What Slowdown? Indian Consumers Are Still Spending
Thirty two-year-old banker Chiragi Kothari recently bought the latest Apple iPhone and then went on a 22-day European holiday with her family in July.
The Mumbai resident tells CNBC that she now plans to visit tropical getaway Mauritius with her husband in the next two to three months.
Kothari is one among many urban, upper middle class Indians who have not cut back on spending despite a slowing economy and rising prices. From entertainment to holidays and spa treatments, many Indians are still indulging themselves.
“We go out for dinners or movies once or twice a week,” Kothari told CNBC. “There’s nothing that I’m doing very differently from what I used to do before. Typically, everyone’s spending pretty much remains the same.”
India grew at its slowest pace in nine years over the first three months of the year and consumer price inflation at 10 percent seems unlikely to ease. Plus a weak rupee and poor monsoons this year are adding to the gloom already surrounding India’s economy. But consumers like Kothari are brushing that aside — to keep spending.
According to market research firm Nielsen, consumer confidence in India remains high. The country ranked only second after Indonesia in a global survey of 56 countries conducted in the second quarter of the year.
“While Indian consumers are getting more anxious about job prospects, rising inflation and a slowdown in the economy, when we look around the world, they still seem to be among the most optimistic. [Indian] growth rates are still the envy of the developing world, given the size and scale of the market,” Piyush Mathur, President of Nielsen India said.
Consumption made up nearly 49 percent of India’s $1.7 trillion economy in 2011, and the country is on track to become the world’s fifth largest consumer market by 2025, according to consulting firm McKinsey & Company.
Splurging on Cars and Spas
Dheeraj Sinha, author of the book “Consumer India: Inside the Indian Mind and Wallet” says Indians are spending more on premium products and services such as cars and spa treatments.
For example, “If you look at sales of relatively premium cars in the $30,000 bracket, those from Mahindra & Mahindra and Maruti Suzuki, they are going up,” Sinha said.
Last week, India’s largest utility vehicle manufacturer, Mahindra & Mahindra, reported that car sales jumped 32 percent in the first quarter of 2012 compared to a year earlier, driving up profits as consumers lapped up their sporty vehicles.
India is also seeing a boom in the wellness and beauty sector with the salon and spa business taking off in the last three to five years, according to Sinha.
Consumer goods firm Unilever recently announced plans to launch a new range of high end hair-care products targeting salon-frequenting consumers, which Sinha says shows optimism at that end of the market.
Bangalore-based Rahul Bhalchandra, Founder and CEO of R&R Salons, which runs the YLG Salon & Spas, plans to increase the number of salons from the current 20 to 200 across India in the next five years. This is thanks to a $16 million investment from private equity firms Helion and Everstone Capital Advisors, which he secured in May.
A Dose of Caution
However, the optimism is tempered with some caution. For another Mumbai resident, 32-year-old marketing professional Bijal Shah, visits to the salon have been cut down from twice to once a month.
“A manicure and pedicure that I used to get done for 500 rupees ($9) last year now costs me $750 rupees ($13),” Shah told CNBC. “I continue to spend the same amount [on discretionary items] but what I get for that amount has become less as prices have really shot up.”
Arvind Singhal, Chairman of management consulting firm Technopak, which focuses on the consumer goods industry, warns that businesses that are used to double digit growth riding on consumer spending will have to tone down their expectations.
“Right now we’re not seeing shrinking as such or negative growth but we’re seeing only single digit growth compared to double digit growth these companies experienced across various sectors,” Singhal said.
'Off the Books' Boost
Financial analyst Ramakrishna Pothula, 34, who lives in Pune, a tier two Indian city, is upbeat about the economy saying the slowdown may not be as bad as government data suggest because it doesn’t take into account the economic activity in India, which is happening “off the books.”
“For example, I have lent money to my friend, there’s no paperwork involved and I’m earning about 15-18 percent interest on it. If I had invested the same amount in a bank, I would have earned almost half of that,” Pothula said.
This extra source of income is adding to Pothula’s spending power who says his next big purchase is going to be a video camera.
By CNBC's Rajeshni Naidu-Ghelani.