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Those Nine-Lakh Chokers

The good news—India is on a buying spree again, though the middle class is still a tad wary

I
t’s that time of the year when Karishma Ghosh, 32, an IT professional in Mumbai, would have gone all out. But with salary remaining a constant over the past two years, she has postponed all “luxurious and unnecessary expenditure” this Diwali. The new food processor and air-conditioner will have to wait. Her logic is clear: “If I look at my overall expenses, they have increased thanks to food bills and full-time maids for my two-year-old daughter.”

Over to Trishna Sen, 39, a communications executive at a private sector firm and married to a naval officer. Last month, she picked up a 46-inch LCD TV, a split AC and a Honda City. “I don’t think there’s been any change in my spending...if anything, it’s gone up,” she says. And here comes the twist: no credit card transactions and EMIs for her; every one of these big-ticket items were paid for by cheque from her savings.

If the urban Indian middle-class consumer was just one person, his or her personality could have been split into two equal halves—caution and cautious exuberance. Urban Indians are shopping again, but with a firm hold on the purse-strings. Memories of the turmoil from the economic slowdown persist. In any case, consumers haven’t had a chance to forget that times are rough: rampaging inflation, LED by food and fuel prices, is a constant reminder. For everything else, there’s all that news on TV about the “real recession” in the rest of the world.

But that hasn’t stopped spending. Organised retailers and companies that make consumer electronics, automobiles and durables are over the moon. So are travel firms, builders and traders in gold. Sales have been robust and demand is growing. “We have shifted our overall strategy from ‘safe’ to ‘aggressive’ mode,” avers Tadato Kimura, GM marketing, Sony India. The country’s largest retailer, Future Group, says if one were to compare same-store sales over the past two years, there would be a fairly significant double-digit growth. “By all indications, the boom is back,” says Raghu Pillai, CEO and member, executive board, Future Group.

At a time when the stockmarket is soaring—as are GDP growth estimates—why then are economists of all persuasions warning the consumer that tough times lie ahead? A FICCI survey says demand for consumer durables will come down due to higher interest rates. The Reserve Bank of India is also worried. “Consumers will absorb the higher prices by devoting a larger share of their household budgets to food. This will presumably leave them less to spend on other, discretionary, products and services. This impact is likely to be greater on lower-income households,” RBI deputy governor Subir Gokarn told Outlook.

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That’s why despite an average increase of 15 per cent in people’s income levels—as well as a well-timed 10 per cent increase in dearness allowance—economists remain cautious. “Despite the festive season, the buying is not as high as in 2007-08,” says Rajesh Shukla, director, NCAER-Centre for Macro Consumer Research. “High-end purchases are more moderate this season, people are going in more for quality purchases.”


Rural ladies in Gosainganj near Lucknow are looking more at silver now. (Photograph by Nirala Tripathi)

Shukla’s views are strengthened by a recent Nielsen study which shows many respondents are not yet convinced that the “recession” is a thing of the past. Interestingly, the study also showed that while Indians were looking to cut costs on household items and utilities like electricity and phone bills, they were ready to spend on consumer goods, particularly electronics. These contradictions indicate that despite the growth reported by retailers, it’s tough to unequivocally say the good ol’ boom days of 2007-08 are back. Also, this year’s positive numbers must be viewed in the context of the poor showing last year. Gains would obviously be accentuated thanks to the base effect.

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To attract customers, companies have resorted to a fierce price play (helped by massive jumps in ad budgets) to offer low-cost solutions. Consider a big-ticket purchase like cars—barring a minor blip during the slowdown, the sector has clocked great growth year on year. Till recently, the average buyer needed two years’ income to buy a vehicle. That’s down to about one now. “The increase in interest rates has not affected the sector either because it amounts to just a few hundred rupees increase in EMI,” says Vishnu Mathur, DG of auto body SIAM.

In another example, Nokia’s recent dual sim phone was launched at just Rs 1,900 while Motorola’s new Qwerty push e-mail phone sells for under Rs 5,000. Similarly, in the LCD TV space, prices have gone down by 15-18 per cent in 6-8 months, making them tempting buys for customers. Then, last month, all dth operators brought down the price of new connections to under Rs 1,000 and offered free installation. The result: new connections have jumped 15-20 per cent and even the more expensive HD boxes, launched just a month back, are out of stock.

