"Raring to spend" or struggling to survive, India's rural poor

Having ridden the wave of economic boom, India's middle class is feeling the pain of slowdown. Corporate India is turning elsewhere to fill the gap; recent reports suggest rural India is ready; by contrast, World Bank offers a different perspective.

Rural spending potential

Four years of agricultural growth - for the first time in 40 years - subsidies and state aid guaranteeing 100 days work per year sees per capita income in rural India grow 4% year on year.

According to some, India's 600 - 700 million rural poor have spending potential, Goldman Sachs optimistically describe them as "raring to spend". In support, 50% of India's consumption expenditure comes from lower income consumers.

Immune from boom and bust

This mass of people don't have loans and mortgages, won't speculate on the Sensex but they do have job security. What income they have is spent on basic goods and services.

Mobile phone providers expect rural India to account for 60% of mobile phone users by 2012 and FMGC sector forecasts rural area sales to grow 40% versus urban 20%.

A differing views

While corporate's feel there is money to be made, World Bank paints a different picture. In late 2008, they concluded India is home to 1/3 of the World's poor and that 828 million people - 76% total population - live on US$ 2 or less per day. In their opinion there is more poverty in India than sub-Saharan Africa.

Two extremely different views of the same segment of society, time will tell whether they are consumers or survivors.

February 14, 2009 Add a comment

India infrastructure receives investment injection, but more required

Urban population growth is putting additional strain on India's infrastructure. Infrastructure projects need major investment and private sector participation if India is improve infrastructure at the required rate.

Crumbling infrastructure prevents India fulfilling its economic potential; in 2007 Deutsche Bank concluded that GDP could be 2% higher but for infrastructure weakness. Having underinvested for years Delhi has been forced to act, but current economic conditions create difficulty.

Urban population boom

Lifting citizens out of poverty means urban population growth and additional strains on power, sanitation, roads, education etc. Goldman Sachs - long time advocate of Indian infrastructure reform - peg 2050's urban population at 700 million. Delhi must do more than deal with backlog demand; they need to get ahead of the game.

Sustaining current levels of economic growth requires minimum investment of US$ 500 billion - equivalent of 8% GDP versus 2008 levels of 4.6% - by 2012. Current government budget deficit makes going it alone impossible yet significant barriers to entry put off foreign and private sector firms.

Government stimulus, domestic demand

To gain traction, government has announced additional measures to its recent domestic stimulus package. Kamal Nath, India's trade minister, recently said, "We are looking at creating greater domestic demand, creating stimulus in the construction, infrastructure sector and in exports."

Existing package allows state-owned India Infrastructure Finance Company to raise money through tax-free bonds, in an effort to refinance 60% of bank lending to the sector. Once approved, new measures in the form of subordinated debt will help companies gain long-term finance.

Investors becoming more choosy

But times have changed, Arvind Mahajan of KPMG, explains, "Even ill-conceived projects managed to get funding earlier. That's in for a change. Investors will be more selective now". Investors are likely to avoid water and power projects for fear that what is produced is given away by influential state governments to gain favor with local voters.

Adding to the perception of risk among infrastructure investors, global ratings agency Fitch recently concluded, "a fair amount of debt restructuring will take place over the next few years" in their report, Infrastructure Finance in India: Lessons from the Front Line.

Reliance recently announced the launch of its Reliance Infrastructure Fund, a vehicle for the public to invest in companies engaged in infrastructure and infrastructure-related sectors like transport, energy, power and oil, amongst others.

India's infrastructure challenge

Urgency is required. Figures in The Economist remind all that in cases lives are at risk:

• 1,000 Indian children die of diarrhea related sickness each day
• 700 million Indians have no access to a toilet, only 13% of sewerage is treated
• 600 million Indians have no mains electricity and 35% of power is stolen
• Just 8,000 km of India's 3.3 million km of roads are duel carriageway
• Average road speed in Delhi is 10 kph, falling from 27 kph in 1997

Private sector and foreign investment

While a US$ 14 billion loan from World Bank will help, government has to spend big and pass through reforms to attract more private sector and foreign participation to share the funding burden.

Regulatory constraints and bureaucracy needs to be removed, policy needs to be consistent at State level and political sensitivities over user charges for services need to be overcome. Only then will the success stories of Delhi Metro and the Golden Quadrilateral Highway be repeated and lofty targets be met.

December 24, 2008 Add a comment

What next for India's inexperienced retail sector?

Kishore Biyani of Pantaloon Retail recently stated that he expects many of India's current shopping malls to fail due to miscalculations on size, tenant mix, location and management. India Insights speaks to three leading professionals in the Indian retail sector to gauge their thoughts on a sector in a state of flux.

