India’s post-pandemic revenge spending is running out of steam

By Ruchi Bhatia and Satviki Sanjay

Consumers in Indian cities are cutting back on spending just as the country’s traditional festive shopping season kicks off, a worrying sign for the world’s fastest-growing major economy.

After a post-pandemic frenzy of sales on everything from cars to mobile phones, there are some signals that urban consumers in India are turning more cautious. Car companies like Maruti Suzuki India Ltd., which couldn’t keep up with demand just a few months ago, are now sitting on record inventory. 

Air travel is slowing and sales of packaged food like salt, flour and oil are weakening. Consumer confidence in urban areas weakened in May and July this year, official figures show.

That’s a more nuanced picture compared to recent gross domestic product data which showed a jump in consumption last quarter, and raises questions about how sustainable that rebound will be. It’s also a test for the three-month long festive season spending in India, when businesses from auto dealers to restaurant chains typically make 20%-30% of their annual sales.

Garima Kapoor, an economist at Elara Securities India Pvt Ltd., said urban consumers have “now completely exhausted” their demand for goods, with savings built up over the pandemic period eroded. Coupled with high interest rates, a clampdown on risky credit and a slowdown in hiring in key sectors like technology and retail, consumers are cutting back on spending, she said.

The evidence is starting to stack up. Maruti Suzuki, India’s largest carmaker, has scaled back production, while Tata Motors Ltd. has cut prices on some of its models by as much as 200,000 rupees ($2,384). India’s largest brick-and-mortar retailer, Reliance Retail Ltd. slashed more than 38,000 jobs in the year through March while Aditya Birla Fashion and Retail Ltd. reported wider-than-expected losses.

Westlife Foodworld Ltd., which operates McDonald’s restaurants in some regions of India, and Sapphire Foods India Ltd., which runs KFC and Pizza Hut stores in the country, saw a drop in same-store sales growth last quarter.

Rural rebound

At the same time that consumers in cities are turning cautious, rural spending is rebounding as farmers benefit from good rainfall over the monsoon season and better prospects for their harvests. Weak rural spending had been a drag on consumption in recent years, and still hasn’t recovered to pre-pandemic levels.

“We will see a rebalancing within consumption this year, with rural consumption likely to improve due to easing inflation and better monsoons, but urban consumption will likely moderate,” said Sonal Varma, chief economist for India and Asia ex-Japan at Nomura Holdings Inc.

That divergence will complicate the outlook for India’s economy, which expanded more than 8% in the fiscal year that ended in March and which the central bank expects will grow about 7% this year.

Some economists have already started moderating their growth projections for India — for example, Nomura now expects 6.7% this fiscal year, down from 6.9% earlier. 

“Weak urban consumption will lower overall growth and would weigh on industrial and investment activity going ahead,” Varma said.

Calls are also starting to grow for central bank Governor Shaktikanta Das to consider cutting interest rates — something he’s so far been reluctant to do as he keeps his focus on inflation. The Reserve Bank of India has kept interest rates on hold for more than 18 months already.

Businesses are hoping that the festive season will see consumers open their pockets, helped by the recovery in rural areas. 

“We are out of the down-cycle in rural because of reasonably good rains and higher minimum support prices for crops,” said Rajesh Jejurikar, chief executive officer of Mahindra & Mahindra Ltd.’s auto and farm businesses, told reporters last week.

Bajaj Consumer Care Ltd, a consumer goods firm that sells hair and skincare brands, is looking to expand into villages to boost its rural presence. Rural growth “was a laggard, clearly it’s turned around,” said Jaideep Nandi, managing director of the firm, at its earnings call last month.