Consumption Trends (Part II)

My previous blog pertained to the consumption patterns during the period pre 1990s- 2000s. This blog contains similar content, however, it stretches over the period post 2000s- the present. Hope you enjoy reading the blog!!!

2002-2003: The Parliament attack in Dec, 2001 led to massive deployments of troops on the borders extending from Gujarat to Kashmir. This led to continuous standoff between India and Pakistan till end of 2003 when the countries agreed on a ceasefire.

In 2002, a major drought occurred with a seasonal rainfall deficit of 19.4% and the year was termed as ‘all-India drought year’. Around 29% of the areas in the country recorded drought conditions with rainfall deficiency exceeding 25%. This took a severe toll on the agriculture production and the electricity sector.

The invasions of Afghanistan and Iraq in 2003 prompted a surge in oil prices to higher levels. The GDP growth was impacted in the period by the border tensions, severe drought and the hardening of international crude oil prices.

2004: E-commerce in India was kick started when eBay started its operations in India by acquiring Baazee.com, which was India’s largest online auction portal.   

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2005-2006: The government announced a revised FDI policy, to allow FDI up to 100% foreign equity ownership under the automatic route in townships, housing, built-up infrastructure and construction-development projects. The year also witnessed the enactment of the SEZ Act, which entailed a lot of construction and township development. In 2006, FDI in cash and carry (wholesale) was brought under the automatic route. Up to 51% investment in a single brand retail outlet was permitted.

Due to the dotcom bubble, more than 1,000 ecommerce businesses in India collapsed and there was muted activity in the ecommerce front in the four years trailing 2000. The entry of LCCs (Low Cost Carriers) in the Indian aviation sector in 2005 marked the beginning of the second wave of ecommerce in India. People began relying on internet to search for travel-related information and to book tickets. As a ripple effect, the success of the online travel segment made consumers comfortable with shopping through the medium, thus leading to the development of online retail. The decision of LCCs to sell their tickets online and through third parties enabled the development of Online Travel Agents (OTAs).

2007: Flipkart was established as an online book retailer by Sachin Bansal and Binny Bansal by investing Rs 2 lacs each. Also, Mukesh Bansal, Ashutosh Lawania and Vineet Saxena started an online portal to customize goodies called Myntra. The companies underwent several hurdles to arrive at the optimal model for reaching out to the Indian market. This gradually invoked the Indian population to shop online. The growth in online retail was partly driven by changing urban consumer lifestyle and the need for convenience of shopping at home.

2008: The collapse of Lehman Brother, a global bank, in Sep, 2008 almost brought down the world’s financial system. Also, the ensuing credit crunch added on to the downturn and resulted in a recession. The global recession hit the Indian Stock markets hard with the country’s benchmark indices falling by around 50% from the record heights they scaled in early Jan 2008. Furthermore, the rupee had depreciated rapidly against the US dollar, owing to the global dollar liquidity shortage, heavy outflows from FIIs looking to transfer funds home and purchase of dollars by Indian banks to fund their overseas operations. The crisis also affected the Indian banks as they were exposed to the impaired assets resulting from the sub-prime crisis. The GDP growth in the first quarter of FY2009 was the slowest in over three years. With the US and several European countries slipping under the recession, Indian exports ran into difficult times. The manufacturing sectors like leather, textile, gems and jewellery were hit hard because of the slump in demand in the US and Europe.

The rising inflation and slower consumer spending affected the retail segment of the country. The Bharti Enterprises was scaling back, even with the weight of Walmart stores behind it. It closed 5 of its 28 Easyday supermarkets in northern India. Also, Pantaloons Retail, then run by Kishore Biyani cut back on expansion plans from 4 million sq ft to 2 million sq ft. Also, the same-store sales were down as compared to the previous year. Shoppers Stop had a 15% drop in daily consumers prompting the company to close some of its airport stores. Its franchise partner, Britain based Home Retail Group’s Argos, exited India. Subhiksha, India’s largest discount retailer was the worst hit with it closing 1,200 stores and battling the issue of non-payment of dues to suppliers and employees. Also, the company’s promoter asked its lenders (ICICI Ventures) to restructure its $ 150 million debt, however, the lenders were not showing any interest in the company.

