In the discussions that your columnist has had, over the course of the past couple of months, with IMA Forum Members, it was palpably evident that urban consumption has begun to taper. As it happens, the trend really became apparent several quarters ago, but then few were prepared to admit that this would last as long as it has. Still, consumer goods companies are likely to record annual revenue growth between 5% and 8%. But that is largely on account of higher prices rather than larger volumes. Analysts have offered various explanations such as greater inflation, poor wage growth and higher home rentals. Whilst these may well be true, the fact is consumption growth is usually in sync with urban employment. That has failed to happen.
Home rentals, the evidence strongly suggests, have escalated at rates far and beyond inflation. The reasons are obvious. Home prices have been edging up, some would suggest as an outcome of investors cashing in on enormous gains from stock markets and switching their asset portfolios in favour of the brick-and-mortar stuff. Consequently, so have the rentals they charge their tenants. As financial markets correct, these gains too may be subject to some correction going forward. Whilst the economy is chugging along reasonably well, in terms of growth indicators especially when compared to the disaster unfolding elsewhere in the world, this is largely on account of rural spends. The problem that India faces is the absence of private investment, which creates new jobs and brings on a new lot of people to the consumption market. The government has, in its recent budget, responded with tax cuts for the middle classes. But analysts doubt that this in itself will make the cut. Frankly, households are unlikely to buy much more fast-moving consumer goods than they need, simply because they now have a little more disposal income. If consumption has to rise, new entrants to the workforce, gainfully employed, must rise first. That is missing.
But one segment that has defied trends is the travel and hospitality sector. Hotel rates and occupancies are going bonkers, and this is fundamentally the result of domestic demand. The question is whether it is sustainable? While the answer will play out in the quarters ahead, it seems possible that the travel market is due for some correction. Over the coming 4 years, over 100,000 new rooms will be added to India’s existing inventory. This constitutes a shift of gears from the rate of capacity creation seen in the recent past. 65,000 rooms were added between 2009 and 2015 and another 36,000 between 2022 and 2024. Hotels have done well largely on account of the wedding business, where Indian families have fallen into the trap of ‘keeping up with the Jones’ with excessive splurges, not seen anywhere in the world.
Consumers are responding with overseas travel alternatives and given better connectivity, with direct flights to a large number of Asian countries, have begun to explore new markets. The impact is obvious with Goa becoming the first victim, with a fall in hotel bookings and rates. As Indian owned airlines continue to expand their regional networks, more tourism will shift overseas. India’s passport is now better accepted in several countries, a direct consequence of its changing economic realities and stronger geopolitical might. This will only get better. Indians now constitute, following the Chinese, the largest tourist segment in Asia.
All said and done, India’s economy remains robust. If bureaucratic meddling is addressed and soft touch regulation replaces cumbersome compliance, investment will quickly follow. And consequently, so will economic growth. But for a few quarters ahead, businesses will need to be careful about costs and margins. The consumption cycle will eventually change, but for now the risks are weighed somewhat to the downside.