Spending to Spur Growth - ToI010111

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Indian Economy Growth Prospects - 2011

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TIMES BUSINESS | THE CONSUMPTION STORY
RETAIL

THE TIMES OF INDIA, PUNE * SATURDAY, JANUARY 1, 2011

SPENDING TO SPUR GROWTH

$500 bn

Size:

13%
Drivers: As disposable incomes grow and large format stores come up, footfalls will go up

Growth:

AUTO

14 m units

Size:

WHILE INDICATIONS ARE POSITIVE, THE POSSIBILITIES ARE EVEN MORE SO
Adi Godrej CHAIRMAN, GODREJ GROUP

30%
Drivers: Surge in demand, especially for new models

Growth:

Riding on high salaries and soaring aspirations, the consumer has come to the party with an urge to splurge. Post recession, the Indian growth story has been all about consumption. Be it cars, durables or cellphones, companies are expected to continue their double-digit growth in 2011. TOI takes a sneak peek into what’s in $13 bn store in the New Year 13%
Namrata Singh | TNN

TELECOM

742 m users

Size:

41% Drivers: Rise in
penetration; falling handset prices; rural growth

Growth:

DURABLES

$7.8 bn
Growth:

Size:

13%
Drivers: Demand for hi-tech flat panels, LCDs, Plasmas; higher disposable income

ndia has got what it takes to become the largest economy in the world. It has a billion-strong population and a GDP of a trillion dollars, which is growing at 7-9%. But it’s the low per capita consumption that provides the icing on the cake— which presents a huge growth opportunity So will 2011 be . an inflection point? Going by the manner in which consumers are lapping up cars, durables, packaged foods and apparels—one can smell the feel-good factor creating a positive effect on the economy . While demand for luxury cars is expected to zoom to another high in 2011, entry-level cars and two-wheelers, too, are expected to ride on the strong growth momentum. The auto sector grew at a scorching pace of over 30% in 2010, something that took most companies by surprise and led to huge waiting lists on many models. In anticipation of a surge in demand, companies like Maruti, Hyundai, Ford and Mahindra are adding fresh capacities while working on new models to keep the excitement going. In consumer durables, which grew at 12-13% in 2010 driven by demand for flat panel displays—LCDs and plasmas—the buying spree is expected to spill over into 2011 as well. The flat panel display market is expected to grow 60% to 4.5 million units by 2011. “The industry is expected to grow at over 15% in 2011 as penetration levels are very low,” says Y V Verma, COO, LG India. TEXTILES & APPARELS Mobile handset sales, too, are on Size: a roll. The number of mobile Growth: connections, which grew 27% to exceed 660 milDrivers: Growing lion in 2010, is exdemand for women’s pected to grow furwear,kids wear and home textiles ther in 2011 on increasing rural penetration and falling prices. On the other hand, growing demand for women’s wear, kids wear and home textiles is helping the textiles and apparels market to grow at 11%, prompting investments to the tune of Rs 3,20,000 crore across the supply chain by 2020, according to Technopak. A large sum is expected to be invested in 2011-12 itself to ride the wave of growth. Similarly housing is fuelling growth , in the cement sector. Property consultants said prices are expected to correct after March 2011 across the country thanks to high interest rates. “Developers will start to feel the squeeze sometime in March/April when it is time for them to repay banks. They will have no option but to reduce rates to ensure sales in the residential sector,” says Pranay Vakil, chairman, Knight Frank. This could further spur home purchases.

