partners, they must have the necessary leadership and communication skills. Additionally, to be able to offer an independent perspective, they must possess a strong understanding of the company's business model and industry. CFOs should also be able to identify opportunities for top-line growth, manage downside risks and drive profit improvement, not just through the traditional methods of cost-control, but using new methods like product line/regional profitability analysis and benchmarking against industry players. Sumendra’s 25-year-long career offers insightful lessons and learning for executives in general and CFOs in specific.