There’s been something of a rally in the stock markets of Indian apparel retailers recently, but Crisil Research thinks the picture is misleading. Consumption is not on a fast upward trajectory, and Indian households can ill afford to run up too much debt to finance spending on clothes. What’s more, as demand for Indian clothing is weak in the United States, and the dollar is strengthening, Indian retailers may see some revenues fall by up to 30-35 per cent.
Earlier this week, there was a rally in the share prices of most fashion retailers—Lifestyle, Reliance Brands and SBICap—because if you believe this rally, the problems facing fashion retailers in India are almost entirely due to the demonetisation of 86 per cent of the currency in circulation a year ago, and the subsequent switch to a new, legal, digitised system of payments. Neither demonetisation nor the demonetisation of fake banknotes has a dramatic impact on Indian consumption trends. On the contrary, it looks like the “tougher” restrictions on cash are having the opposite effect, in that they are restricting purchases of low-quality goods that can be exchanged for high-quality goods if you use a credit card.
At least this suggests that something relatively positive can be done to improve Indian consumption trends—strengthening rules against cash and giving Indians more access to credit to help improve their consumption habits. But this hasn’t really happened so far, because what the demonetisation policy did is to leave the choice of currency and payments technologies in the hands of these high-end retailers, since the money supply situation was so bad.
All the same, recent projections from Crisil suggest that Indian households will need to consume 12 per cent more per year in the years ahead to keep their spending at the rate achieved in 2017. That would require an annual rise of 20 per cent in real consumer spending—a number quite unrealistic. Indeed, despite the recent rally in the share prices of Reliance and SBICap, a lot of the shine has gone off Indian apparel retailers in recent months, partly because the numbers just don’t add up.
The most optimistic projection is that annual consumption growth, according to the Savita Jain and Anjani Agarwal report, would be 9 per cent per year, a growth rate that was achieved in the decade to 2013 and does not look likely to be sustained at a rate that large for the foreseeable future. But even if the real inflation rate remained at around 4.3 per cent, this would require household incomes to grow at a sustained level of 10 per cent a year. For now, the experience of the last decade suggests that such a measure of growth is a fantasy.
Overall, according to Crisil, even if growth in real consumption remains at the 2017 level of 9 per cent per year, total revenues of Indian apparel retailers will drop by about 15 per cent. At a time when India faces serious macroeconomic challenges—reduced growth in productivity, rising debt, tight financial conditions and relatively high inflation—this is not a recipe for success. This does not suggest, as a lot of commentators have suggested, that Indian consumers are “analogue” and “ageing” and should take up low-value jobs in the unorganized sector rather than buy clothes. But it does suggest that Indian consumption trends are likely to get worse rather than better in the coming year, if not the year after that.
This presents an enormous challenge for the government and Indian households alike. If household incomes do not rise enough to generate demand for Indian apparel retailers, the primary damage will be done to jobs in the unorganised sector, and possibly India’s potential for sustained growth. Meanwhile, while it’s one thing to say that “the situation should be solved by a leap of faith,” if these trends persist it may well be a matter of either very high interest rates or very high inflation in the country.
Whatever the reasons for the slowdown in Indian consumption growth, it looks like we are very much not where we want to be, either in terms of growth or jobs, when it comes to families buying clothes.