Demand Drivers Archives - RAMA BIJAPURKAR

The DNA of Consumer India will remain unscathed after covid-19

admin — Mon, 11 May 2020 00:01:00 +0000

Winners will be those who proactively market better. Losers will be those who wait for the consumer to emerge suo moto. (Photo: Reuters)

Investors are well-advised to track the supply side as carefully as they are tracking the consumer side

CoronavirusCovid-19

Marketers and investors are increasingly wondering how consumption will change post covid-19 and the lockdown. The obvious answer is that everyone is going to be less well off, and consumption will shrink. In an earlier column we modelled the amount at risk.

People will spend on necessities first (could include replacing a broken phone or refrigerator, not just food and school fees). For getting a piece of the “nice to have but can do without” expenditure, there will be a fierce cross category battle (buy an iPhone now, paint your house next year or downsize the wedding and give the newlyweds a car instead).

The Indian consumer toggles seamlessly between ‘stretch’ and ‘settle’ behaviour—in good times, “whatever I can afford plus one price-performance level up” (stretch) and in bad times “let’s stay with the most manageable price-performance point” (settle). We have seen all this before in earlier downturns, no surprises here.

But there also seems to be a hypothesis developing that this never-before experience may change Consumer India’s DNA permanently. If I had to pick a number on a 10-point scale where 10 is significant transformation and 1 is kuttey ka doom (the proverbial dog’s tail that always goes back to the original curl), I would pick 3.

Some behaviour changes will happen, but with a twist. Will we offer household help liberal salary hikes because we have experienced their workload and our dependence? Probably not. Move to a do-it-yourself fully gadgeted home? No. But we will buy insurance with options like cleaning robots, or even buy gadgets for helpers to use to better clean the dirty places we discovered during our house arrest.

What about digital becoming the primary way of life and living for all? Global investor and author Ruchir Sharma recently wrote that things we expect to happen post-covid were already happening pre-covid—covid is just “telescoping the future”? Moving to digital ubiquity had already begun —thanks to Chinese phones, the cheapest telecom rates in the world and even temples going online! The momentum multiplies.

Increased health and cleanliness focus? We have created a caste system in that too; ever noticed how, before masks were made compulsory, in many swanky buildings the hired help and building staff wore masks but not the residents? The driver but not the owner in the back seat?

Many will go back to things we gave up in deference to modernity, more shoes will be left at the door, more concern on jhoota (sharing eating utensils). But even now we see that the outside drain or garbage pile continues to be ‘not my problem’, but my home must be disinfected for covid care.

Will the fear of going out make us live inside? We are already seeing social distancing being given the go-by whenever the lockdown is lifted even slightly; it’s not just the poor that were standing outside liquor stores; enough cars are visible on the road.

So no, don’t hold your breath expecting covid-19 to deliver a brand-new, evolved Consumer India. But Consumer India is in a rare state of pause and has time to listen, to reflect, to re-evaluate what fulfils their needs best—that is the opportunity, and the ‘watch-out’, for marketers.

Winners will be those who proactively market better. Losers will be those who wait for the consumer to emerge suo moto. So, investors are well-advised to track the supply side as carefully as the consumer side to determine likely outcomes.

Rama Bijapurkar is an independent market strategy consultant.

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Only half of India’s household consumption will come through post covid

admin — Mon, 20 Apr 2020 00:31:00 +0000

The so-called middle class, which is actually India’s richest 20% of households, accounts for 36% of consumption expenditure.

India’s household consumer demand is vulnerable and skittish because of dismal occupation demographics, lowly paid and uncertain livelihoods for most
Low food inflation and protection of urban salaried jobs may make it better, a spoilt agricultural season may make it worse

The ongoing discussion on the prognosis for consumer demand is currently based on extrapolations from supply-side data and macro-economic variables. This column aims to supplement it by providing household-level data on consumption, a “people-view” of those who cause this demand to happen.

India’s household consumer demand, the jewel in its gross domestic product (GDP) crown, is vulnerable and skittish because of dismal occupation demographics, lowly paid and uncertain livelihoods for most; and because most Indian households have very little “surplus income”, money remaining after covering their routine expenditure, leave alone their non-routine requirements and emergencies. Consumer demand commentators have been generally reluctant to link the dismal occupation demographics to consumer demand, beyond monsoon-dependent agriculture and, after demonetization, small business owners and their employees.

The covid-19 pandemic has forced us to acknowledge the universe of migrant—daily-wage workers—individual service providers who hunt for their daily bread, 32% of Indian households who contribute about 24% to India’s household expenditure. By contrast, the so-called middle class, which is actually India’s richest 20% of households, accounts for 36% of consumption expenditure.

The accompanying tables provide a map of consumption expenditure based on the share of household consumption expenditure contributed by different occupation groups further divided into the income level they belong to. Some occupation categories with similar earning vulnerabilities due to the present problems have been clubbed. The income levels have been so defined because our data shows that the bottom 40% of households have virtually no surplus income, the top 20% of households are discontinuously better earners and spenders (actually they are the so-called middle class that dominates our discourse on consumption) and the 40% in the middle are what we call the aspirational Indians in terms of consumption behaviour—spending more in good times and hunkering down in bad. The data comes from pan-Indian ICE 360° India household surveys (2014, 2016) and thinsamples of 2018, on how Indian households earn, spend, save, live, think and access public goods, done by our think tank and fact tank People Research on India’s Consumer Economy. Our aim here is to provide a people-based frame by which to construct reasonable risk maps for consumer demand, adjusted as policy initiatives unfold and depending on a business’s consumer profile. First, a look at rural India’s consumer demand risk map. Rural households account for 57% of all India household consumption expenditure (and 54% of India’s household income).

Table 1 shows the share of rural household expenditure (number in each square) contributed by households in each occupation x income category, and our reading of risk levels of each one’s expenditure holding in this environment.

Since our hopes are riding on a good harvest, a bit more detail on agriculture dependence of rural households: 22% of rural households are dependent entirely on agricultural business income, another 5% on agricultural labour income; 28% are dependent mainly on agricultural business income (all those in Row 1, Table 1) and 9% on agricultural labour. We have combined the last one with all casual labour (Row 5, Table 1). Another 30 %of rural households (some parts of those in Row 2,3,5,Table 1) have some dependence on farm income but since it is a minor component of their income and of total farm income, we have not segregated them.

A good harvest safeguards 30% of rural expenditure (Row 1, Table 1). Given lockdowns and their after-effects on the large spending segment of casual labour and on the micro businesses, and the drying up of remittance from urban Indian migrants, about 34% of rural expenditure will be severely stressed ( Row 4,5, Table 1). The salaried in rural India (Row 3, Table 1) are safer than the salaried in urban India because they are relatively more formally employed, so another 18% of rural expenditure is ‘safe’. Overall, we believe about 62% of rural spends will come through if agricultural activity can get done on time (‘safe’ expenditure plus half of the partially at risk expenditure). The hope also is that some part of the 29% of expenditure contributed by casual labour may be salvaged as it also gets used for agriculture.

