Drunken Man's Walk

Business Standard - February 20, 2010


No, this is not a volte-face from my assertion in an earlier column (Unprepared for our consumption) that we are unprepared for a demand boom. It is definitely true that the long-term size of consumer demand in India is so large that most of us have yet to comprehend its scale; but the nature, or character, of this demand and its growth trajectory do not make such a happy story. SL Rao, the former head of NCAER, described it as the walk of a drunken man. You know he will get home eventually - he always does. But on the way, he will take three steps forward, maybe two sideways and one backwards.

What we never factor into our company models is that, consumer demand is a complex aggregation of the demand of the many "mini-India" demand segments, each of which blooms and withers according to its own seasons and reasons. So we are talking about the collective progress of a group of drunken men! And that's what companies have to learn to deal with. Companies need to be able to invest according to the pattern of the walk, which actually is not impossible to predict, if one were to take a more granular approach to understanding it as the sum of its many parts. Companies must know by now that their core contributing consumer segment will shift - sometimes every year and sometimes every few years. The golden period of 2003-2008 had all mini-Indias doing ok, hence there were no unpleasant surprises to deal with. The rural boom has gone bust at least twice in the past 15 years following massive euphoria, and the consumers' "up-trading" and "down-trading" behaviour is the routine explanation for unforeseen growth or decline of the premium or discount-end of the market. Foreign investors, especially the FDI ones, often ask why they need to "diffuse" focus and build a wide portfolio straddling so many price performance points or even so many product categories for a market that is so small. Why design a business that has so much more strategic complexity than its present market worth? Because, there is no other way to mitigate a business risk in India, or to fully benefit from an overall demand growth.

Coming back to the cause for concern about "no-caveats" gung-ho attitude to consumer spending, and making a case for a more granular assessment of the "good" news: A recent equity analyst's report called the MGNREGA the "national rural consumption guarantee" Act (the italics are theirs), yet they would most probably discount the stock value of a company that has been growing its top line through price discounts or buying consumer sales through handing out freebie gifts in exchange. That's just one part of the problem. While this scheme does put a little spending money directly into the hands of lots of households and boosts their consumption, it also causes collateral damage to the consumer spending of other segments. As many farmers, agricultural input marketers and rural micro enterprise owners now say, the MGNREGA rates are like declaring a minimum support price for labour rates in the region, resulting in cost inflation - the articulation of which is farmers saying "not getting labour". There is, therefore, a greater investment and an interest in farm mechanisation and, consequently, a greater pressure on free cash flow that farmers have, despite better yields, move to cash crops and price realisations - good news for some companies and not so good for the others. The famed non-agricultural income is estimated to be about half of the total rural income, but over half of it is still dependent on the income well-being of the farm economy. Therefore, in good times, it acts as a booster to overall income, and in bad times, it tends to depress itself. Depending on what product you offer to which consumer for what need, the rural story doesn't look uniformly great!

Now to address the GDP number euphoria of India Inc.: Today's joined-at-the-hip "default" connection made between GDP and corporate sales potential, or performance, is conceptually questionable, to say the least. There is no dispute that a connection exists between increased income in the hands of people and what is spent. But that's at a 30,000-feet high altitude. On the ground, GDP growth does not automatically translate into uniformly great news for sales of tractors, soaps, packaging machinery and boilers, as it results in differential income growths of different consumer segments. GDP growth of 7.5 per cent this year and 6.5 per cent last year does not mean better news for a fast moving consumer goods (FMCG) company. We have seen enough data points now to know that good GDP growth years can mean a revival of consumer confidence in borrowing and easier consumer credit, hence harder times for FMCG companies. And the same GDP growth can mean either great or average news for consumer durables companies depending on what exactly fuelled that growth. One-time demand booms that occurred because road connectivity went up at the same time as good monsoons, or easy credit conditions prevailed at the same time as a real estate slump do not make for a trend - it's a temporary blip!

So, maybe we should consider the possibility that aal is not as well for everyone at the same time!

The author is an independent market strategy consultant.