2009-2010: FDI norms in various sectors such as commodity exchanges, credit information and aircraft maintenance were relaxed. Flipkart added the feature of Cash on Delivery, which pushed the online sales. Also, Myntra expanded its catalogue to retail fashion and lifestyle products driven by the growing interest of the country’s population. Snapdeal, an online platform started providing daily deals but pivoted into an ecommerce company via the marketplace model. It is one of the first online marketplaces in India. Also, the social networking gained steam in the Indian online space which has now emerged as an anchor in any company’s digital strategy.

The GDP growth rate improved in the period due to the high capital inflows attributed to QE (Quantitative Easing) undertaken by the US to combat economic slowdown.

Post Liberalization Period (2011- 2020s)

2011: Government allowed 100% FDI with 30% local sourcing requirement in single brand retailing and 51% FDI with no sourcing requirements. This resulted in entry of large corporates like Reliance, Aditya Birla, TATA and Bharti in modern retail segment.  Retail modernization has gained momentum not only due to retailers like Croma, Reliance Digital, Next and e-zone, but also due to major investments made by giants in consumer products like Sony, Samsung and LG. Owing to the entry of various players in the online ecommerce market, the VCs (Venture Capitalists) and private equity players demonstrated their faith in the growth of ecommerce in the country which is substantiated by the significant increase in the total investments ($ 305 million in 2011 as compared to $ 55 million in 2010).

2012: The organized retail industry witnessed a phase of consolidation marked by mergers and acquisitions, before the overseas retailers enter the country. Arvind Lifestyle Brands Ltd bought the Indian operations of British fashion retailers Debenhams and Next and American brand Nautica and Planet Retail Holdings Pvt Ltd. Tata Sons-promoted Infiniti Retail Ltd, which operates the electronic products retail chain Croma, acquired Australian retailer Woolworths’ Indian subsidiary Woolworths Wholesale (India) Pvt Ltd.

Jumping into the band wagon of ecommerce and online portals, Indian Postal Service undertook a major IT project to modernize its operations and be a preferred partner for ecommerce players to reach all PIN codes across the country. Also, Amazon.in launched Junglee as a price aggregator and comparison tool which marked Amazon’s low cost entry in the Indian market.

With the European sovereign debt crisis, Indian government’s budget conditions worsened and it resorted to selling dollars which devalued the rupee in 2012. The EU countries had a share of 18.6% in India’s exports which made it vulnerable to the Euro area’s instability. Furthermore, the textile and apparel exports were impacted as both Europe and the US are the major importers. The GDP growth rate was affected which was majorly due to the domestic policy logjam, tax disputes and shaken investor confidence in Indian economy.

2013: FDI limit in telecom sector increased from 74% to 100% out of which up to 49% was allowed under automatic route and the remaining through FIPB approval. Also, FDI in gas refineries, commodity exchanges, power trading and stock exchanges have been allowed via the automatic route. During the year, big global brands like Tesco, Singapore Airlines and Etihad lined up to invest in India.

Since the onset of liberalization, the country experienced a high jump in the inflows of FDI in service sector which includes financial and non-financial services, telecom, information technology and hotel and tourism.

Amazon, which does not provide Cash on Delivery facility in another country across the world, started providing Cash on Delivery option in India to keep up with the market norm.

2014: Flipkart acquired Myntra for an estimated value of approximately $ 300 million. This ensured the sector consolidation and a win-win situation for both the portals.