Turning now to urban consumption, which accounts for 43% of total consumption, and is more lucrative because of higher income salaried households, but very geographically scattered. We expect that for the largest chunk of urban consumption—the salaried class—job security will be an issue, especially since urban salaried occupations unlike rural tend to be of all kinds, and less formal. Twenty percent of urban expenditure accounted for by the high-income salaried group is totally safe (Row 1, Table 2). This segment has surplus income, is also the darling of banks, and is not only earning during the lockdown, but has also been abstaining from consumption this last month—no beauty parlour visits, no eating out, no conveyance expenditure, no shopping sprees, a condition that is likely to last for quite some time. They can and will spend if suppliers who can address them make an effort at persuasion. For the rest of the salaried class (we expect job losses and restructuring and we expect only 8-9% of the 23% of consumption they account for to remain,

Of the small businessmen, micro entrepreneurs and solo service providers (Row 2, Table 2), we expect half of their consumption worth to materialize —15% of urban consumption lost or at high risk. Even if they do have surplus income from the past, the present jerk on their revenues will make them very cautious spenders; besides, all of them carry debt.

Another 9% of safe consumption is from agriculture income dependent families and those who live off investments, pensions, rent and remittances (Row 4,5 Table 2). So totally, we expect about 52% of urban consumption to hold (safe expenditure plus half of partially stressed expenditure).

Taken together, we assess that 58% household consumption will come through, contributed 61% by rural and 39% by urban India. Low food inflation and protection of urban salaried jobs may make it better, a spoilt agricultural season may make it worse. We would also like to point out that the salvaged potential expenditure, even after removing half of it, is still by far larger than the top lines of most large consumer companies—so this is not the time to give up and say the tide has gone out, but to continue to grow with targeted strategies to grab a share of the wallet.

Rama Bijapurkar and Dr Rajesh Shukla are co-founders of think tank People Research on India’s Consumer Economy

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Bridging the income gap

admin — Sun, 04 Jan 2015 09:01:00 +0000

By: Rama Bijapurkar and Rajesh Shukla

Inequality in India has reduced in the last decade but the key to reducing the still yawning spread in incomes is supporting an entrepreneurial ecosystem with gusto.

(Illustration: Ajay Thakuri)

ABOUT: Among the keenest watchers of Indian consumers, Rama Bijapurkar and Rajesh Shukla are co-founders of People Research on India’s Consumer Economy, a not-for-profit research centre on India’s consumer economy and citizen environment. Bijapurkar has served on boards of several Indian companies and is author of We Are Like That Only and A Never-Before World. Shukla, formerly director at NCAER Centre of Macro Consumer Research, is author of How India Earns, Spends, Saves.

The discussion inside India on inequality has become very complex and fragmented. Lost in the maths and the economic theory, the ideology and the international comparisons is the “people view”. It’s the tower of Babel and the championship of siloed thinking out there.

Gini coefficients (based often on expenditure survey data which are kinder measures of inequality than income data or based on theoretical income distributions derived from experiences of other countries), poverty line measurement debates, confusingly opposite conclusions offered by market economy supporters, and welfare economy supporters using the same data on whether trickle-down has happened or not, horrific census statistics on toilets and water and equally horrific stock market indices all jostle together. And demographic dividend discussions and skill building and job creation discussions don’t have reduction of income inequality as the explicit goal that they chase.

Let’s get this debate back to the basics – taking a “people view” and not a supply-side or macroeconomic numbers-driven view – let’s understand factually how unequal we are on the measure of income (earning power) inequality. Should we worry and under what circumstances? How have incomes grown between 2005 and 2014 based on real survey data and disaggregated across different segments of society, what is it that those who earn more have compared to those who earn far less, how much of this can we attribute to welfare schemes, and what is the way forward?

Fed up with macro-data-driven or, worse, fact-free debates on different parts of the inequality beast, People Research on India’s Consumer Economy (a not-for-profit research centre) conducted a household survey late in 2014, representing all Indians (not just people in urban India shopping at malls). One lakh household listing interviews and 20,000 detailed income, expenditure, occupation, inclusion-related interviews were done, covering 21 states grouped into seven clusters, and over 1,000 survey locations. As is common international best practice, respondents were asked their income details for a reference period of one full year – in this study for 2013/14.

So just how unequal are we in terms of what we earn? Is it getting worse or better?

Sixty-three million households have about half of India’s household income, 46 per cent to be precise. (On the upper bound, if we were to do this analysis by total household income and not per capita income, the share of income would have been over 50 per cent.) Unlike the automatic assumption we usually make that these will be urban households, 45 per cent of them are rural.

Has income inequality changed significantly in the last decade? Not really, as the data shows.

During 2005-14, approximately a decade, it hasn’t been all bad. We will end up with five years of high GDP growth, two years of not-bad growth, and two years of below par growth – averaging above 7 per cent. The resultant increases in real annual income in the poorest 20 per cent households has been over Rs 50,000 and that of the 20 per cent of households just above it, almost Rs 1 lakh.

Income inequality

What is more heartening is that only 44 per cent of the total household income that was added between 2005 and 2014 went to the richest 20 per cent and that isn’t really such a worrying number at all given how unequal our living conditions and access to market institutions and public goods are. Even better is that the next three income quintiles (or 20 per cent bands of income) captured 50 per cent of the additional income generated during this period.

While the richest 20 per cent (Quintile 5 or Q5) have continued to be the biggest and most disproportionate gainers, the next 20 per cent (Q4) are losing the income capture game. Their distance from Q5 is far more now than it was in 2004/05. Q3 and even Q2 gain at their expense.

Has the income grown sufficiently for everybody across the board to improve their surplus income or what is left over after expenditure, both routine and not? Not significantly except for the richest 20 per cent who have grown far more secure. The poorest 20 per cent continue to spend more than they earn and the 20 per cent above them barely balance their income and expenditure. Aspirations to consume and new ‘must have’ necessities of living have grown at the same pace as or faster than income, hence not improving financial health. They need to be supported with direct or indirect boosts to their income.

Is MNREGA and more of the same the way to go? All evidence points to the answer “no”. First, the amount of money distributed per household if calculated is far lower than the income increases that have occurred. We all fall into the trap of noticing large aggregate spends and not noticing the fact that there are a large number of beneficiaries getting a little bit each – exactly like India’s economy, which is a large economy of lots of modest income people. Secondly, our data shows that of the poorest 20 per cent of the households, less than two in five have been able to get the MNREGA benefit. About 25–30 per cent of the next three quintiles of income earners claim to have availed of the benefit and 13 per cent of the top quintile of households also claim to have benefitted. Targeted subsidies using direct benefit transfer to bank accounts may help but it’s also a high-tech way to perpetuate the same thing.

Why do those who earn more, earn more? Here’s where we all know the answer but refuse to see or say. It is the elephant in the room. But if data is needed to prove it, here is some data.

Simply, people who are better educated earn more. The education system is broke, and does not serve the poor at all. The discontinuous earning of the top 20 per cent is reflected in the discontinuous education they have attained.

If that problem is too much to fix as people suggest it is, then the option is to provide jobs which utilise them in as-is where-is condition. That’s called non-agricultural labour and 62 per cent of the poorest quintile of households earn their livelihood this way, and the wages are better than those in agriculture at this low level of subsistence. So it is suggested that a construction boom can boost incomes a bit more at the bottom of the income pyramid. But is providing value-added work the best we can do?

Capital intensive, modern, state-of-the-art manufacturing won’t boost that many incomes of that many people even if you look at suppliers and ancillaries and other related facilities that it spawns, including service facilities.

As for skill-building, all communication today makes the “you can get a job” promise. This makes people say, and rightly so, I want an office job. The focus of skill building should instead be towards saying “you can have your own business and grow it”. If there aren’t enough organised sector jobs to absorb them today (and by the way the same goes for very high-end CEOs as well), at least we can tap into the tremendous entrepreneurial energy, learnability and enthusiasm that young India has demonstrated and create organised ways to support them. Our book, A Never-Before World, describes the energy of this kind that is visible in urban India, especially in large cities. What is needed is financing of wannabe truck owners (today cleaners with low-paid jobs), caterers or small eating kiosk owners (thelawalas in fear of the police), or stay-at-home family cooks, laundry operators (today dobhis who iron on the roadside or in houses), trained nurses who can come together to set up a home care services company, and so on.

