“Historically, welfare spending & government transfers have a strong correlation with consumption cycles,” he says.
Edited excerpts from a chat:
Consumption remains the dominant contributor to India’s GDP, but growth has been weak in recent years. What have been the key challenges, and what is your outlook on India’s consumption story?
Consumption is a significant part of our economy, with Private Final Consumption Expenditure (PFCE) contributing ~56% to the GDP in FY24. However, growth in overall consumption has lagged behind overall GDP growth, with PFCE growing at 3% in FY24 compared to 7.6% for GDP. Overall consumption numbers are still below the pre-pandemic trend. Key challenges include a sharp rise in inflation post-COVID, lower rural wage growth and erratic and skewed monsoons over the last two years, which have mainly impacted rural consumption. The rural segment is now showing signs of recovery. Sector outlook is positive, with moderating inflation in India and globally, favorable monsoon conditions and an increasing trend of welfare spending by states. In the long term, consumption remains a strong growth story, driven by factors such as a strong demographic dividend, per capita income crossing the critical US$2,000 mark, increasing urbanization and growing digitization, which improves access to products and services.
K-shaped recovery in consumption has been in play post COVID with high-end segment of consumption growing faster than overall consumption. Is this likely to reverse?
As India progresses from US$2,000 per capita to higher numbers during the Amrit Kaal, more households are likely to enter the middle and upper-income ranges. We expect the premium & luxury segments to continue to perform well on account of the Income pyramid changing dramatically leading to higher premiumization. Incrementally, we expect recovery in mass market segments led by rural recovery and increasing trend of welfare spending. Historically, welfare spending & government transfers have a strong correlation with consumption cycles.
Recent commentaries from corporates suggest rural consumption is recovering. What do you think is leading to a recovery?
Recent commentaries from corporates suggest early signs of recovery in the rural economy and we believe the trend is sustainable due to lower inflation, expectations of good monsoon and increased government’s budgetary allocation towards boosting the rural economy. In fact, the IMF’s July comments also highlighted an improved outlook for rural consumption as one of the key reasons for upgrading the growth forecast for the overall economy.
The HDFC Non-Cyclical Consumer Fund is a uniquely named and positioned fund within Consumption funds. How is it different? What are some sub-segments you are overweight on and why?
The fund excludes cyclical sectors within consumption space, potentially lowering risks and volatility across business cycles. We are overweight on Consumer Staples, Healthcare, Consumer Tech and Hospitality. Sectors like Healthcare, Consumer Tech and Hospitality, in our view, have strong sectoral tailwinds.
