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Goods demand fades, services holds out hope

by Index Investing News
October 29, 2023
in Financial
Reading Time: 2 mins read
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The pent-up demand fuelled by pandemic time savings is beginning to peter out for goods, but may last for some more time for services, say economists.

Overall consumer demand is also expected to come under pressure from tighter monetary conditions and lesser pull from rural India. However, high-end consumption is expected to provide some support.

“Inequality is playing out. Wherever there has been recovery, it’s either been heavily biased towards the more affluent and upper-middle tiers or where it has been mass-based, there has been downtrading,” said Abheek Barua, chief economist, HDFC Bank.

“This is a sign that your pent-up demand has petered out already.”

Downtrading refers to consumers choosing lower-end brands or lower-pack sizes. Barua noted that the fading of pent-up demand may now turn to services.

Fast-moving consumer goods companies have also been highlighting this trend in their quarterly earnings.”We are seeing that both premiumisation and downtrading is playing out,” said Suresh Narayanan, Nestle chairman.

“On one hand, there is pressure on household budgets among some sets of consumers. On the other hand, Indian consumers, particularly those in urban areas, have not hesitated to invest in budget-friendly treats such as chocolates and biscuits,” he added.

To address this, Narayanan said Nestle has been introducing bridge packs. These are typically packs priced between ₹10 and ₹25.

“Demand for some goods like lifestyle items may be high for higher income groups, taking a bigger share of wallets. But the pent-up component in many sectors has been done away with,” said Aditi Nayar, chief economist, Icra.

Tighter monetary conditions may play out in the coming months with interest rates likely to remain elevated for longer than expected now.

“Volume growth remains a challenge, and whatever growth is happening now is because of prices – the industry has seen more price-led growth rather than volume growth,” said Mayank Shah, senior category head at India’s largest biscuits company, Parle Products, which makes Hide & Seek and Milano.

Rahul Bajoria, MD and head of EM Asia (ex-China) economics, Barclays, says while urban consumption has fared better than rural this year, a good kharif harvest could raise prospects.

Experts say the industrial production data shows signs of slowing consumer demand even though overall growth hit a 14-month high of 10.3% in August.

Consumer durable growth contracted 1% in the first five months of 2023-24 compared with the previous year.

“The pent-up demand seen in 2022 has diluted considerably in 2023. The fall in output of mobiles/telephones does come as a surprise as this means that demand may be getting saturated,” said Madan Sabnavis, chief economist, Bank of Baroda.

Urban push
However, economists point out, urban consumption may support consumption demand.

“Overall, momentum in private financial consumption expenditure or PFCE seems steady going by the high-frequency indicators (albeit skewed more in favour of urban consumption),” Bajoria noted.



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Tags: demandFadesgoodsholdsHopeServices
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