Is “Consumption” the New Buzzword?

After the unexpected outcome of the General Elections on June 4th, investors quickly shifted their focus to “Consumption” stocks. In today’s market, narrative is everything. So, what is the narrative for “Consumption”?

The BJP suffered some unexpected losses, majority of which were in rural India and some semi-urban areas. This indicates that the BJP does not hold as much clout in non-urban India as we may be inclined to believe. With key state elections coming up later this year and early next year, the BJP-led coalition government may want to rectify this situation. This could lead to some populist announcements aimed at boosting the rural economy. Since the rural economy has a direct correlation to consumption stocks, this has given rise to the “Consumption” narrative.

This narrative gained further traction when the Prime Minister chose the “Kisan Nidhi Scheme” to launch its third term. On June 10th, the government sanctioned the 17th instalment of the PM Kisan Nidhi Scheme (INR 20,000 cr), expected to benefit over 90 million farmers.

Coincidentally, our macro data released on May 31st might also be prompting the government to move “Consumption” up on its priority list. Let’s take a look at the data.

India’s GDP averaged to 8.2% in FY24, with positive surprises throughout the year. Private consumption, which constitutes about 56% of GDP, grew by a mere 4% in FY24 (compared to its long-term average of ~7% excluding the Covid period). Given that the largest component of GDP grew at a slow pace, what led to the positive surprise? The answer lies in Gross Fixed Capital Formation (GFCF). GFCF, simply put, is a measure of new value added through investment rather than consumption. GFCF grew at 9% in FY24, much higher than its long-term average of sub-6%. This year, GFCF averaged to about 33.5% of our GDP, slightly higher than its historical average of 32%.

A significant part of the GFCF growth can be attributed to the government’s capital expenditure program. However, two challenges lie ahead:

• The government is on a path of fiscal consolidation, which may lead to curbed capital expenditure going forward to meet fiscal deficit targets.
  
  

• The General Election outcome may have fueled the need to announce some populist measures, diverting funds towards boosting disposable income or distributing freebies.
  
  

Why did consumption falter?

There could be multiple reasons, but our guess is:

• ‘Agriculture, Livestock, Forestry & Fishing’ experienced an almost flat growth at 1.4%, much lower than its historical average of ~4%. This flattish growth could be attributed to patchy monsoons observed last year, poor crop yield and ever-changing government policies. The poor growth in agriculture and allied activities has had a cascading impact on rural consumption which is evident from the quarterly results of various consumer companies that reported weak demand growth specifically from rural India.
  
  

• Higher food inflation for the most part of FY24, which may have led to lower disposable income for the masses. Food inflation averaged to ~7.5% in FY24 compared to 6.6% in FY23 and 3.8% in FY22. It has remained elevated at over 8.5% in FY25 so far.
  
  

Why does this need to change?

• For India to continue to grow at 6-7% p.a., private consumption needs to recover.
  
  

• A recovery in private consumption will reduce dependence on the government’s capital expenditure program, which cannot continue unchecked for an extended period.
  
  

• It also reduces dependence on exports, which are impacted by various global economic and geopolitical issues beyond our control.
  
  

Our view is that the government would have tackled the issue with low consumption growth, with or without the outcome of the General Elections. The problem was already large enough that it could not have been ignored.

Allocating to consumption: Strategies & Considerations

So yes, consumption is the new buzz word. As asset allocators, we urge investors to consider allocating part of their equity portfolio to this theme. There are multiple options that one can consider:

• A diversified portfolio exposed to consumer staples, consumer durables, auto, telecom etc.
  
  

• Select portfolio of stocks in the sectors mentioned above.
  
  

The time to add would be now. While there is a risk that we don’t see any meaningful policy announcements to boost consumption, in our view the downside risk is limited for these low beta stocks, making the risk reward ratio favorable for the trade.

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