Post liberalization, the Indian government focused extensively on the services sector which led to generation of employment in IT and BPO service companies. However, the employment opportunities were only for the skilled workforce whereas the low skilled workers were completely marginalized. This led to the imbalance in the distribution of the disposable income. In 2014, Prime Minister Narendra Modi launched the ‘Make in India’ initiative in order to promote the manufacturing sector and attract FDI and generate employment opportunities for the low skilled workforce. Also, the manufacturing sector has a multiplier effect on exports which will help the government to wipe off India’s trade deficit which in turn will lead to positive impact on the finances and economy of the country. FDI inflows in India’s manufacturing sector grew by 82% to $ 16.1 billion during Apr-Nov, 2016. Companies like Apple, Panasonic Corp, Huawei, LeEco and many more have plans to set up manufacturing facilities in India in partnership with the local companies.

2015: The Digital India Programme was introduced by the government of India which boosted the trade through online channels due to the improved online infrastructure in the generally non-serviceable areas.

2016: In Aug, 2016, GST Bill was passed and in Nov, the GST Council agreed on a multi layered rate structure. This will make India a common market leading to economy of scale in production and efficiency in supply chain. Also, it will lead to expansion of trade and commerce and would prove favourable for the organized logistics industry and warehousing.

The government allowed 100% FDI in ecommerce ‘marketplace’, while continuing with its stated policy of not allowing foreign funded online retailers to sell directly to consumers. It has also put a clause that e-commerce marketplace cannot, directly or indirectly, influence the selling price of products. This essentially means companies will not be able to offer huge discounts to consumers anymore, which had become the unique selling proposition for all online retailers. Heavy discounts offered by operators, even for third party products and services, has been the key driver of e-commerce in India. Another clause included by the government was that e-commerce marketplaces themselves cannot derive more than 25% of their sales from a single vendor or their group firms. This resulted in Flipkart and Amazon signing up other vendors to reduce dependence on their in-house vendor (WS Retail for Flipkart and Cloudtail for Amazon).

In Jul, 2016, Flipkart acquired Jabong from Global Fashion Group through its unit Myntra in a deal valuing $ 70 million. The acquisition of Jabong is expected to boost the sales of Flipkart which is struggling to protect its leadership in a market where Amazon has made rapid strides. With the acquisition of Jabong, Flipkart controls almost 70% of total online fashion market in India which it might use to dictate terms and demand higher margins and the same may pose a threat to various Indian and international labels. Currently, Myntra and Jabong are making their backend operations and supply chain interoperational. The two websites are running independently, however, they will have inter-operability in technology.

The demonetization drive in the period plunged the factory activity into contraction as a cash crunch severely hurt output and demand. The drive to demonetize the higher value notes reduced the consumer spending which was indicated by the reduction in volumes reported by the FMCG industry. The automobile industry, too, faced contraction with two wheelers witnessing dip of 22% in sales in Dec, 2016. Around 80% of the consumer durables market operates on cash which in turn was hit by the slump in discretionary spending by the consumers. Hence, the manufacturers launched new schemes and discount offers and promotions to tempt consumers to buy the goods. Even though the small kirana stores were affected by the drive, the consumers flocked the large stores which accept non-cash payments. Sales were up by 15% on a week-on-week basis in the first week after demonetization was announced at retail stores of Future Group.

2017: The start of the year was the harbinger of tough times for IT companies like TCS, Wipro and Infosys with changes in the immigration policy which overhaled the H1B visa and calls for more than doubling the minimum salary of H1B visa holders to $ 130,000. This would stop the IT companies to send Indians on H1B visas and focus on local hiring in the US.

The Union Budget, 2017-18, stated tax reduction to 5% on income of Rs 2.5 lacs to Rs 5 lacs which could moderately boost consumption resulting in better income for the retailers. Also, the planned investment in rural, agriculture and infrastructure sectors would not only create jobs in the country but would also spur the consumer spending boosting the economic growth.

The announcement of 5% tax exemption for companies having turnover below Rs 50 cr will help around 96% of MSMEs and start-ups of India. Further, there is tax holiday for start-ups for 7 years.