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In the IT space, the laptop market has got a boost in sales thanks to a significant drop in prices. Today laptops start from around Rs 15-17,000, a price at which stripped down Netbooks were available last year. An appreciating rupee has obviously helped here. This has made imported components for products cheaper and pushed down prices. Also, consumer durable loans, both low interest and interest-free, which had disappeared from the market over the past year or so, are slowly making their way back.


Does It Come In purple? A Maruti showroom in Noida near Delhi sees brisk sales. (Photograph by Sanjay Rawat)

Indeed, consumer loans are back in business, especially for automobiles and homes. Pralay Mondal, country head (retail assets and credit cards), HDFC Bank, says on the whole the loan segment has seen a 30 per cent growth. There have been marginal increases in interest rates. But there’s also been a change in perception to lending by banks—particularly vis-a-vis unsecured loans. “I would say that mid- to lower-income customers might find a restriction in their ability to spend,” says Mondal, who adds that credit card spends started picking up from late 2009 and this year.

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The clearest indication of the change in consumer behaviour post the slowdown comes from Uttam Nayak, group country manager, India and South Asia, Visa. “While it is true that consumers are spending money more liberally now than before, it is also true that the consumer has become more value-conscious after last year.” This has also affected credit card usage patterns in India, says Nayak, as people are trying to maximise the benefits they can derive from card usage. “The kind of irrational confidence that existed in 2007-08 where people splurged on multiple cards has not returned so far. Instead of having a wallet full of cards, they are consolidating spends on one card which gives maximum benefits,” he says.

Retailers are quite clear now that irrational pricing will not work. Chicco, an Italian retailer that makes baby care products, recently opened three stores in India. “The spirit is certainly up...performance has beaten expectations too,” says Vineeth Nair, CEO, Chicco. Nevertheless, Chicco tweaked prices for India. You’d pay 30-40 per cent more for some of its products at a London or New York store. Nair says, “We’re not expensive, so our visitors keep coming back.”

Even for high-end fashion, consumers are demanding more, avers Sanjay Kapoor, MD of Genesis Luxury. “People are no longer looking at brands for the label, but looking for the value proposition,” he says. Even global fashion powerhouse Zara launched in India with a combative pricing strategy—something that would have been unheard of before the slowdown. Incidentally, sales of luxury products have shot through the roof—the market for high-end apartments, art and fashion is the one segment that observers say has crossed 2007 levels.

We'll Take It

After last year's washout, the middle class is back to shopping with a vengeance

  • Automobiles 16% Car sales have defied even the industry's own estimates; new models will keep the growth up.
  • Mobile phones 15-18% Sales continue to rock thanks to demand for dual SIM phones as well as new service providers and low tariffs.
  • Housing 7-10% Apart from certain pockets in Delhi and Mumbai, growth has been fairly steady in the metros.
  • Travel & tourism 12-15% Domestic tourism certainly grew over 2009 as more Indians hit the road. Foreign travel remained on an even keel.
  • Luxury brands 20% Sales of art, high-end housing, luxury cars and fashion accessories have surpassed 2007 levels.
  • Laptops 20-25%
  • Washing machines 11%
  • Refrigerators 15%
  • ACs 40%
  • Retail 13-20%

Credit Growth

  • Personal loans 5%
  • Housing loans 5.4%
  • Advances against FDs 5.7%
  • Credit Card Outstanding -7.4%
  • Education loans 11%
  • Consumer Durables loans 9.7%

Figures indicate growth from a year ago Source: Industry estimates and RBI

In other segments, companies are happy to bask in brisk sales. Consumer durables sector, for one, is finding it difficult to meet demand and many in the industry are ruing that they have not increased capacity in the past two years. Market leader Samsung, for instance, has set a target of selling 1.5 lakh LED TVs this year. Last year, the company sold just 40,000. Flat panel TVs are expected to clock 1.2 million units this year, up from last year’s 0.5 million, says a company source.

Similarly, the value-conscious Indian is shopping around for good travel deals. There is a 15 per cent overall increase in domestic travel over last year. Business-class travel has more than doubled. Some 66 per cent have booked flights 21 days in advance this year, compared with 54 per cent a year ago. Says Tarique Khatri, VP, business development, Cleartrip, “Indians are also making more long-haul flights than last year. They certainly are upbeat.” Well, the good news is that the urban Indian consumer is back to shopping. The even better news is that she’s savvier and even preparing for an uncertain future.

By Arindam Mukherjee with Arti Sharma, Pragya Singh and Lola Nayar

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