I

$54 bn

11%

he transformation in the consumption pattern of the Indian consumer is well underway. Per capita income is increasing, income distribution is improving, dependency ratios are falling and aspirations are rising—all of which are being catalyzed by an unprecedented boom in investment, especially in infrastructure. As an economy, we are in the middle of a capital-raising spree to address supply-side issues in infrastructure. Added to this are spending and subsidies to create a social safety net for lower income groups and populist programmes that are part of the political agenda. All in all, circumstances and conditions that favour consumption are on the ascendancy. Given that almost all categories of goods and services have very low penetration and with the middle class expanding, high growth in consumption is inevitable. The principal sectors that will see robust growth in 2011 are consumer durables, FMCG, packaged food, real estate, entertainment—including cable TV—mutual funds and telecom. The cricket World Cup, being partly hosted by India, would give a boost to all consumer durables in general and TVs in particular. The impact of the 3G roll-out should give a boost to the telecom sector, but the degree of impetus will be determined by both price and content. Retail may see some liberalization in FDI norms, but could The principal be constrained by political sectors that compulsions. The FMCG will see robust FMCG sector will see a spate of growth in 2011 are new launches that focus Size: consumer durables, on providing more FMCG, packaged segmented offerings. Growth: food, real estate, On the food front, entertainment, prices are expected to remain high, mainly mutual funds and Drivers: Positive because of the growing telecom consumer sentiment, LUXURY demand and inadequate rural market growing faster than urban policy interventions in improving farm productivity, Size: Higher agricultural practices and supply chain efficiencies. Rapid ing a presalaries urbanization and the concomitant changing values will drive mium for effecGrowth: aspirational spending, especially in branded goods, packaged and tive products. This is C o n ready-to-eat foods. Spending on infrastructure and the NREGA expected to expand the scheme will ensure higher rural consumption. The long-term trend of sumption market exponentially Drivers: Aspirations, affluence. Over 2 million falling dependency ratios and demographic dividend are bound to will be pownext year. Ajay Piramal, households, which pay off in the years to come. ered by higher chairman, Piramal group, annually earn $100,000 India is, however, a large country where a majority of households disposable insaid: “Unconventional algoor more are financially vulnerable. Most are unsalaried—while the figure is comes as both rithms of understanding the less than 40% in urban areas, it is less than 15% in rural areas. The hiring and inconsumer will help the industry ability to leverage consumption is still very low and the temporarily crements gather discover latent needs.” curtailed micro-finance initiative will dampen consumption, especially in momentum in rural areas, and soften discretionary spending. Thus, the consumption 2011. Numbers Services sector story, though robust, is not fully inclusive. indicate that 2011 The services sector, which contributes The threat to the consumption story would be largely structural and on will bring back account of a deficit in optimism caused by the current loss of faith in the over 50% of the GDP, will continue to salary hikes witpolitical and business environment, largely due to the irresponsible shine even as manufacturing growth nessed in the actions of a few. Structurally, the consumption story of 2011 would be takes long strides. For one, India stands boom year of significantly advanced if transaction costs are reduced by eliminating 2007 (12-15% rise in remunerations). Ac- to benefit from the trend of global ennon-value adding barriers to free movement of goods through the cordingly global HR consulting firm Mer- terprises focused on reducing the cost , implementation of the GST, which, in my opinion, should be done post. cer has revised its forecast for 2011. “The of the IT industry This augurs well for haste with the concurrence of all state governments. Reforms in the revival in the economy and renewed hir- job creation. In domestic consumption, agriculture sector should be undertaken and new capacity creation is ing activity across sectors has contributed IT/BPO will ride on the growth in inencouraged. All these require an enlightened and co-operative political to this upward trend,” says Shamita Chat- surance, banking and telecom sectors. dispensation. With people taking to the skies like terjee, head, information, products and In short, while the indications are positive, the possibilities are even never before, airlines are inducting solutions, Mercer Consulting. more so. There is also a huge increase in the new aircraft, which is driving demand number of active consumers, with over for professionals like pilots. What will 20 million people being added to the also encourage people to travel by air working age population every year. more frequently is the assurance by “Couple this with rising disposable in- aviation secretary Nasim Zaidi: “Passengers can look forward to complete transparency in fares.” The Indian travel market would Demand for commercial property grow to $20 billion in 2011 ($15.8 billion (2011-14): in 2010), according to PhocusWright. J S Shin What would follow is a mad rush by million sq ft hospitality chains to set up hotels in PRESIDENT & CEO Demand for residential property the country Industry