The vaunted consumption story in the fastest growing major economy is cracking

Consumer companies in India that make everything from soap to cars are sounding the alarm: Spending by the urban middle class has been languishing for more than a year as inflation and unemployment weigh on sentiment.

At least seven of India’s largest companies, including the retail arm of Reliance Industries Ltd. and consumer arm Hindustan Unilever Ltd., have noted weaker consumer demand and a challenging business environment in their July-September earnings results.

Urban demand growth has been on a downward trend for five quarters, according to data from Kantar Worldpanel. And the feeling of unease about this is spreading.

As the post-pandemic euphoria fades, higher interest rates, subdued wage growth and poor employment prospects are negatively impacting urban demand. While India’s rural consumers are showing signs of spending more thanks to a good monsoon season that has boosted rural incomes, this cannot make up for the decline among nearly 500 million urban residents.

The fault lines in India’s consumption story do not bode well for the global giants that rely on India’s 1.4 billion-strong consumer base to fuel growth amid an economic slowdown in China.

“The cause for concern is that growth is happening only in certain segments,” RC Bhargava, chairman of Maruti Suzuki India Ltd., told reporters on Tuesday after India’s largest carmaker posted disappointing profits. “What used to be 80% of the market is no longer growing,” he said, referring to the entry-level small cars whose sales are seen as a gauge of urban consumer demand.

According to Bhargava, small cars made up as much as 80% of Maruti’s sales in 2019.

Sales from operations of Reliance’s retail unit, India’s largest retailer and part of billionaire Mukesh Ambani’s conglomerate, fell 3.5% in the quarter ended September 30 – a decline partly attributed to weak demand for fashion and lifestyle products.

A revival of rural demand, however welcome, cannot compensate for the shortfall in massive urban spending. For Unilever’s India unit, smaller cities and towns account for just a third of sales, Chief Financial Officer Ritesh Tiwari told reporters last week. A recovery in demand growth would happen within a few quarters, he said.

“The pattern is quite clear that urban growth has fallen in recent quarters,” Hindustan Unilever CEO Rohit Jawa said after the maker of Dove soaps and Magnum ice creams posted weak profits.

Cutting projections

The slowdown is now feeding into India’s growth forecasts, although the country’s central bank has shown no sign of giving in to calls for rate cuts.

Investment banks such as Goldman Sachs Corp. have already lowered India’s growth expectations to 6.5%. The Narendra Modi-led government now also “conservatively” estimates real growth of 6.5 to 7% for the country in the year ending March 2025.

“Underlying demand conditions need to be monitored,” India’s finance ministry said in a report on Monday. The softening consumer sentiment indicated a moderation in urban consumption, according to the report.

The slowdown is across all sectors: Passenger car sales have fallen for two months in a row in September, while air travel has fallen for three out of four months since June. Factory activity in India has been declining since July, although it registered a rebound this month.

“Companies are cutting payroll expenses,” wrote Sonal Varma and Aurodeep Nandi, economists at Nomura Holdings Inc. in an Oct. 28 report.

Companies are reducing their payroll costs due to a combination of weaker nominal salary growth and a leaner workforce, they wrote.

“We believe this weakness in urban demand is likely to persist,” Varma and Nandi wrote, explaining that the post-pandemic surge in pent-up demand has ebbed, monetary policy is tight and the central bank’s crackdown on unsecured credit harms activity.

Passenger car sales are likely to decline 2% in October from last year, while two-wheeler sales may rise only 7%, Nomura said in an October 29 note. The broker said it was “concerned about demand and doesn’t see an upturn as of now.”

Credit card delinquencies

Kotak Mahindra Bank Ltd. reported an increase in gross non-performing assets and slippages in the September quarter. Axis Bank Ltd. also witnessed “some deterioration in asset quality,” CEO Amitabh Chaudhry said in a post-earnings call this month.

The latest data from credit reporting agency TransUnion CIBIL shows that credit card delinquencies have risen 17% as of June from a year ago.

Rising credit card defaults and declining demand in cities are linked, Suresh Ganapathy, head of financial services research at Macquarie Capital, told Bloomberg News.

“The feedback (from the banks) was that there is a middle class that is indeed more affected,” Ganapathy wrote in an email last week. “There is a question of inflation and over-indebtedness – all of which, in a sense, has caused this slowdown.”

Litmus test

Businesses have been waiting for the Indian festival season to boost sales – a three-month period that culminates with the Hindu festival of Diwali later this week.

Diwali traditionally sees shopping in India similar to the Christmas season in the US and European countries. Therefore, sales during this festival period will be a litmus test for Indian consumption demand.

India’s demand for festivals has so far shown a “mixed picture”, Reserve Bank of India Governor Shaktikanta Das said on Monday.

This time last year, Indians spent big and manufacturers added more capacity to meet strong demand.

While companies like Reliance and Hyundai Motor India Ltd. said they are seeing an improvement in their sales at the start of the festival season, others are less optimistic.

“The motorcycle industry is virtually flat with only 1% to 2% growth. We thought it would be more than 5%-6%,” Rakesh Sharma, executive director of Bajaj Auto Ltd., said in a post-earnings call on October 16.

Sharma said he was waiting to see how the entire festival season would pan out, but he kept his expectations justified. “I don’t think we will achieve 8%, 9% growth. I would be surprised.”

(Updates with Kantar data in third paragraph.)