The Right To Grow

We need to separate the truth from the jingoism and examine whether it was luck, economic prescience or a super robust economy that made us successfully hang in there the last one year. Was the growth of the golden years of 2003-08 the 'entitlement' of our economy or was it 'flogged' and extracted and borrowed from the future growth? My assessment is that more than entitlement, favourable circumstances had a lot to do with it. The tight money policy towards the middle of 2008 was perhaps tighter than warranted (some say it would have choked off growth had the crisis not hit, so it's a random act of providence!). The saviour of rural demand holding out was partly an act of God and partly an act of government for reasons other than economic prescience (writing off loans and clearing the slate for fresh consumer credit to flow, NREGA money due to an impending election) and partly due to a one time jump in road connectivity.

For a consumption driven economy, our consumer base isn't all that it is cracked up to be. Between 2000 and 2003, we performed poorly. And it's not as if there was a fundamental improvement in the quality of our consumer base to cause the sparkle of the next five years. The events that drove 2004-08 performance were good monsoons, good global economy, a stock market boom fuelled by FII and high animal spirits which drove the rich India (both urban and rural); and as enumerated earlier, a star burst of one time events that stimulated the poor, rural economy up (the best ever monsoons road connectivity jump, loan write-offs, NREGA etc). All the stars were aligned and it got as good as it could. We were actually quite lucky that the global meltdown came when it did and interrupted our bullishness party, or else we would have discovered very many more people swimming naked when the tide would finally have gone out.

The bullishness (animal spirits?) of the supply side in the latter part of the 2003-08 period was because we believed that we had broken through the 6%+ growth barrier and were firmly in the 8%+ range, and had created an unstoppable growth engine that would head towards 10% GDP growth. Driven by consumer spending this, in turn, attracted company investments, both domestic and FDI, and huge inflows of money into the stock market, making a lot of Indians even richer. Companies played the valuation game and borrowed to fund expansion which would improve valuation but would not take a chance on sufficiency of consumer demand – instead of the other way round!

The modern retail sector valuations have been a lot like the dotcom ones. Twice the revenue multiple for an under 5% net margin, and in early stage valuations, even a 1 % net margin. The only difference between the two was that while many dotcoms had neither a proven revenue nor a profit model, retail companies here had a revenue model, even if they didn't have a profit model! The media valuations also defied logic, as did the housing and the power. As we know, when everyone is playing the valuation game, and when new businesses are being built to be sold asap that is unsustainable.

Young educated people with good jobs who started working in the boom period and had never seen a downturn or a slowdown, are now saddled with high EMIs and low bonuses. Fortunately for us, this generation also has parents who are pretty well off and offer a safety net. Banks were infected by the same mood and lent far more easily than they should have – and when the trouble began, they discovered the virtues of risk management, both with consumers and with companies, especially the SME sector which is the mainstream and the mainstay of business India.

We definitely have not built a growth autobahn on which we were speeding along in a well engineered vehicle. We have at best been rattling along on a rough and ready, state of the art in parts highway in a sturdy jugaadu, coasting along on its momentum and powered by our collective confidence in it, de-risked by the law of large numbers of many mini-demand segments and mini-economies, each with their own triggers and turn-offs. Once such a contraption slows down, it is not easy to get it back to its earlier speed; but it isn't easy for it to crash and self-destruct either.

While private final consumption expenditure and per capita income has grown nominally in double digits every year in the golden years, and even as we count up the increase in mobile phones and television sets and two wheelers, the consumer base remains very fragile, and hence the consumption economy is being built on shifting sand. Only a tiny fraction of Indian consumers have regular salaries, leave alone jobs in the organized sector. Most don't have a social safety net either. Most pay more than they should for education, and for loans from which they fund consumption. A health emergency usually destroys their financial (and consumption) rhythm. A family of four people working in Mumbai can earn Rs 15000-20,000 a month serving those who can earn a lot more with their time saved; but will live in a one room 200 sq feet or less servants quarter in Mumbai and when ejected from there at any time, suffer huge income losses.

Most consumers are self-employed, and not out of choice — the great Indian dream is still to have a regular and well paying job. Only 37% of urban Indian households and 11% of rural Indian households have a chief wage earner who earns a regular salary/wage. Only in the top twenty cities is the salaried percentage close to half. In reality, most consumers are financially vulnerable. A quarter of them have loans outstanding, and in case of a major drop in income, feel that they do not have savings to sustain themselves even for a year. What makes them spend is a financial (mis)optimism that something somehow will work out. (Source: NCAER, 'How India earns, spends and saves'.) We don't have enough jobs being created either, and many people will perforce have to become self-employed, and we do not have a support system for micro-entrepreneurs.

We need to learn a lot more about our consumption economy. Unfortunately, we don't have enough sophisticated data sources that are timely and which examine what's happening at the level of people who power it. Because our consumer base is getting more and more heterogeneous, sample sizes need to be larger and it has to be the government's business to fund it.

Consumer India is a hydra-headed monster (or a many splendored beast if you prefer), and often begs the question: Which India and whose India are we talking about? It is true that if the stock market went down to zero, it would still not affect half of consumer demand because the top 20% of India, by income (45 million households, approximately), account for about 40% of consumption expenditure, and the stock market and mutual funds serve a maximum of 30 million investors. Assuming one investor per household, this will not even be the top 20% of Indian households.

The companies that serve India's entire consumer base are equally heterogeneous — Indian and non-Indian multinationals, as well as micro-enterprises, importers from China and the rest of Asia who sell on the pavement as well as modern trade and so on. Many of these are not on any known radar and so we don't really have a good picture of what's going on out there to be able to say we know it all exactly. Perhaps it is this heterogeneous nature of the consumer base that de-risks India's consumption economy.

We have a 110 million strong country that has a slightly better per capita income than Brazil, a 330 million strong country that is slightly poorer than Indonesia, and we have a 650 million large country that is as rich – or poor – as Bangladesh. We have the ability to build global scale domestic businesses and yet most of our consumer base hasn't even started its consumption journey in earnest. The task on hand is to build the engines of growth and fix the fundamental quality of our consumer base, relying on a strategy with which businesses can tap into a collectively rich but individually poor heterogeneous consumer base like no other in the world. The debate isn't about the cost of money or the level of subsidy that will help us hit a high number of GDP growth today. It's about improving the health of the goose that lays the golden eggs.