consultants pre. SAMSUNG, SOUTH WEST ASIA dict that around 36,000 additional rooms (2011-14): will be added in major cities by 2013. million units he year 2010 has seen very healthy growth trends in consumer Overheating of economy? electronics, cellphone and IT Industries. High GDP growth, a Demand generation for office space burgeoning middle class and growing consumerism are factors (Bangalore + NCR + Mumbai): The flip side to the consumption stothat contributed to the 8-10% spike across categories. As we move into 2011, I expect these categories to sustain growth with some of ry is inflation. There may be a threat the technology trends being witnessed this year getting more pronounced. of overheating of the economy. HowIn 2010, we saw a broader trend towards personalization or comes and the growing middle class ever, there are more optimists than customization of devices to suit consumer preferences. In this context, and you have a huge pool of consumers naysayers. “There’s nothing worrisome manufacturers are now looking beyond hardware and towards content and who will actively participate in India's about factors like inflation and overservices. Development of applications and open OS platforms are more growth story,” says Tanya Dubash, ex- heating of the economy,” said Mahesh relevant today than ever before. Thus, in 2010, one saw the emergence of ecutive director & president (market- Vyas of CMIE. The ride could be a bit smartphone, ‘smart TV’ and in the last quarter, the launch of tablets. bumpy though, with commodity volatil, ing) Godrej Industries. Mobile phones with open OS platforms like bada, Android or Windows and . Market analysts are particularly ity Other impediments like rising taxTVs that allow you to download applications from the net have become bullish on companies offering ation could also hamper growth. Sigreality and I see all these categories gaining traction in 2011. The roll-out goods/services which are discretionary nificant capacity additions could lead of 3G services will further fuel the demand for 3G enabled devices like in nature, i.e. prompted by affluence. to surplus situations if actual demand cellphones and portable PCs. “It is the young urban consumers who does not keep pace with the forecast. Digital convergence is fast becoming a reality and one can see that in However, the rise in salaries and othwill be the ones to watch out for,” says the form of various new devices that have been introduced in India this Naresh Kothari, president & head, eq- er factors present a favourable prospect. year. Take for instance the launch of tablets, which allows consumers to uity capital market, Edelweiss Capital. The exuberance of India Inc on a posiexperience PC-like web browsing and enjoying multimedia content on the Take the case of the $3-billion Indian tive consumption story is telling. “I am roughly 7-inch display, wherever they go. Moreover, users can luxury market comprising watches, ap- not overly concerned of the economy overcontinuously communicate via e-mail, voice and video call, SMS/MMS or parel, shoes, jewellery liquor and cos- heating. I feel the Indian consumption , social network with the optimized user interface. metics. The market is slated to grow at story is just beginning,” says Premium product categories outpaced the growth of conventional 20%, buoyed by over 2 million households Dubash. Others feel a balproduct categories in 2010. Thus, one saw categories like flat panel which annually earn $100,000 or more. ance between control of IT/BPO TV, split AC, fully automatic washing machine growing faster than The number of such households, too, is inflation and liquidity conventional product categories like flat TV, window AC and growing in double digits. Says Saugata would be critical. Till Size: semi-automatic washing machine. While the trigger for growth Gupta, CEO (consumer products), Mari- then, there’s no stopin the metros and larger cities was upgrade and replacement co, “The below-30 age group with a high ping this consumpGrowth: demand, a lot of the growth in consumer electronics came from . propensity to spend and a positive dis- tion party first-time buyers, especially in the semi-urban markets. The position towards brands and uptrading semi-urban markets are rapidly maturing to show strong will continue to drive the consumption (With inputs from Drivers: Domestic adoption of consumer electronics and I see this trend continuing story Items of daily use like soaps, laun- Rajshri Mehta, Ree.” growth will ride on growth in insurance, into 2011. The relatively low penetration levels of consumer dry shampoos and creams will continue ba Zachariah,Samid, banking and telecom electronics in India and strong adoption of new technology products to witness good growth, especially in the ha Sharma, Rupali by Indian consumers present strong opportunities for growth. rural areas, since the rabi crop would re- Mukherjee, Vikram KuAccordingly, the retail experience of consumers is becoming very relevant mar and Partha Sinha in sult in higher disposable incomes. and one is seeing an expansion in large format retail. What’s more, armed with more ther- Mumbai; Pankaj Doval, This is another factor which is both leading to as well as contributing Sinha and apeutic options, sectors like pharma- Saurabh to the growth of consumerism in the country. Thus, with a stable socioceuticals are seeing a boost with con- Shalini Singh in New Delhi; political environment and with the Indian economy poised to maintain its sumers’ willingness for self medica- Mini Joseph Tejaswi in GDP growth of over 8%, consumerism will definitely get a boost in 2011. tion. They are also not averse to pay- Bangalore)