Major sector challenges

High rental costs are a major issue for the sector; a correction in the real estate market is required as margins are being squeezed. Shankar Balan, Head of Accessories and Brand Licensing at Madura Garments and Peshwa Acharya, VP & Head of Marketing & Consumer Experience at Reliance Retail each make it the primary sector challenge.

Acharya also feels that the sector is suffering from a general lack of talent due to lack of experience, in addition he highlights the difficulties of establishing a retail model that is a mixture of Western and Eastern influences.

Salil K. Sahu, Managing Director of Home Stores India comments that due to the sector being in its infancy there are a lack of experts who understand both Indian sensibilities and retail design. This has led to, "a lack of coherent concepts and brand experiences".

Future of the sector

Balan predicts that organised retail will turn its focus to new local markets, "There is huge untapped potential from the secondary and rural markets where the aspirations run high on account of media penetration."

He also makes the point that India's socialist roots; high income tax and low wages will insulate the sector from the global downturn as consumers will spend only what they can afford, rather than being tempted by easy credit.

Acharya expects new formats to evolve but warns that Western models and format designs will not necessarily work in India. Salil agrees, "The sector lacks an Indian identity and has not developed a sensibility for design, aesthetics and branding". He goes on to say, "the sector has not created environments where Indian's are inherently comfortable".

Evolution of the mall

In Metro cities, Balan expects better zoning and mall management, in addition he believes that developers will improve the range of activities available, making the point, "while we do not the equivalent of Ski Dubai, the shift to leisure activities will gradually take place". Acharya agrees, and anticipates that mall schemes will become, "all day entertainment locations".

Balan forecasts that once consumer sentiment and the economy recover, the speed of development in secondary cities will "surprise everyone".

New mall models are predicted by Acharya, including micro-malls in city centers, hyper-malls located outside city centers and specialist malls catering for specific market segments.

December 5, 2008 Add a comment

Inflation spikes, interest rates rise, GDP drops - from boom to bust?

India's growth and global rise was seen as inevitable by many. Many now speculate that the bubble has burst. Although slowing down, foreign analysts would do well to remember that India's economy is still rapidly growing, however, there will be inevitable ups and downs along the way.

Current India economy coverage makes grim reading. Andrew Holland of Merrill Lynch says, "This time last year the talk was of India decoupling from the troubles of the rest of the world economy. Now it's clear that India has it's own problems. It has gone from hero to zero."

Inflation spirals

Reserve Bank of India (RBI) predict 13-year high inflation of 12.4% in mid-August, will rise further. Compounding problems prudent Governor, Yaga Venugopal Reddy ends his term in early September having warned of economic overheating due to populist Government policies including generous fuel subsidies, farm worker loan waivers and 21% salary increases for 5 million civil servants.

Interest rates forced to follow

Forced to react, RBI has had to raise interest rates to recent-record 9%, leading to further GDP slowdown - 7.9% year-on-year, April to June - compared to 8.8% previous quarter. Foreign investors are getting jumpy, the Sensex Index is falling and India's fiscal deficit is under scrutiny.

Talking to India Insights, Rajiv Banerjee, Special Correspondent for The Economic Times believes that sentiment in India is guarded, "There's a palpable sense of slowdown given the slide on the stock market, and rising interest rates that have affected consumer spending."

So is India's success story over?

India's status is under threat. World Bank figures predict that Russia will become the world's second fastest growing economy (after China) with 7.1% growth, surpassing India's 7%.

Domestic problems need addressing, but the global economy inflicts global pain. While decoupling was predicted, booming global oil prices have a telling effect, India imports 70% of its oil and heavily subsidises domestic prices. Banerjee supports this view, "A lot depends on how crude oil prices move, a drop means inflation may head downwards, thereby providing consumers with relief from skyrocketing prices."

Jim O'Neill, chief economist at Goldman Sachs - who predicted that India's economy could surpass the US by 2050 - still sees potential but qualifies it in the paper, "Ten things for India to achieve its 2050 potential", in the short term he sees the price of oil as a major problem, "Given the inflation challenge, the fiscal and current account position, one might say oil prices are the most critical thing for India in the next six moths or so."

Still growing in a global down turn

Considering India's starting point and its size and scale progress was never going to be as straightforward as some predicted, HSBC economist, Robert Prior-Wandesforde appears to have a measured view, "Just as many forecasters and markets were too optimistic in 2005-07, effectively running with the view that whatever China could do, India could do better, there are now some that are suggesting that it can do nothing right".

Banerjee, still senses optimism and provides perspective, "It (growth) may not be at the scale seen previously, due to the global slowdown, but even if India grows 6-7%, it will still be one of the fastest growing economies amidst a global downturn."

September 7, 2008 Add a comment