LET’S STOP THINKING IN CONCEPTUAL SILOS. LET’S FOCUS ON DOING whatever we can to help people help themselves earn more -make big bold moves and let small entrepreneurs flourish.

But our efforts on financial inclusion have neither focused on them nor specifically included student loans in large enough numbers for people to get skilled (also, it has not hugely funded skill building institute entrepreneurs). This is where skilling missions have failed us so far – the skilling ecosystem has to be built in its entirety and with a strategy in mind to achieve a thought-through outcome. We know that the only way things work in India is if we enable people to find their way. Let’s put the cart before the horse for a change. If enough people with skills exist, online exchanges will mushroom and aggregators will provide shared services. It isn’t difficult – but it isn’t something the corporate mindset can think about. As the organised sector develops, it may pay a premium to acquire these aggregations of skilled workers.

Let’s stop thinking in conceptual silos. Let’s focus on doing whatever we can to help people help themselves earn more – make big, bold moves and let small entrepreneurs flourish.

The decrease in “power distance” of the Indian society that we have been noticing is also a big boon. Demanding more wages is happening more now than before. MNREGA set a new benchmark for wages and while some sigh about becoming a high-wage economy, it seems a far more useful way to build an equitable society than through handouts.

How do the people of India think about income inequality? They worry about fairness and improving their own lot. They want their children to have far more opportunities than they do today or their parents did, so that they can earn and live disproportionately better. They want entertainment, leisure, and family life to improve. Talk to them and they are not asking, “Why do you have a Mercedes car and send your child abroad to study?” They are asking, “Why can’t my child go to college and get a well-paying office job which is permanent?” and “Why can I not have running water, my own toilet and not have seven people in a room?” What is the equality being sought? Equality of opportunity to go up in life and improve your condition. Equality of getting a basic good education and timely health care and an equal opportunity for talented children to realise their potential and access to public recreational facilities. China has provided many of these without worrying about income inequality. In India, the state hasn’t done so and has abdicated its role in providing these facilities, forcing poor people to pay more to private providers.

The road we are on leads to a more income equitable society. We don’t need an about turn. We need more road work. We need to work more on the road.

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Can Narendra Modi evolve from COO to CEO?

admin — Sun, 14 Apr 2013 09:02:00 +0000

There is something seductively reassuring about operational performance improvement (OPI). Narendra Modi’s speeches at business forums have been all about it and he offers himself as an OPI-delivering chief operating officer (COO), with a successful model demonstrated in one pilot state, ready to be scaled to the rest of India. This resonates deeply with Corporate India, which has improved margins and taken advantage of the rising tide of ‘automatic’ GDP-driven revenue growth, for the past 15 years, on the back of an almost maniacal focus on building a lean, mean, efficient, scalable supply machine that could make maximum hay when the sun shone.

Given how flabby and dirty the government machine is, there’s clearly a lot to be tangibly gained by the citizen-shareholder too – as is the case with investors in India Inc – and they may well elect him for that reason. Given all the case studies he presents of his OPI genius in identifying bottlenecks, diving deep into issues and implementing smart solutions, Corporate India understands and approves. More so since heady growth has caused job inflation too, making many COOs hold the title of CEOs, equating OPI to the totality of business strategy. But even if we take it on faith that he would be able to bring OPI to all of India, including in state governments, we still need to demand much more from a person who we are signing up for a CEO leader, and here’s why.

Beyond Silos
When you do an OPI, what will get done is very clear – engine tuned, rattling parts fixed, people efficiency improved, liposuction done on historical and stubborn flab to make the organisation consume less and yet have more energy, business processes reengineered, smarter inventory management, logistics, resource mix and allocation, better connect with customers through multiple touch points, etc.

On the other hand, what doesn’t get done is things that improve the fundamental heath of the organisation; like coaching the leadership team to become more confident, more self-aware, or defining goals and strategy for the organisation as a whole; not task silos within it which will help identify, choose and capitalise on opportunities or hedge against threats, both of which abound in the new world as a result of environmental bombshells or competition of the future or cranky world markets.

In good times, at board compensation committees that evaluate CEOs, we were so taken up with CEOs who were doing an excellent OPI job that we forget to ask the larger, critical questions. We are now asking if a leaner, meaner, fitter organisation is, ipso facto, equipped to create continuous value as tailwinds slow down and growth must come from other ways. We are now beginning to ask CEOs: “What haven’t you been doing that you could have done to make the company better positioned for the future?”

“Is being a better and bigger and smarter aircraft carrier the best place to focus the CEO energy or should (s)he think about the future of conflict in the world and whether this will be relevant at all?” “If this happens then what will you do?” “How do we grow revenues in hard times through market share increase from me-too competitors all of whom operate similar machines in scope, spread and efficiency?” Or, “is it time to change business models to get non-linear performance [that is more bang for the same effort] and how will we cope with the consequences?” Or, “should we invest heavily in overseas markets at this time, take a cut in margins, and go up the value chain there”? Mr Modi’s candidacy must be similarly interrogated.

Time for Questions
When we see OPI-focused scorecards for the entire top team, with huge bonuses riding on them, we now worry that the entire top team may become a one trick pony. We ask: is there anyone who knows how to do different things should we need to? We need to ask that of Mr Modi’s chief ministership too. We also ask: The CEO has delivered the numbers but is it at the cost of the organisation’s culture and values? Is there enough intellect and diversity of ideas in the team or do we have a cloned bunch of pygmies around one godlike leader? Is there a harmful autocracy, with no dissent or empowerment, and what happens if the CEO is run over by a truck? We haven’t yet examined these issues in the context of Mr Modi, and they could determine our country’s fate.

We need to hear what his assumptions about the world and country are that will drive his agenda; we need to ask, “What is your view in this state versus Centre federalism, when you get to the Centre?”

“What is your philosophy on working in coalitions, because you most likely will have to manage one?” “How centralised will decision-making be, what sort of leadership style do you believe in?” “If China attacks us, will you ally with America?” “What about your assumptions on the economy, what about food inflation?” “What is your comment on reservations?” “How do you think about the Right to Education Act, the food security bill?” “Do you believe in trickle down?” “Do you believe in a foreign policy of nonalignment?” “What is your attitude to dissent, the emergency, China’s regime of bread or freedom…”

It’s time for us to ask Modi far more CEO questions, even if the majority view is that an OPI COO is what the country needs today. It is necessary but not sufficient for the leader of this complicated country now needing to revisit its values, its assumptions, its institutions.

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End of Ride-the-Wave Growth

admin — Fri, 24 Aug 2012 08:51:00 +0000

Consumer demand is still a large pie, and the bigger share will go to agile consumer-centric businesses

Is consumer demand alive and well, even after the Budget? Prices will go up, driven by service tax and excise duty increases; cost of fuel, freight and utilities, and EMIs too, have shot up. India Inc will most likely take a one-shot price correction and pass on even past-absorbed cost increases to consumers in for a penny, in for a pound being their logic. And, in any case, the stock market is too woebegone to react too much. Of course, the absolute truth is that when prices go up, demand comes down, and it is tempting to conclude that consumer demand is heading for the ICU and tough times lie ahead.

