Excerpts from IIFL Report on Indian Consumption Theme Being Under Trouble,
After 4 years of robust growth, we expect India’s household consumption growth to decelerate sharply over the next 1-2 years. Sustained agri-commodity inflation, unprecedented asset price inflation, acceleration in government expenditure, and a sharp increase in wages due to a tight labour market have been the four key factors driving the uptick in household consumption in the past few years. We believe these four
tailwinds are largely behind us. Furthermore, a few of these tailwinds such as asset price inflation and wage growth will likely turn into headwinds, weighing on consumption.
Farm price inflation to moderate - A significant acceleration in agricultural growth (the overall farm income pie has doubled in the past five years) has been the biggest driver of rural prosperity in recent years.
Asset price inflation to cool off: Gold and land are the largest household assets in India. Prices of both these assets have increased sharply after the global financial crisis (12-13% Cagr in real terms over the past 3-4 years).
Government spending growth to decelerate: Both central and state governments have seen a sharp acceleration in their revenue expenditure following the financial crisis (~18-19% Cagr in the past 4-5 years, from 12-13% previously), which has boosted aggregate demand
Wage inflation pressures to subside: Finally, we believe strong wage growth in recent years was another key driver of consumption growth.
