Business: Consumer: Why Aren't You Spending?

For three years now the buyer has been reluctant to bite the bait laid out by the market. What will make him loosen his purse strings and trigger a spending boom?

Higher incomes plus lower taxes plus stagnant prices equals a spending boom, right? Wrong. For at least three years now, the Indian consumer's reluctance to spend -- perceived or real -- has caused much misery and mystery. From a government neck-deep in debt to an industry confronted with a stockpile of unsold products, to the general slack in employment and income, it is the slowdown in consumer spending that is in some way or the other behind every dark cloud hovering over the economy today.

"If balance sheets of both government and private companies are bleeding today, it is because they have been let down by the slow pace of consumer spending," says R. Ravimohan, chief executive of the Mumbai-based rating agency CRISIL. No wonder both the Government and industry are anxiously monitoring how much consumers are spending and on what. In fact, they are going out of their way to prod people into loosening their purse strings.

For starters, approximately two crore government and public sector employees are getting Rs 93,000 crore in additional salary since the implementation of the Fifth Pay Commission award in 1997 and 1998. This translates into an average salary increment of Rs 3,914 a month. Add to that the bonanza from slashed income-tax rates. Since 1997 personal income-tax rates have fallen by 5 to 10 percentage points across all income levels, and monthly incomes up to Rs 4,167 are exempt from tax.

Willy-nilly, industry too tried to fuel spending. From 1997 onwards, the average price of all industrial products has not risen faster than 4 per cent a year. In fact, thanks to the intensifying competition, the prices of a host of consumer durable products like televisions, refrigerators and washing machines have dropped over the past three years.

Consumer

In the last three years:
27% Indian delayed buying appliances
34% postponed purchase of a vehicle
30% put off buying property
21% shelved a family vacation
22% of owners of consumer durables* have replaced at least one product in the last three years.
*Television, refrigerator, washing machine, air conditioner, two wheelers.

However, the ensuing consumption pattern has been disappointingly tardy. By the Government's own admission, growth in private consumption has dipped from 6.8 per cent in 1996-97 to 3.9 per cent in 1997-98. "Both within and outside the Finance Ministry, experts are perplexed as to why the stupendous salary hikes and substantial tax cuts in the last three years have not resulted in a spending boom," ponders Arvind Virmani, senior adviser in the Ministry of Finance:

The people's unwillingness to spend is reflected in the spurt in savings. Between January 1997 and January 1999, fixed deposits with banks swelled by Rs 2,05,236 crore. Why, even an India Today-IMRB survey of consumer spending among 2,045 people across six cities, seven occupations and three income classes shows that over a third of the respondents were saving more than they were a couple of years ago. Such a pronounced preference for savings even though there were hardly any lucrative investment options (because of a comatose stock market, depressed real estate and large-scale failure of financial companies) is instructive. A majority of Indians are either not convinced that they are actually earning more or are postponing their purchases.

Two caveats before the explanation. The problem is not that people are spending less than before, but they are not spending as much as the Government and industry expect them to. Could it be then that expectations are unrealistically high which make even a moderate rise in spending seem really low? Yes, but only partially. Says Kirit Parikh, director of the Mumbai-based Indira Gandhi Institute for Development Research: "To assume the present level of demand to be India's potential demand is to assume that present economic growth is the country's potential economic growth. That amounts to understating our capacity to progress and prosper faster."

The demand we are concerned with is essentially the demand for consumer durables (electronic gadgets, home appliances, two-wheelers and automobiles) and not the demand for consumer non-durables (soaps, detergents, cosmetics or food products). The exclusion of non-durables is because demand for such products generally does not vary much with change in prices or income. Explains I. Natrajan, chief economist with the Delhi-based National Council of Applied Economic Research (NCAER) who specialises in consumer behaviour: "Given a fall in income or rise in prices, a family would switch to a cheaper soap brand rather than stop using soaps altogether. Unlike durables, the consumption of non-durables is not postponed indefinitely."

The factors restraining spending span the economic, political and psychological spectra. In the economic arena, even though salaries have risen, employment growth -- one of the most potent drivers of demand -- has faltered. In the private sector, which accounts for 30 per cent of all organised sector jobs in India, the growth in new jobs has slipped from 6 per cent in 1996 to 2 per cent in 1997. In the public sector there was no net job creation in 1996. Skyrocketing corporate salaries have also settled down to more realistic levels. A study done by Noble and Hewitt, a leading human resource consulting firm, found that corporate salaries, which were growing annually at a heady rate of up to 70 per cent in the early '90s, slid to a modest 12-15 per cent rise in 1998.

All this translated into intensifying insecurity. A majority (53 per cent) of India Today-IMRB poll respondents admitted to being more uncertain about the future of their incomes and jobs today than ever before. In fact, an overwhelming 72 per cent of respondents perceived their income growth to be negligible or less than what they expected. Blockage or loss of money in stock markets tightened the clamp on middle-class spending. Between 1994 and 1998 an estimated Rs 25,000 crore worth of share value was eroded on the BSE alone (See chart: "Why the spending boom could not take place"). In the same period, an estimated Rs 10,000 crore sunk in several deposits of non-banking financial companies. The result was shrivelling consumer sentiment.

To be sure, industry too shot itself in the foot. With unfailing consistency, company after company -- mostly foreign, but also Indian -- overestimated the size of the Indian market right through the '90s. Even though the euphoric projection of a 300-million Indian middle class was deflated by the mid-'90s, a horde of companies had already made huge investments and assembly lines had started producing goods far in excess of their demand. Such was the extent of the overestimation that even after two years of a virtual hold on new investments, the consumer-durables industry had a 20 per cent excess capacity in 1998.