However, business logic should not be as simplistic as that, and before FY13 business plan targets are slashed, consider this: the total size of India’s economy will grow close to $2 trillion, and a large chunk of it will be consumer spending. As we know, in most of the consuming class, food is well below half of the household expenditure. This means that the pie is large and who gets a share of it will depend on how good the relative product-price-pitch to the consumer is. Some sectors will suffer as they pricecorrect, like voice telecom, but on the other hand, there is galloping demand for vanilla and value-added data services, and there is a large enough segment that will pay more for better speeds and quality of services. And if airfares go up the way they threaten to, high-quality video conferencing will be in demand.

The only roadblock will be suppliers’ agility and energy to deliver. Offer a home maintenance, home décor-trained service force and easy-to-fit range of things and many upper-class homes will do up their homes more often than they have and add more things than they have had before. Offer better Class X and XII online coaching and practice testing, and laptop and internet sales will zoom. Offer easy trade-in services (only possible by businesses who know how to profitably sell older consumer durables) and many households will upgrade their televisions to make up for not splurging as often in the multiplexes. Offer quicker home delivery from restaurants and impulse purchases will increase – even paying more for a single dish works out cheaper for households than eating out. The consuming class has got used to all these indulgences. They just need to be delivered in a slightly different way now to keep consumer spend going.

The focus has to be on category fight for wallet share, not industry growth rate as a given, and a brand fight within. Increased prices of both air-conditioners and electricity will dampen consumer enthusiasm; but past ‘ride-the-wave’ growth rates, driven by prices tumbling as taxes decreased and competition increased, as incomes grew and electricity stayed the same, are over. The air-conditioner market growth, however, need not decline. People are now used to air-conditioning in public spaces and cars, live more strenuously and still have enough money for discretionary expenditure – so, growth rates depend on whether companies can make the customer choose this as spending priority.

Consumer businesses have lazily used GDP growth rates as a basis to decide their own growth rates for the year; however, a realistic bottomup estimation of market opportunity, as in the number of people who could potentially afford it and have a need for it, will show that most consumer businesses have plenty of headroom for growth, if they work smarter and with more concern for how customers think and process value, and offer and communicate superior customer perceived value. B2B businesses understand this a lot better than B2C businesses.

The current mindset is that economic growth ensuring business-as-usual growth of 25-30% or higher consumer demand has collapsed and there isn’t a clear idea of how to deal with it. This mindset is going to miss out on a lot of perfectly good business growth opportunities that India offers. This is an underserved market, especially in the upper classes, and there is much that is possible – in fact, fairly low-hanging fruit exists! Marketers have got lazy in the land of plenty; while it is still a land of plenty. Having to work harder for a larger share of a growing pie is a mindset that needs to be embraced again. There are always the many silver linings of demand in the apparently ubiquitous dark clouds. There is a lot of money with the top 20% income households that are getting richer and still have a lot of money to spend. Household savings will fetch higher interest, so, even as borrowers groan, savers smile, both are often the same people when it comes to large ticket items. Consumers will be far less likely to switch if they get continued value than in the hectic bargain-hunting days when suppliers recklessly fought price wars.

It is a good time for customer-centric businesses who believe in creating value advantage with consumers, and it is time for brand-building because customers are also pausing a bit in their hectic acquisitive and experimental mode (as are suppliers). Rural-urban mass markets have scale at last and are similar in character – the true middle market is here at last. Try selling televisions with built-in UPS or inverters, and better-quality roofing cover for monsoons, or more convenient-to-fix-on roofs in large modest-income settlements throughout the country; sell even the humble, but good quality corn caps and feet pads for the multitude of Indians who have troubled feet! And, if they deliver value, large brands will be created.

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Solving the Income Data Puzzle

admin — Sat, 12 Nov 2011 17:25:00 +0000

The problem with Income Data in India
Income data in India has always been a contentious issue. There is a lot of intuitive discomfort that we have with the numbers, especially when you have to explain them to someone from overseas who is evaluating the potential of the Indian market with a view to investing in it. “How can any one who earns so little, afford to buy so many things, and still manage the living expenses of a family of five?”, they ask, puzzled! We can definitely vouch for the fact that the income data is generated by reputed, world class organizations, using rigorously designed, huge sample size surveys that would satisfy any survey data excellence standard, anywhere in the world. So, there is no “survey science” flaw on which to hang our discomfort with the data.

Obviously something isn’t adding up. For example, consider the NCAER data (2001-02, the latest they have available). They describe a lower middle tier of consumers that they call the climbers, earning between Rs.2-5 lakhs a year, 70% of whom have basic durables like TVs and refrigerators, a little less than one third of whom have entry level cars and 13% have ACs. Take their next category – the upper middle class that they call the strivers. The survey data shows them as having a annual income between Rs.5 -10 lakhs a year and on that income, one in two have cars, and others luxuries. Since the number of rich households earning Rs.10 lakhs or more a year is a mere 8 lakh households in 2001-02 (and about 11 lakh households now), they alone cannot be contributing to all the consumption increase that we are seeing from the supply side. And we are not that much of a credit driven society in any case. So the consumption data must be correct.

Consumption data, is like maternity. A certainty. Income data is like paternity. A matter of opinion. Various people have changed survey income data to suit their logic comfort levels. For example, a presentation made by one of the big consulting firms, arbitrarily moved all the income categories upwards by about 40%, claiming that “team analysis” had led them to conclude that this is the extent of understatement of income that people give in surveys, to save themselves from income tax. But these are fact free analyses which are high on conjencture.

But, income data has its pluses…
Interestingly, as we will show later in this article, all survey income data produces more or less the same results of income distribution ie what income percentile has how much of the income. There is very consistent lying (under-reporting) from the people of India when asked the question on income – no matter which agency does the survey. We are forced to conclude that the income data we are getting is what, in statistics-speak, we would call ‘reliable’ but not ‘valid’. ‘Not valid’ because it does not measure what it is supposed to. But reliable because it repeatedly identically gives you the same result on whatever it is, that it is measuring.

Obviously, the survey income data is some measure of exactly under reported income or expenditure data, which is on an interval or a relative scale, where the distance or difference between Rs.500 000 and Rs.530 000 on the scale, is the same as the distance or difference between Rs.60,000/- and Rs.90,000/-. However purchasing power has to be an absolute number, which can be compared with other such numbers from around the world. So the relative scale of income distribution doesn’t really help; except to make comparisons between people or between periods of time.

And GDP per capita data its minuses
And so business leaders, economists, politicians, equity researchers – in short everyone other than marketing folk who think of markets as made of people and not macro statistics – prefer to use the GDP per capita or related number as the real income number. Yes this is a reliable and hopefully a valid number. So Indian GDP per capita in 2003-04 is US $ 550, and we know exactly where this stands relatively to any other country. And with the notion of Purchasing Power Parity, at least intellectually, the concept is clear even if not intuitively or strategically!

The only trouble with per capita GDP or any such macro number is that you cannot identify people (consumers) based on their per capita GDP, and band then together, and then study each band (or per capita GDP consumer segment) in further detail. Therefore we do not know what people in each per capita GDP category own, and how this is changing over time, where they live (in terms of town class and so on). Most of all, there is a magic number that people use of GDP per capita above which, they say consumption will ‘take’ off. This number ranges from US $1200 to US $2000. And is used often to determine the size of the consuming class in India. However we do not know whether this magic number, no doubt empirically validated from other economies around the world, makes sense for this market because a market’s potential in terms of how many can afford to consume depends on (a) income levels and (b) cost of goods. We have seen 2 wheelers and telecom take off at well below the magic number because price thresholds were discontinuously lowered but performance maintained.