T

$3 bn

20%

REALTY

2011 TO SEE A FRESH SPURT IN CONSUMERISM

240

4.25

46%

T

$73 bn

14%

AFFLUENT YOUTH AND RURAL INDIA WILL DRIVE CONSUMPTION IN 2011
Wilfried Aulbur MD & CEO, MERCEDES INDIA

fter a successful 2010 that has put the challenges of 2008-09 behind us, our attention turns to 2011. True, most studies predict a bright future for India in the mid-to-long term with most industries growing by a factor of 5-10 over the next 10-15 years. But will 2011 be a year that follows the general trend or are there reasons for subdued growth? From where I stand, there is every reason to be optimistic. The underlying dynamics that propel India forward are

A

many and they will be as relevant and as powerful in 2011 as they were in 2010. Take India’s youth as an example. The number of young Indians, who are welleducated, tech-savvy and making a decent living, continues to grow. Today, teenagers between 17 and 20 spend more than 40% of their discretionary income on apparel, books, footwear and mobile phones. Since we are globally the most optimistic lot as far as the economy is concerned, according to the Nielsen Global Consumer Confidence Index, there is no reason why young, confident Indians should change their consumption pattern in 2011. Another driver for growth will be rural India. Even today, companies such as Hindustan Unilever, Hero Honda, Dabur and TVS achieve 40-60% of their sales from the rural market. Maruti-

Suzuki, whose rural sales accounted for only 3.6% of total sales a couple of years back, today reports 20% of sales from rural areas. Many FMCG product sales grow significantly faster in rural areas than in urban pockets. This development is not only driven by improvement in the income of a large section of India’s population, but also by increased awareness through improved mobile phone and TV penetration as well as better connectivity through new and improved roads. With a fair monsoon and heavy government investment in infrastructure over the next few years, all these factors remain valid in 2011. Lastly, the introduction of GST should lead to a greater ease in doing business by introducing a simplified tax structure, which should reduce tax

cascading and distribution costs in the form of centralized warehousing. As far as the luxury automotive segment is concerned, 2010 was another exciting year that brought luxury car makers a growth of about 80%. This growth is driven by a clear change of attitude among buyers. Businessmen, self-employed and salaried people, all profited from strong stock and real estate markets, rising company profits and salaries, and readily available finance. Significant movement was seen in the relatively unexplored territories, such as with the 200 luxury cars that got sold in one transaction in Aurangabad. In 2011, continued economic expansion, increased penetration in Tier II and Tier III cities (for example, Mercedes will open full-fledged facilities

in Baroda and Rajkot), a continuous shift in the mindset of Indian elite, which doesn’t mind to indulge in luxury, and increased competition with stronger presence of brands such as JLR will lead to double-digit growth of the segment. With the economy growing at about 8.5% in 2010/11 and, according to RBI, expected to grow at the same pace in 2011/12, as well as with all the factors mentioned above, double-digit growth will not be limited to luxury automobiles but will also be seen in other sectors such as telecom, auto, media and entertainment, consumer goods, real estate, education, healthcare, etc. So, let’s get ready, fasten our seat belts and put the pedal to the metal for another exciting year in the beautiful country that is India!

Illustrations: Mahesh Benkar

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