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Consumer, boom

2 May 2012 By Jeff Glekin

India’s consumers are feeling bullish. In fact the Indian consumer is still the most optimistic in the world, a Nielsen survey said. But booming consumption is only a real strength if investment can keep up, which at the moment isn’t happening. Otherwise the result will be more inflation.

Consumer stocks tells the story. The Bombay Stock Exchange’s FMCG Index, which tracks the likes of Nestle, Colgate, and Tata beverages, is up 21 percent since the start of 2012, or 9 percentage points higher than the benchmark Sensex index. Hindustan Unilever, the largest consumer goods maker in India, beat market estimates with a 21 percent annual rise in quarterly profit on May 1, helped by higher volumes and prices. Net sales for the quarter rose 16 percent year on year.

That shows up in national figures too. India’s consumption made up 58 percent of GDP in the financial year ending March 2012. China can only dream of such a domestic consumption story.

But the flipside is that India’s investment, which makes up 32 percent of GDP, is too low. India’s rate of capital formation declined by 4 percent in the second quarter of 2011-12, and by 1.2 percent in the third quarter. There are several likely reasons, of which the biggest is probably bureaucracy. Multiple clearances and approvals make it hard to get big projects moving. There may also be fears that the demand will not continue for long.

The risk is that if demand does persist, India’s inflation problem may get worse as consumers bid up the prices of basic good. Wholesale prices are already rising at around 7 percent a year. The reserve bank’s rate cut last month made it slightly cheaper for companies to fund investment, but did nothing to help firms overcome the key bottlenecks of shortages of land and power. That requires better governance in New Delhi. A central bank report warned in April that foreign direct investment would have been 35 percent higher in 2011 if it weren’t for so much “policy uncertainty”.

Bullish consumers give the economy strong foundations. But the government needs to do its bit to get investors to match.

 

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