Consumer Durables News

india inc: Why is India Inc not investing? The answer lies in people cutting back spending on soaps, biscuits

At an event recently, finance minister Nirmala Sitharaman questioned India Inc on what’s holding them back from investing at a time when the world is looking at India as an investment destination.

It is no secret that one of the biggest ambitions of the Modi government has been to put India on the manufacturing map and to create an alternative to China as global biggies plan to diversify their production hub.

Private sector investment has taken a hit due to multiple factors. The bulk of the heavy lifting has been done by the government during the COVID period to support the economy and in hopes that it will lead to private investments crowding in.

India’s economy is still dominated by private consumption and COVID brought it to a standstill. The green shoots have now started to show up and the revival is mostly led by consumption returning to contact-intensive sectors like hospitality.

However, the real concern is the continued weakness in the consumer goods sector. The recent Index of Industrial Production data showed that the consumer non-durable sector contracted by 2 per cent and was almost flat in the April-July period.

This is a worrying scenario as people have cut back spending on day-to-day items like soaps, shampoo, biscuits among others. With rising inflation and stagnating incomes, this is a serious challenge to the overall demand outlook.

“Higher inflation and squeezed disposable incomes are likely to have led to a deferral of discretionary consumption of non durables,” said Aditi Nayar, chief economist, ICRA.

Meek rural demand due to high cereal inflation and middle-class income households readjusting their budgets to account for higher prices of daily-use items is a challenge for industrial recovery.

Even though capacity utilisation has gone up, new investments will only come up when the demand outlook looks durable.

“The consumer non-durables segment continues to be an area of worry… Rebound of the consumer non-durable segment is critical for a sustained and broad based industrial recovery. Going forward, the recovery in this segment looks challenging due to the squeezing of the purchasing power of the households as wage growth is lagging behind inflation,” a Mint report quoted Sunil Kumar Sinha, principal economist, India Ratings and Research, as saying.

Broad-based recovery key to revival

The Economic Survey of 2019 expected a virtuous cycle of growth to be kicked off by increased private investment generating capacity expansion, jobs and demand. The government on its part has take a number of steps to create an environment for private investment to pick up including reduction in corporate tax and announcement of the PLI scheme.

The industry is responding to calls to invest but more needs to be done to propel India’s growth rate. At a time when the central banks are trying to tame inflation by raising rates, whatever nascent demand had returned to the economy will take a hit and consequently result in a slower investment revival.

The two-and-a-half years of COVID have led to uneven growth in income levels with one pocket prospering while the rest struggling to make ends meet. The Hindustan Unilever boss, Sanjiv Mehta, had suggested that an urban job guarantee scheme should be rolled out just like the rural one.

The volume hit in rural areas in the FMCG sector and people shifting to unbranded items is a sign of pain in the consumer goods sector. A broad-based recovery in demand is key to industrial revival.

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