Can the Indian consumption story remain intact post COVID-19?

The good times as we know, are over. A collapse in consumption and an additional supply crunch stares us in the face. From manufacturers to retailers, everybody is going to face tough times ahead.

Ever since coronavirus pandemic has arrived, our lives and livelihoods has been challenged. People have lost their freedom and their income. The Indian economy is no exception, it has seen the biggest demand slump since the financial crisis. 

Despite the sharp slowdown in the Indian economy in march 2020, it most certainly have clocked a GDP of about $3 trillion for the year ending 31st March 2020. With the domestic private consumption contributing almost 58% of India's GDP, it would amount to somewhere around $1.7 trillion, of this roughly 48% is consumption of merchandise i.e. $825 billion and the remaining $875 billion is spent on services.

The biggest enabler of the merchandise consumption in our country is retail sector. This retail industry which facilitates buying of roughly 250 million Indian households is also the country's largest employer after agriculture. Census suggests the employment by retail to be close to 45-50 million direct jobs, this includes 20 million independent retailers, several tens of thousands of retail outlets operated by large organized retailers and the small but extremely important e-commerce retailers.

Recently IMF came up with its global growth projection which paints a really gloomy picture. Only India and China are having any positive growth whatsoever, if the report is to be taken at face value. Rest of the world is starring what we call recession which in some ways is a necessary evil. Indian growth for FY2021 would be around 1.9% of GDP and the perhaps more than 5% by FY2022. This rapid downward slump in India's economy which started much before COVID-19 hit us, will have a significant impact on what Indians will consume in the next 4-8 quarters. This change in consumer behavior will be more because of the diminishing purchasing power of people rather than supply side constraints.

Out of the $825 billion of consumer spending on merchandise, about $550 billion is food and grocery consumption. This particular category is likely to see the least impact both in terms of volume and offering, in fact there are estimates that due to unnecessary hoarding by people it might shoot up as well. Only subcategory that is looking weak is the 'lifestyle food' sub category, i.e. healthy food with exotic ingredients, premium snacks and premium alcohol etc.

Another big category is the apparel & footwear category which stands at $65 billion, although much smaller than food and grocery for consumer spending in merchandise. This category is expected to see the worst affect post the coronavirus pandemic due to changing consumer behavior towards non essentials, excessive inventory in pipeline and cash flow problems. With apparel and footwear stores completely shut down during lockdown and non essential delivery prohibited for e-commerce companies during the same period, the already procured inventory would become slow moving with change in season. The consumer sentiment is expected to be quite low after the lockdown is relaxed for a few quarters. Under such circumstances it is pretty evident that spending on clothing and footwear won't be the priority for most of the consumers in different income brackets. We will also see heavy discounting on the part of retailers and manufacturers due to excessive inventory and liquidation protocol, with well known brands selling at a heavy discount the worst hit will be the non branded category and standalone small stores.

A category that is usually considered weather proof in India is the jewellery industry, accounting for $60-65 billion. There is lot of buying into gold since investors are looking for safe heaven for their investments. But the usual fast moving, value for money designer jewellery has seen downward sales due to change in consumer behavior amidst lockdown. It is expected to revive by September 2020 during the wedding season.

The least long lasting impact would be seen in the consumer electronics and durable segment which constitute around $50 billion. Since summer is approaching, the sales of ACs and refrigerators might be impacted in case the lockdown stretches for long. These categories will see the demand coming back strongly, both in summers and the wedding season.

There are some other categories related to home etc, which might see consumers shifting their preference for more value for money products while the volume should hold.

Therefore, it is safe to conclude that post coronavirus pandemic, business scenario for non food categories is not looking very bright. There will be be tough times ahead.

Conclusion:

Even though the Indian consumption story has had a rock solid foundation over these years post reforms in 1991, it is no longer going to serve the economy in the short term specially in the backdrop of the coronavirus pandemic. The Indian economy was already sputtering before the pandemic hit us. Our consumption has been directly affected by the economic stagnation and job losses in most of the industries. This has eroded the consumer sentiment of our middle class which are the biggest consumers in our economy. We are starring a potential recession and once the psychology of recession sets in, it would be really hard to get people back to shopping in the same capacity as earlier. They are more likely to buy essentials then undertake any discretionary speeding. Among all the categories the discretionary is going to be the hardest hit. Merchandise retail like apparel, footwear and accessories are going to take a long gestation period to come back on track.