It’s no secret that one of the Modi government’s biggest ambitions has been to put India on the manufacturing map and create an alternative to China as major global corporations plan to diversify their production center.
Private sector investment has taken a hit due to multiple factors. The heavy lifting has been done by the government during the COVID period to support the economy and in the hope that this will lead to a build up of private investment.
India’s economy is still dominated by private consumption and COVID has crippled it. Green shoots have now started to appear and the recovery is mainly driven by the return of consumption in contact-intensive sectors such as hospitality.
However, the real concern is the continued weakness in the consumer goods sector. Recent industrial production index data showed that the consumer staples sector contracted 2% and remained virtually flat in the April-July period.
This is a worrying scenario as people have reduced their daily expenses like soaps, shampoo, cookies etc. With rising inflation and stagnating incomes, this is a serious challenge to the overall demand outlook.
“Rising inflation and compressing disposable incomes have likely led to a postponement of discretionary consumption of non-durable goods,” said Aditi Nayar, chief economist, ICRA.
Weak rural demand due to high grain inflation and the readjustment of middle-class household budgets to account for rising prices of daily use items is a challenge for industrial recovery.
Even though capacity utilization has increased, new investments will only appear when the demand outlook looks sustainable.
“The consumer non-durables segment continues to be a concern… The rebound of the consumer non-durables segment is essential for a sustained and broad-based industrial recovery. Going forward, recovery in this segment looks difficult due to the squeeze in household purchasing power as wage growth lags inflation,” said a Mint report quoting Sunil Kumar Sinha, Senior Economist, India Ratings and Research.
Large scale recovery key for rebirth
The 2019 economic survey expected a virtuous cycle of growth to be launched by an increase in private investment generating an expansion in capacity, jobs and demand. The government, for its part, has taken a number of measures to create an environment conducive to the resumption of private investment, including the reduction of corporate tax and the announcement of the PLI programme.
The industry is responding to calls for investment, but there is still much to be done to propel India’s growth rate. At a time when central banks are trying to keep inflation under control by raising rates, whatever nascent demand has come back into the economy will suffer the consequences and therefore lead to a slower recovery in the economy. investment.
The two and a half years of COVID have resulted in uneven growth in income levels, with one pocket thriving while the rest struggle to make ends meet. The boss of Hindustan Unilever, Sanjiv Mehta, had suggested that an urban job guarantee program be deployed in the same way as the rural program.
The volume hit in rural areas in the FMCG sector and the shift of people to non-branded items is a sign of pain in the consumer goods sector. A general recovery in demand is essential for industrial recovery.