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!