Analysis: India's middle class tightens its belt, squeezed by food inflation

Sapphire Foods India

13/11/2024 05:33

* 
      Urban consumption hits two-year low, index shows
    

        * 
      Inflation at 14-month high; food inflation in
double-digits
    

        * 
      Middle class frustration impacts Modi's election
performance
    

        * 
      Fast-food chains report sales declines
    

  
    By Praveen Paramasivam, Shivangi  Acharya
       CHENNAI/NEW DELHI, Nov 13 - India's city dwellers are
cutting spending on everything from cookies to fast food as
persistently high inflation squeezes middle class budgets,
threatening the country's brisk economic growth.
    Slowing urban spending over the past three to four months
has not only hurt the earnings of largest consumer goods firms,
it has raised questions about the structural nature of India's
long-term economic success.
    Since the end of the pandemic, India's economic growth has
been driven in large part by urban consumption, however, that
now seems to be changing.
     "There is a top end – the people with money are spending
like that is going out of style," Nestle India Chairman Suresh
Narayanan said.
    "There used to be a middle segment, which used to be the
segment that most of us fast moving consumer goods (FMCG) firms
used to operate in, which is the middle class of the country,
that seems to be shrinking."
     Nestle India, which makes Kit Kats and other well-known
goods, reported its first quarterly revenue drop since the
COVID-hit June quarter in 2020.
    While there is no officially defined income bracket for
Indian middle class households, they are broadly estimated to
account for a third of India's 1.4 billion people.
They are considered a key demographic both economically and
politically, with middle class frustration seen as a significant
factor behind Prime Minister Narendra Modi's weaker election
performance this year.
     Asia's third-largest economy is expected to expand 7.2% in
the financial year ending March 2025, the fastest among its
major peers.
    Belying those rosy projections, however, are signs of a
sharp slowdown in the household sector.
    Indian urban consumption hit a two-year low this month,
according to an index published by Citibank that captures
indicators such as airline bookings, fuel sales and wages.
    "While some of the fall could be temporary, the key macro
drivers remain unfavourable," Citi's chief India economist
Samiran Chakraborty said.
    Growth in inflation-adjusted wage costs for listed Indian
firms - a proxy for earnings of urban Indians - has remained
below 2% for all the three quarters of 2024, well below the
10-year average of 4.4%, data from Citi showed.
Chakraborty cites this as a key factor impacting urban
consumption, along with declining savings and tighter rules for
personal loans.
Headline inflation has averaged 5% over the past 12 months, but
food inflation has held above 8% as weather shocks elevated
prices of vegetables, cereals and other essential foods. In
October, retail inflation hit a 14-month high of 6.2% while food
prices jumped to 10.9%.
    Anecdotal data suggests retail sales rose close to 15%
year-on-year during the 2024 festive season, which runs from
August to November, Nomura said in a note last week, about half
last year's pace.
    "During this festival season, we have not spent at all,"
said Rajwanti Dahiya, 60, who survives on her husband's monthly
pension of 30,000 Indian rupees ($356.76).
    "Savings are low, barely there."
    A 'SHRINKING' MIDDLE
India's central bank expects 7.2% GDP growth for the fiscal year
ending March 2025 on the back of improved rural demand and a
strong services sector.
    Higher government investment could also support demand, said
Rahul Bajoria, head of India and ASEAN economic research at Bank
of America.
    "If government spending kicks in, that probably does have
some multiplier effects on private consumption spending as
well," said Bajoria, who expects GDP growth at 6.8% in the
current financial year.
     Some are less optimistic with Citi and IDFC First Bank
economists expecting GDP growth in the July-September quarter to
miss the central bank's projected 7%, weighed by slower urban
consumption.
     That pessimism has hit consumer stocks with the Nifty FMCG
index  .NIFTYFMCG  declining 13% since Oct. 1, compared with a
7.4% drop in the benchmark Nifty 50  .NSEI .
     Of the FMCG index's 15 constituent firms, only one reported
a pickup in sales volume growth in the September quarter.
     Consumers in large cities are swapping branded items from
hair oil to tea for cheaper unbranded alternatives, reflected in
the first sales volume decline in 11 quarters for the foods and
refreshment group at Hindustan Unilever.
    "We see the growth in big city standing down, although in
smaller cities and in rural the growth continues to be good,"
Hindustan Unilever chief executive Rohit Jawa said last month,
after reporting lower than expected earnings.
    Consumers are also cutting back on dining out.   
    Fast-food chains such as McDonald's, Burger King, Pizza Hut
and KFC posted same-store sales declines, earnings showed.
     While people are still coming, they are choosing cheaper
meals, Rajeev Varman, CEO at Burger King operator Restaurant
Brands Asia  RESR.NS  said after posting a 3% drop in quarterly
same-store sales.
     "We prefer budget-friendly stores that give good deals and
discounts to manage our monthly expenditure," said 37-year old
Avinash Crasto, a Mumbai marketing and sales executive who has a
family of four and identifies as middle class.
     
    ($1 = 84.0640 Indian rupees)
     

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
India's urban consumption slows as inflation bites    https://reut.rs/3UDWvl1
India's slowdown in consumption    https://reut.rs/40zLdSC
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(Reporting by Praveen Paramasivam in Chennai and Shivangi
Acharya in New Delhi; Editing by Sam Holmes)
((mailto:Praveen.Paramasivam@thomsonreuters.com; +91
867-525-3569;))