Therefore we decided to get together as a team and look at all available income constructs and see how they relate to each other. The purpose of doing this is not to arrive at a single measure of affluence for all to use; but to enable a more informed choice. Further, recognizing that given the limitations of each, multiple measures will need to be used, the endeavour is to be able to establish some consonance between GDP per capita and survey data on income or expenditure.

We have included this article in the BW White Book because we felt that this academic detour could form the necessary lens with which to look at the rest of the data in this book.

SECTION 1: THE MACRO NUMBERS OF INDIA’S INCOME

Table 1. Components of National Income at Current Prices,2003-04

Economic Indicators (Refer Box 1 for definition)	Total			Per Capita			Annualized Growth Rate between 1993-94 and 2003-04
Economic Indicators (Refer Box 1 for definition)	Rs. Billion	US$ Billion	$ PPP terms	Rs.	US$	$ PPP terms	Annualized Growth Rate between 1993-94 and 2003-04
Gross Domestic Product	27,600	599	3,036	25,356	550	2,789	6.18
National Income	22,520	489	2,477	20,690	449	2,276	6.41
Net National Disposable Income	25,971	563	2,856	23,860	518	2,624	6.55
Private Income	25,296	549	2,782	23,240	504	2,556	6.73
Personal Income	24,219	525	2,664	22,250	483	2,447	6.59
Personal Disposable Income	23,585	512	2,594	21,667	470	2,383	6.57
Domestic Saving of Household Sector	5,799	126	638	5,328	116	586	9.77

Box 1: Definitions

•	Gross Domestic Product: Total value of goods and services produced by a nation.
•	Net National Disposable Income: (Net value of all goods and services produced in a nation’s economy, including goods and services produced abroad at market prices) + (Other net current transfers from rest of the world)
•	Private Income: (Income accruing to private sector from domestic product) + (Interest on public debt) + (Current transfers from govt. administrative departments) + (Other net current transfers from rest of the world) + (Net factor income from abroad)
•	Personal Income: (Private income) – (Saving of private corporate sector net of retained earnings of foreign companies) – (Corporation tax)
•	Personal Disposable Income: (Personal Income) – (Direct taxes paid by households and miscellaneous receipts of govt. administrative departments)
•	Domestic Saving of the household Sector: Financial saving and saving in fixed assets by the household sector.

Even though India’s total household income and saving can be known from National Accounts Statistics, it does not provide the same information across economic groups. Therefore, the pattern of distribution of total income and saving across households with different economic status is not known. Thus, “What share of India’s total personal disposable income comes from the richest 10% of the households?” or “Do the poorest 10% of the households save anything at all?” – these questions remain unanswered. Moreover, per household income or saving for households with different economic status is also not known. This paper tries to find out how India’s total personal income and saving differs across different economic groups.

SURVEY BASED INCOME DATA
Overview of surveys
There are three surveys that, between them form the holy grail of income / affluence data, with different users consistencies being partial to one of these. These are the NSSO expenditure survey (National Sample Survey Organisation) of the Government of India; the NCAER (National Council for Applied Economic Research) household survey called MISH and the marketing world’s favourite, the IRS (originally christened the Indian Readership Survey), conducted by Hansa Research for the Media Research User’s Council.

In 2004-05, we added another interesting survey called the National Data Survey on Savings Patterns of Indians (NDSSP), conducted for the Ministry of Finance, overseen by lowest India Economic Foundation and conducted by AC Nielsen.

All these surveys have an all India sample – details of which are available on the individual websites. The IRS covers 240 000 households 120,000 in each half of any year with the data reported on a rolling basis. It however has a straight and simple income elicitation measure using a show card with different income categories written on them. The NSSO covers a thick sample of 120,000 households and a thin sample of 40,000 each year; it is an expenditure survey but also collects data on income and wages but does not include self employed and businessmen. The NCAER MISH covers about 300 000 households and also asked the respondent his or her perceived income the way the IRS does.

In our knowledge the NDSSP is the only all India survey in recent times that has a specific method for ascertaining the incomes of the respondents. Incomes for wage earners are easy enough to ascertain; however, for self-employed, entrepreneurs, farmers, fisherman, etc. simply asking a question on income can yield poor results as respondents may confuse revenues with incomes. For non-wage earners of all types, the survey tool specifically queried respondents on the revenues from their business and expenditures related to business. The income was then specifically derived. This measurement of income is sharper than the IRS, which asks respondents to indicate which income category their household falls into, thus measuring household income as belonging to an income band, rather than eliciting a specific number.

Comparison of Results

Pattern of Income Distribution 1999 / 2004Income Shares * %

	Quintile 1 (lowest)	Quintile 2	Quintile 3	Quintile 4	Quintile 1 (Highest)
NDSSP adj 2004	4.8	8.7	13.2	20.5	52.8
NSS 1999	4.0	7.9	12.2	20.6	55.3
NCAER MISH 1999	6.3	10.5	15.3	22.2	45.7
IRS 2005	4.8	9.0	13.7	21.4	51.1

Source: Bhalla, Surjit Singh. (2004), Reforming Personal Income Tax in India, Oxus Research & Investments, New Delhi, India.. NACER, NDSSP: National Data Survey on Saving Patterns, NSS: National Sample Survey, NCAER-MISH: National Council for Applied Economic Research – Market Information Survey of Household and Indicus Estimates, IRS: Hansa Research conducted for MRUC

* Household income shares for NDSSP, NSS, IRS Per Capita income shares for NCAER.
** NDSSP adjustments have been made based on Indicus Analysis, to derive income and savings of the total household, based on the data of one earning member, and the demographic profile of other members of the household, using the survey data of members interviewed with similar profiles in other households. For details, see www.indicusanlytics.com

All sources of survey data, especially the NDSSP adjusted and IRS, have almost identical percentage distributions of what the income share of each income quintile is, thus showing the data to be reliable and robust in percentage distribution terms, even if not comparable on the absolute incomes.

For the rest of this analysis, we have decided to adopt the NDSSP survey distributions on income and savings as the standard survey data to use and not the IRS or NCAER, because IRS data is available only by quintiles, not deciles; and NCAER data is too dated.

Household income and savings distribution, from NDSSP (adjusted), 2003 -4, and expenditure distribution
from NSS

Deciles	Income Distribution(%)	Saving Distribution(%)	Expenditure Distribution(%)
1 (lowest)	2.0	0.6	2.5
2	3.2	1.4	3.8
3	4.1	2.2	4.7
4	5.4	3.6	6.0
5	6.2	4.5	6.8
6	8.8	7.3	9.3
7	8.4	7.1	8.9
8	11.9	11.1	12.2
9	15.8	16.8	15.5
10 (highest)	34.1	45.3	30.4
Total	100	100	100
Top 20%	49.9	62.1	45.9
Top 5%	22.7	31.4	19.9
Top 1%	8.6	12.6	7.3

The higher the income per capita per household, the higher their savings as well. 34% of total income is earned by top 10% of the households. When we look at the saving pattern across economic status, it is found that as high as 45.3% of the savings comes from the richest 10% of the households.

The poorest 20% of the households contribute just 5% to India’s total personal disposable income. In case of household saving also, only 2% of the savings come from these households, and to apply these distributions to all macro data, so that we can get a distribution of macro indicators across income deciles – thus bridging the gap between the more valid macro numbers with no distribution available, and the less valid survey numbers which have a distribution available.