Such large-scale capacity addition was the result of one fundamental fallacy: using income -- and only income -- to determine the size of the market. The other determinants like occupation, culture, place of residence and composition of families were overlooked while estimating the market. For instance, while a chartered accountant, a travel agent and a university professor could have the same income; their spending patterns could vary drastically. Similarly, the disposable income of a family residing in Mumbai would be different from the disposable income of a family living in Nagpur, even if the two families earn equally.

Most initial entrants into the Indian market ignored these differences. Observes economist S.L. Rao, one of the pioneers of consumer market research in India: "By ignoring the fundamental differences among households of similar income levels, many investors ended up adding chalk with cheese and arrived at an impressive, but misleading, size of India's consuming class."

Even with these constraints and pitfalls, consumers would spend more than what they are spending today if companies dare to be innovative and explore markets more aggressively. Remember that income growth may never return to the trajectory of the early '90s and tax rates too are likely to stabilise at existing levels. Demand boosters like the Fifth Pay Commission are also rare. Instead of looking for external factors to boost spending, industry and Government will have to enable people to buy what they desire, but are unable to.

Explains Rao: "There are incomes to be spent and demands to be met. What is missing are the products of the "right" type at the "right" price." After all, even today only 79 out of 1,000 Indians own a colour television and only 86 have a refrigerator at home (see chart: "What could still trigger spending"). Not only are the experts unanimous in their belief in a large untapped spending potential, most of them suggest a three-pronged strategy to unlock that potential:

I. Cut prices, customise products: The biggest cause of the existing demand-supply mismatch is the non-availability of products at prices masses can afford. Even though competition has kept prices from rising, the average price of even a no-frills colour television is about Rs 13,000. That's more than 10 times India's absolute monthly per capita income of Rs 900. In most large consumer markets the price of a basic consumer product is well within a few days' income of middle class households. Even after adjusting per capita income for cost of living difference between India and the US, it takes only two days' income to buy a CTV in the US, vis-a-vis over two months' income in India (see table). Remarks Natrajan: "The Indian market is very large, but at a price masses can afford to pay."

Clearly, in the absence of excise tax cuts, it may not be possible to reduce prices without changing the product. And herein lies the crunch, "Indian companies have to customise products to suit middle-class preferences and pockets," says J.D. Singh, professor of marketing at the Delhi-based International Management Institute. An instance of successful product customisation is Nirma, which redefined the Indian detergent market in the early '80s by offering a detergent 50 per cent cheaper than its multinational rival. But instances of such product innovations have been very rare. Most companies have instead taken a shorter route of cutting prices by taking out the frills from the product. For instance, a host of consumer electronics firms have recently launched basic colour televisions sets priced at around Rs 10,000 to lure price-sensitive consumers. While that will pep demand somewhat, it may still not draw rural consumers who are unable to purchase consumer durables for non-price reasons -- such as the non-availability of power.

In certain developing countries of Africa, the consumer-durables market witnessed an exponential growth when companies introduced fans, refrigerators and television that ran on kerosene and batteries! The acute shortage of electricity in those countries had denied its prosperous rural middle class the use of these products.

True, a majority of rural households do not have incomes to purchase consumer durables, but rural India's share in the consumer-durables market is poised to grow phenomenally. Between 1989-90 and 1995-96 the rural market's share in colour televisions and refrigerators rose from less than 20 per cent to nearly 30 per cent, while its share of cassette recorders and quartz watches shot up to 75 per cent. Companies are more attentive to rural consumers today than in the past but, as Singh puts it, "Their reach is limited and participation low."

II. Easier access to hire purchase: Expansion of hire-purchase schemes is one way of making price-sensitive consumers spend. Here India has made substantial strides in the '90s. Not only has the number of credit-card holders quadrupled in the past eight years, but virtually every consumer product is now available on installment in big cities. If hire purchase has not yet trickled down to smaller cities, blame the Government. "India's commercial laws make credit selling extremely risky. They are loaded against creditors and favour defaulters," says Bibek Debroy, economist and a legal expert. In 1997, non-bailable warrants were issued against several executives of Eicher Motors when the company repossessed a few light commercial vehicles that were sold on credit, but which were not being paid for.

III. Create demand through marketing innovation: This is one innovation that Indian companies have experimented with most successfully. The segment where it is most visible is the replacement market. And one company that has been most daring in marketing innovation is Baron International, the erstwhile distributors of Akai. The company increased its sale of colour TVs from a mere 2,500 sets in 1994 to 4.29 lakh sets in 1997 by creating and then riding the replacement market boom. Says Kabir Mulchandani, CEO of Baron International: "We proved that it is possible to create demand that did not apparently exist." In the process he also dispelled a widely held notion that the demand for consumer durables in metropolitan cities is saturated.

In fact, the replacement market is growing in leaps and bounds. A fifth of the India Today-IMRB survey respondents admit to having replaced at least one consumer durable product in the past three years. Corroborating the finding, the NCAER's Consumer Market Demographic Report 1998 estimates that 21 per cent of the 47 lakh black and white TV owners, 34 per cent of 1.7 crore lakh wrist watch owners and 51 per cent of 49 lakh transistor owners are willing to replace these products with newer models.

All figures, findings and instances hold out one lesson. Making the Indian consumer spend is far trickier today than ever before. Companies must address the four Ps -- product, price, promotion and psychology -- to lure people to the market. Says Subodh Bhargava, CEO, Eicher Group: "If companies are ready to walk an extra mile and take risks, the consumer will reward them." That is for sure, given that Indians' appetite for consumer goods. After all, more houses in India have a TV set than a kitchen or a toilet!