Incomes after Covid are below inflation; low-end demand is hurt

 Incomes after Covid are below inflation; low-end demand is hurt

"Corporates and economists said that consumer earnings have not kept up with post-pandemic inflation, which has an effect on consumption and reduced demand, particularly for low-end consumer items.

A significant increase in the price of food and drinks, which make up a sizable portion of the ordinary Indian's consumption basket, has caused consumer price inflation, which was 3.7 percent on average in FY '19 to climb to 6.7 percent in FY23, according to the most recent CPI data.

Corporates said that because of inflation, city workers who returned to their hometowns during COVID-19 in 2020 and 2022 lost their pay. According to them, 70% of the consumer goods sector, which is experiencing a degrowth, is made up of mass end customers who make between Rs 10 lakh and Rs 15 lakh yearly."

"The percentage of GDP devoted to private final consumption expenditure (PFCE) decreased to 58.5 percent in FY'23 from about 70% in FY-04.

"In the recent past, nominal income levels have remained stagnant as wage earners' income grew by 7%, while self-employed individuals saw a 3% decrease in income growth between Q2 FY23 and Q1 FY24," said Aniket Dani, director of research at CRISIL Market Intelligence and Analytics. "Inflation averaged about 6% during that same period, meaning real income stayed stable or even experienced a degrowth."

The low-income category was disproportionately affected by food and fuel inflation, which was trending higher than core inflation.

On a larger scale, the decline in consumption is apparent. "The math is easy," said Nikhil Gupta, Motilal Oswal Financial Services' chief economist. "It shows that income growth lags consumption growth when savings continue to decline."

It is challenging to do a detailed examination of the precise labor segment that is affected. According to Gupta, "the salaried organized sector, which employs 20–25 percent of the workforce, did not see any stagnation post-COVID." This market sector is seeing a rise in demand for upscale products to fulfill their goals.

"Over the last ten years, household income has increased overall by 5–6% in real terms," he said. However, Gupta claims that the income growth of 50% of the labor force, which includes self-employed people and a portion of the unorganised sector, has not kept pace with the development of the salaried class.

Mass-consumption products are mostly where the slowdown in consumption is seen. "The consumer goods sector, which is experiencing a decline, is dominated by mass end customers, who make an average of Rs 10-15 lakh per year. Due to this decline in growth, no one is investing in the bulk end of manufacturing; instead, everyone is concentrating on the premium end, where growth is expected. But for the economy as a whole to remain sustainable, this sizable portion of the market must continue to expand, according to Kamal Nandi, executive vice president and head of business at Godrej Appliances.

According to influential figures in the sector, businesses have also redirected their attention towards promoting high-end items that provide bigger profit margins. Industry insiders said that the majority of entry-level electronics models have been moved to e-commerce platforms, which have the financial means to provide steep discounts. Corporates claim that a combination of ambitions and alluring credit packages is transforming the consumer environment and causing a change in preferences for luxury goods, which in turn is improving profit margins.

According to a Bank of Baroda analysis, this industry has been severely impacted by either the effect of inflation or a decline in buying power due to a decrease in employment since the COVID-19 pandemic. On the other hand, a certain group of wealthy customers continue to purchase high-end items in spite of inflationary pressures.

"The narrative is divided into two halves. First, the pay growth for the salaried class was not the typical 10-12%. That's because last year's reduced earnings led to smaller increases, according to Bank of Baroda chief economist Madan Sabnavis. Secondly, there has been a total of 25% inflation during the last 3.5 years. Real buying power is so declining. Because their customers are wealthy and prepared to invest in uniqueness, high-end products are still in demand. Demand in this area also takes longer to level down since there are always new models of automobiles, watches, and cellphones to choose from. Thus, a mixed image of consumption is seen."

 

"In addition, since the pandemic, inflation-adjusted earnings have decreased for those who are depending on their savings. Prior to the Covid-19 pandemic, real interest rates were 2.0% on average. According to a Deutsche Bank research, real rates were notably negative between FY21–FY23 due to the pandemic, but they turned positive at about 1% in the first half of FY24. Based on projections, CPI inflation could average approximately 5.1% in 2HFY24, which would raise real rates to +1.4%. Real returns would thus still be below pre-COVID levels.