APPLYING SURVEY DISTRIBUTION TO MACRO NUMBERS TO GET THEIR DISTRIBUTION

As we said earlier, the endeavour of this exercise is to create a bridge that can link survey data (plus: provides a reliable distribtution, minus: provides in valid absolute numbers) and macro data on income and savings (plus: valid absolute numbers, minus: no distribution available), so that we can have the best of both worlds.

We now apply these survey data distributions to all macro data, so that we can get a distribution of macro indicators across income deciles – thus bridging the gap between the more valid macro numbers with no distribution available, and the less valid survey numbers which have a distribution available.

Personal Disposable Income , Household Sector Saving and GDP across Deciles, All India, 2003-04

Deciles	Personal Disposable Income (Rs. billion)	Saving (Rs. Billion)	Per Capita Income(Rs.)	Per Capita Saving(Rs.)	Per Household Income (Rs)	Per household savings (Rs)
1 (lowest)	471.25	32.62	3,813	264	22806	1579
2	752.21	80.80	6,437	691	36167	3885
3	968.19	130.33	8,806	1,185	49537	6668
4	1,281.29	209.09	11,066	1,806	59909	9776
5	1,465.41	263.56	13,750	2,473	75990	13667
6	2,083.93	423.65	17,034	3,463	89123	18118
7	1,992.33	413.51	21,061	4,371	115168	23903
8	2,809.31	645.99	26,910	6,188	137889	31707
9	3,725.28	971.78	37,602	9,809	183476	47862
10 (highest)	8,035.84	2,627.84	88,940	29,085	395551	129351
Total	23,585.03	5,799.17	21,767	5,352	115981	28518
Top 20%	11,761.12	3,599.61	62,090	19,003	289544	88618
Top 5%	5,365.25	1,818.12	124,642	42,237	527731	178832
Top 1%	2,038.44	732.12	257,041	92,318	1017456	365425

India’s total personal disposable income during 2003-04 was Rs. 2,358,503 crore, and the domestic savings of the household sector were approximately Rs.5,799,00 crore.

For those who prefer to think in terms of US Dollars GDP per capita, the top 10% of Indian households have a GDP of USD 204.3 billion, translating into a per capita GDP of USD 1857; while the lowest 10% have a GDP of USD 12 billion translating into a per capita GDP of USD 109. For those who do believe that USD 1200 per capita GDP is indeed the magic number at which consumption takes off, the size of the consumer base is a bit over 20% of India, a population of 220 million or so.

Deciles	GDP (USD billion)	Population (mn)	GDP Per Capita (USD)
1 (lowest)	12	108.8	110.2
2	19.2	108.8	176.3
3	24.6	108.8	225.8
4	296.6	108.8	32.3
5	37.1	108.8	340.7
6	47.9	108.8	439.9
7	50.3	108.8	461.7
8	71.3	108.8	654.7
9	94.6	108.8	868.7
10 (highest)	204.3	108.8	1876
Total	599	1088	550
Top 20%	298.9	217.6	1373.6
Top 5%	2500	54.4	136
Top 1%	51.5	10.9	4733

Finally, linking consumption / ownership to GDP Per Capita
Now that we have established the robustness of the survey data like the IRS in terms of getting income shares of income percentiles right, and applied those shares to GDP per capita, now the last step is to link the GDP per capita to the extent of consumption that happens at each level of GDP per capita.

Rama Bijapurkar is an independent market strategy consultant; (www.bijapurkar.com)
Laveesh Bhandari is the founder and head of Indicus Analytics.(www.indicus.com)
IRS Analysis, courtesy Vineet Sodhani,, Hansa Research (www.hansaresearch.com)

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Calibrating SEC Classifications In Terms Of Relative Purchasing Power

admin — Mon, 12 Sep 2011 17:40:00 +0000

India is far too complex a market with multiple determinants of consumption behaviour, that no single consumer classification system works well for all kinds of product categories, and for all kinds of strategies. Income is one basic classificatory system which we have discussed earlier. The SEC (socio Economic Classification) system for classifying consumers is a favourite and, some would argue, more robust alternate system used by marketers and market analysts to classify consumers based on their propensity to consume. More robust because it is closely correlated with income, and easy to accurately elicit from respondents, no matter how poor or illiterate they are. The Urban SEC system (classes A to E) is based on the occupation and education of the head of the household, while the rural SEC (R1 to R4) system is based on the education of the head of the household and the type of house lived in.

There is however one problem with SEC classification that income does not have. In the case of income, it is intuitively easy to quantify the purchasing power of each income class; and, as discussed in the previous article on income, while this may not be a valid absolute measure of income, it is a very reliable measure of relative income across different classes, allowing us to compare them usefully. To compare the purchasing power of each SEC class by going back to income distributions of each social class member would defeat the purpose of having an alternate categorization method that was free of the problems of income measurement. Therefore, spurred by the core idea of socio economic classification that all variables used must be easy to elicit and easy to verify, the team at Hansa Research has developed two simple yet forceful constructs, one that works at an aggregate level and the other that works at a category level. Both use data from their IRS study. IRS is a twice a year survey conducted by Hansa Research for the Media Research Users Council, MRUC. IRS 2005 had a sample size of 2,42,118 households from an all India sample.

1. The aggregate level index called Households’ Potential Index (HPI),

HPI uses consumption / ownership of a whole host of durables, packaged goods, services and demographics, to construct a simple aggregate index of how much purchasing power a household exhibits. (See table). The concept underlying the index is simple – households owning or using a low penetration item or having a less popular demographic characteristic (like high education levels) get a higher score for that. The scores are then aggregated across all items and a HPI score arrived at

for the household. Thus in place of income, we have a sort of “consumption” / “ownership” / “characteristics” based index which is a measure of purchasing power. Again, the score for any category is simply done, eliminating all judgement. It is the reciprocal of the penetration of the category in the total universe. Thus if 70% have a television, then television ownership in a household generates a lower score on power / potential (1/70), but if only 10% have an air conditioner, then air conditioner ownership in a household gets a higher score (1 / 20). The raw scores aggregated across all items included in this index are then normalized on a 1 to 1000 scale. Further, within a broad category, premium versions of it as treated differently – example, a black and white TV, a colour TV and a flat screen TV.

Based on this HPI score, the relative purchasing power of each SEC is as below

For the first time, on a sensible common scale the rural SECs and the urban SECs have been compared. This eliminates the differences in how they think about income (since these types of income surveys measure respondent’s perception of their own income, without any cross checks).

The R1 social class, the top end of rural is between B2 and C of urban, closer to B2. therefore, we would say that there is one top band of purchasing power in India, Urban A1A2, comprising about a little over 6 million households; Then there is the next band, which we believe would qualify for the ‘middle class India” label, comprising B1R1B2C, between them, harbouring 30 million households; The ABCR1 target group which would form the broadest possible target group for most consumer goods is about 35.4 million households, and 132 million individuals over the age of 12. This target group grew 26.9% between the years 2000 and 2005. Then there is the lower middle, comprising DE1R2 which is about 37 million households, where we believe that most Bottom of the Pyramid activities should begin. The lowest income, are the E2R3R4 of 134 million households. These households, form the bottom 60% of the population by income, but account for an income share of 30%. Perhaps there is fortune, after all, at the bottom of the pyramid!

2. The measure of consumption evolution or sophistication of a SEC at an individual category level : For each category that one would like to examine, the overall penetration of the category is plotted against the share of ‘premium’ or ‘evolved’ or ‘sophisticated’ variants of that category. For example: penetration of all TVs vs. colour TVs; penetration of colour TVs vs. flat screen TVs. Penetration of any motorized transport vs. 4 wheeler ; penetration of all dental care products vs. penetration of tooth paste and so on. The positions of each SEC on this penetration – evolution graph provides a comparison of the relative sophistication of the SEC with respect to the category.

Relative Levels of Sophistication of Consumption across SEC
The charts 1 to 5 plot, for all the SEC classes, the relative sophistication of each SEC as described earlier i.e. a plot of penetration of the total category vs. the penetration of the premium or sophisticated variants in the category.

This has been done for the television category in charts 1 and 2 (all TVs vs. colour TVs penetration in Chart 1, all TVs vs. flat TVs penetration in Chart 2), personal transport in chart 3 (all motorized transport vs. cars penetration), for the oral care category in chart 4 (all dental cleaners vs. toothpaste penetration ), and the skin care category in chart 5 (all skin creams vs. specialized skin creams penetration).

One interesting finding is that the rural R1 on this criteria is equivalent to different catego ries of urban SEC, perhaps partly due to the intrinsic felt need of the category and partly due to the marketing effort aimed at it. In televisions, R1 is equivalent in sophistication to D and R2 to E1; in personal transport, R1 is actually equivalent to B2; in oral care and skin care, R1 is equivalent to C in consumption sophistication.

For detailed methodology and data, please contact Hansa Research, IRS team. Mr. Vineet Sodhani’s email id is
Vineet.Sodhani@hansaresearch.com
irsinfo@hansaresearch.com

Rama Bijapurkar is an independent market strategy consultant and Ashok Das is the Managing Director of Hansa Research

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Will Consumption Hold Up?

admin — Sat, 16 Apr 2011 09:00:00 +0000

Future income projections will show what we already know based on data of the last five and ten years: that between now and 2015, if there is no dramatic change in policy, past patterns of income growth will perpetuate and the top (richest) 20 percent of Consumer India will increase its income at a much faster rate than the rest of India and get even more unequally rich. We also know from past data that this group has a healthy income surplus, so, despite inflation, it will continue to increase its surplus. That’s why we haven’t seen any demand-led slowdown in expensive durables including cars, the stock market, in high-end smartphones and so on. That is why business class seats are not going a – begging despite ridiculous spot fares, because the opportunity cost of the buyers’ time to earn more is greater.

Housing is never a good indicator of how consumers are feeling because prices are often driven by how builders are feeling, and it is noteworthy that people are not quick to sell their property despite falling prices in some cities, so staying power is still strong. This group comprises around 50 million families or close to 250 million people and is significantly bigger than most other countries. Forget the per capita income of this group relative to other countries- that is an old consultant argument to keep multinationals feeling good about the price points at which they operate. The fact is that this group will have well over 50 percent of the not inconsiderable income of all Indian households, and a much larger share of the income surpluses. Sure, current consumption takes place right down the income spectrum, and income and consumption growths will happen to varying degrees in all of Consumer India, and are not to be ignored. But the richest 20 percent of Indian households will be the most potent driver of consumption of the near future. It isn’t all urban – it includes the well-connected (via roads and cars) rural dweller with an urban mindset as well.

Kishore Biyani has been saying for a while now that Consumer India watchers are too obsessed with income economics and are not seeing the full consumption story because they are missing out on social insights. Applying his India 1-2-3 construct, where India 2 comprises the people that constitute the service economy that serves India 1’s rich folks, what does the consumption story look like? First, that there is a large group, maybe three times that of India 1, whose incomes grow at the same pace as or even faster than its employers/customers, India 1. Second, they are far more sophisticated than their income levels would warrant, because of the connection. Just think about the number of people that “service” an average upperclass household.

I recently wrote an article for women on how to manage household help and the responses that poured in form India 1, especially younger householders, were very telling. There was a lot of comment on “back up” strategies because every service provider in the house needs to be backed up because women in this segment were very active outside the home, whether in a self-income generating role or as an “earning increase facilitator” for the man of the house. A young woman moaned that she had so many people working for the three-member family that she was contemplating hiring someone just to open the door for them in the morning. That will not be hard to find. India grabs earning opportunities; any of the helpers would happily send their ten-year-old child to do this before the late morning school-shift.

In addition to these “in-house” service, there are out-house services too. Home delivery people for everything under the sun, masseurs, curtain makers, fitness trainers at the gym and multiplex workers, among other. Economists would say it is the usual, expected trickle down multiplier, so what’s new? It is learning about it this way that helps companies targeting Consumer India to go from a global and generic understanding to exploit consumer markets better.

India 2 also is growing sophisticated very fast, has very steep learning curves and finds opportunities for selling value-added services very quickly – far more so than large companies do, actually. This column is written about mehndi walis at weddings who have noticed the increase in foreigners coming to upper-class Indian weddings thanks to foreign educated children, and extended their service line to include “sari draping” and “tattoos” in addition to traditional offerings. My istri wala who come home to iron clothes, has figured that summer means lightly-starched cotton saris for me, sent to the laundry for “roll press”. He offered a new service at a price higher than ironing, lower than the laundry, using branded starch and five minutes of the spin dry cycle of my washing machine to eliminate dripping, followed by specialized ironing using a heavy iron! The curtain man has learnt to make fabric blinds, self taught from a book a customer gave him, the massage bai is charging extra for face massages and then on to facials and so on.

Even if growth in India 3 is slow, India 1 and on its back, India 2 will see sustained consumption growth, and is ready to spend more if relevant supply is made available.

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Bharat Buying

admin — Tue, 30 Dec 2008 09:39:00 +0000

In a previous column in this paper, I had suggested that what was more likely to upset our economy was, companies failing due to bankers’ reluctance to lend, than evaporating consumer demand. I had, perhaps naively, suggested that instead of the government spending good money to bail out consumer demand, they should spend it to incentivize banks to lend to those companies, which are otherwise fundamentally healthy, but suffering from a severe hangover, due to excessive expansion in boom time. This has elicited a sharp response from bankers who say they are not in the ‘bailing out’ business, and must evaluate lending risk even more stringently now than they did in the past.

THAT IS A FAIR POINT; HOWEVER, THE RISK ASSESSMENT HAS TO BE SOPHISTICATED ENOUGH AND AT THE FIRM LEVEL SO THAT THE BABY IS NOT THROWN OUT WITH THE BATH WATER AND LONG TERM WINNERS HAVING A TEMPORARY BUT SEVERE BAD TIME ARE NOT TREATED THE SAME WAY AS LOSER COMPANIES, WHO DESERVE TO DIE. THE PROBLEM WITH EVEN THE FUNDAMENTALLY SOUND COMPANIES THESE DAYS IS THAT THEY NEED TO BORROW A LOT MORE AT THIS JUNCTURE THAN THEY NORMALLY WOULD – OR SHOULD – BECAUSE EQUITY FUNDING HAS DRIED UP FOR NOW, AND THEY HAVE ALREADY BORROWED TO THE HILT AND DEPLETED RESERVES FOR AGGRESSIVE EXPANSION ON SEVERAL FRONTS SIMULTANEOUSLY. THEIR ASSUMPTION THAT TOP LINE GROWTH WILL SOON COME IN AND JUSTIFY THIS EXPANSION STILL REMAINS VALID, THOUGH THE EXTENDED TIME FRAME NEEDS TO BE EXTENDED IN SOME CASES.

An often repeated point that perhaps bears repetition is that the top 10% of India by income, accounts for about 34% of the consumption expenditure and yes, they are hurting badly, with savings diminished by the stock market, jobs at risk, heavy borrowings, and have put a serious check on their high end expenditure. The top 20% of India which would be top and middle class India, accounts for about 45% – less than half of the total consumption expenditure, and are slowing down their consumption. India has about 50% of its consumption expenditure coming from the not rich, not middle class people, but from even lower income people who do not borrow money from banks or invest in the stock market, and are not employed in the formal sector. This is borne out by any data source you look at.

So, in deciding whether an individual firm is worth a temporary life line, it is necessary to understand how badly the consumer demand for the categories it operates in is affected – an assessment that needs to be done from simple first principles of consumer behaviour with respect to the category, rather than from some formula linked to factors like the Sensex or interest rate or falling real estate prices. What does a falling stock market have to do with how often modest income consumers wash their hair? Since when does the rural or small urban money lender or pawn broker’s usurious rates have anything to do with PLR? As for falling real estate prices, several millions of people are happy that the bubble has burst, making housing affordable again.

Some categories (not sectors but sub sectors that are product categories) are fine, others are slowed down because some consumers have deferred their decision to act while they wait and watch for the best deals and the best times, and yet others are correcting violently because in the past two years more people were enticed with easy credit, to buy them when they could ill afford to do so (NPAs are no worry in a rising market).

To illustrate with a few examples, FMCGs have greater sales in terms of value from the bottom half of rural India than from the top half of urban India, and will be posting growth this quarter. They also are hoping to gain from the postponement of purchase or replacement of consumer durables. LCV and automobile demand is deeply affected by lack of loans since 75-90% of the price was loaned. Many LCV buyers took the loans on a hope and a prayer that business would grow, not because they currently could afford them. As for two-wheelers, 50% of motorcycles sell in the rural India (lower income than urban India). But the category growth has been slowing down for well over a year, thanks to a gradual turning off of the bank loan tap to those who could not afford them, given the rising delinquency trend of the past. Further, patterns were different. The 100 cc Hero Honda still grows slightly, Honda scooters grows smartly, Bajaj slips up, even as it moves its mix to the premium range. Consumer demand is about price-value equations, as consumers perceive them 30-40% of cell phone sales come from rural India and growth continues at the lower end – in any case, many of the lower income consumers acquire the instrument or the pre-paid card and use it sparingly. So unless telecom rates go up drastically, that business is safe. When we look at falling category growth rate numbers with worry, we must remember that we have, these past few years, seen consumer demand growth greater than what our income growths have warranted due to “abnormal” decreases in price thresholds on all consumer durables – either through indiscriminate loan schemes, sweet trade-in replacement and upgrade deals, or just low prices with margin-volume trade offs being made by marketers. And we will now see what will appear to be a steep slow down, but in reality is a part correction for bullish marketing policies of the past and partly because of today’s problem environment. As my friend Prof. Jayant Verma says, it is such small bush fires that keep the overall forest healthy!

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The Prognosis for Consumer Demand

admin — Mon, 28 Jul 2008 10:26:00 +0000

After the last edition of this column about the human face of the economy, and its implications for economic policy, someone asked why a consumer markets person was writing about the economy now. That is exactly the point that was attempted to be made in my last column and re iterated again here – that The Economy is not just about invisible macro forces or numbers like exchange rates and indices of industrial or agricultural production; but that it is also about how different people or groups of people actually get affected, how they think about their situation, and the spending / saving / investment choices they make as a result of that.

When conference rooms debate whether there is an economic slowdown, if they are B2C companies, they are speculating about the spending and saving / investment choices and compulsions of rich and poor individual people; and if they are B2B companies, the spending and investing behaviour of big and small companies, who, in turn, make their choices taking into account how consumers and customers are likely to behave. Whenever slide 1 of a business outlook presentation says “expected slowdown in GDP growth” and slide 2 goes on to say that there will therefore be a slowdown in soaps or shampoo business, it does beg a two minute contemplation, at least, on how exactly GDP growth is connected with how often people bathe or wash their hair, and what they use to wash it with. The same way that a fall in the stock market is assumed to mean bad news for all other markets too, like the refrigerator market or even the housing market that is driven by aam janta . There is some connection, of course, but not in a simplistic way. A very small fraction of consuming Indians are directly or indirectly connected with the stock market and the behaviour of those not connected with it does significantly swing the performance of the economy. It could work in the reverse direction too – right now, a lot of non participants in the stock market are pleased with the near 10% interest on fixed deposits, and feeling a lot more secure about spending. Another example – with correction in real estate prices, many more people will be able to rent cheaper, and for those that are planning to buy, cheaper real estate and distress sales may make their entry into the market easier. Today’s column is therefore a consumer-side view of what’s happening in the economy – a worms eye view comment on consumer demand.

The state of the economy is confusing. As usual we have mixed verdicts and many truths – all true – about the state of the economy and the state of consumer demand. Two days ago, in an interview with a newspaper, the finance minister said that on the back of agriculture and services growth, “I think 2008-09 will also be a good year in terns of overall growth, however it will be a year when growth will be accompanied by inflation.” Further, early data is showing that planned investments with committed funding is proceeding according to plan, and no one is pulling the plug on these plans. Therefore work creation for aam janta (not job creation, because we need to remember that a large part of India is self employed now) will continue to grow for now, and people who choose to work harder and smarter will get rewarded with their incomes rising, because there will be enough work for all. There seems to be no let up in the shortage of appropriately skilled people, and since the education ministry is not about to remedy that in a hurry, we will see incomes of a certain section continue to rise.

Early data on corporate results this quarter are also showing that top line growth is strong, but margins are getting squeezed because of raw material and interest costs going up. Whether consumer demand will or will not slow down will depend on whether they choose to take the hit on margins themselves (and incur the wrath of the stock market) or whether they choose to pass it on to the consumer, in which case demand will slow down because belts will be tightened and consumption will be more deliberate and thought through (do I really need this bigger screen TV or do I really need to buy this new model of cell phone now or should I wait for diwali, maybe it is time to stop frivolous buying and go in for that 26000 rupee computer for the kids because that has to be bought some time or the other, so why bother tom postpone it). Because of the competitive intensity being high in every consumer industry, companies are not in a mood to cooperate with each other and raise prices together. The dominant logic seems to be that holding and growing market share is very important now, because the cost of building back lost share is likely to be greater than the cost of a temporary margin hit. In fact companies are seeing this as an opportunity to work on operating efficiency improvement and going in for IT driven investments in a big way. So if you are a supply chain efficiency or CRM or data mining or video conferencing expert then this is a good time for you to scale up. (In any case, even as far as the corporate’s relationship with the stock market is concerned, from the point of view of quite a few corporates, there seems to be a bit of relief that crazy valuations have got corrected and companies can tell long term business health and potential for profitable growth stories and profit from it.)

So, if the prognosis is that the middle class and above urban aam janta’s incomes will rise, and that agricultural incomes could rise too, but equally that the things to buy will be more expensive, then we will see very value conscious spending behaviour happening. There will be a return of category fights – health insurance because I am feeling vulnerable versus an upgraded lap top and expensive skin creams because they are cheaper than a facial at a beauty parlor, and in any case, my foreign holiday is not happening. Assets will do better than experiences, children’s education will continue to prevail, productivity tools like personal transport and telecom will continue to get used, though not upgraded as often. Some sectors will lose and some will gain, depending on which segment of Consumer India we look at. The value conscious Indian consumer will be even more value conscious since he has to make choices; however the algorithm in his head of Value = benefit minus cost, will process benefit and cost differently from what companies think he would.

Rama Bijapurkar is an independent market strategy consultant

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