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Consumption Trends (Part I)

Pre-liberalization period

After independence in 1947, in 1951 the First Five Year Plan was introduced which mainly focused on the development of the primary sector. The Second Five Year Plan largely emphasised on government led industrialization. This started the License Raj, wherein government controlled the production amount and the price of commodities along with having full control over the manufacturing company. The rupee was devalued in 1966 with two major wars against China and Pakistan and multiple changes to India’s leadership in the post-Nehru era. With nationalization of banks in 1969 and the Monopolies and Restrictive Trade Practices Act of 1970, the License Raj further strengthened. This created a smaller pool of opportunities and resulted in stagnation in growth. Due to the limited choices on account of scarcity of resources, a ‘scarcity economy’ emerged. The annual growth rate of economy of India was stagnated around 3.5% from 1950s to 1980s, while per capita income averaged 1.3%.

From 1980s to 1990s, the economy grew at an annual rate of 5.5% or 3.3% on a per capita basis. Industry grew at an annual rate of 6.6% and agriculture at a rate of 3.6%. Investment increased from about 19% of GDP in the early 1970s to nearly 25% in the early 1980s. During the late 1980s, India relied increasingly on borrowing from foreign sources. This led to a balance of payments crisis in 1990 which in turn resulted in economic reforms by the government in Jun, 1991.

Liberalization Period (1990s-2000s)

1991: The government of India introduced reforms which liberalized the industrial policy and invited foreign investment by privatization of industries and abolished the license system as a part of liberalization. In many industrial sectors, automatic approval for FDI was introduced. The reforms influenced the national income and the standard of living of the people. Thereby, increasing the consumption expenditure after the introduction of reforms. The reforms saw the country breaking free of the low growth trap of 3.5% per annum. Real GDP growth averaged 5.7% per annum in the 1990s.

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The economy grew at 5.7% during the 1990s irrespective of the meagre 1.1% growth in 1991- a crisis year for the nation.

The government of India introduced measures for the ease of FDI in the country. Some of the highlights were removal of ceiling of 40% foreign equity under FERA, introduction of the dual approval systems for FDI proposals (through an automatic approval channel for FDI in 35 priority sectors by RBI up to equity participation 51% and through formal government of India channel via FIPB/SIA). Also, existing companies could hike their foreign equity up to 51% in priority sector. The sector which attracted higher inflows was services.

India’s IT boom started in the mid-1990s after the liberalization of the Indian economy in 1991 which enabled the foreign IT companies to outsource their work to India and it in turn provided many young Indians with well-paid opportunities.

The creation of corporation called Software Technology Parks of India (STPI) provided satellite links to major IT developers which in turn enabled them to transmit the work done in India directly abroad. Companies like Oracle, GE Capital International Services, Microsoft Corp, Motorola Inc, IBM and SAP established development centres, R&D centres and software development centres.

1992-1993: Indian mining sector was opened to foreign direct investment.

1993-1994: Permission was granted to foreign investors and NRI investors to repatriate their profits and capital.

1996-1997: The upper limit for foreign equity participation under automatic approval was raised from 51% to 74% of the equity capital in select industries.  The list of industries open for automatic approval was also expanded. NRIs and OCBs (Overseas Corporate Bodies) were given automatic approval for equity in priority industries. FDI in cash and carry (wholesale) with 100% rights was allowed under the government approval route.

The first wave which contributed to the ecommerce boom now started. B2B online portals and online matrimonial and job portals were launched. The liberalization of the country’s international trade policies was the key factor that accelerated the growth of B2B online portals. The first wave of E-Commerce in India was characterized by low internet penetration, a small online shopping user base, slow internet speed, low consumer acceptance of online shopping and inadequate logistics infrastructure.

1998: Simplified procedures for automatic FDI approvals were announced by Reserve Bank of India. This in turn implied that there is no need for Indian companies to acquire prior clearance from the Reserve Bank of India for inward remittance of foreign exchange or for the issuance of shares to foreign investors.

1999: As the Indian government simplified the FDI rules, the entry of foreign brands into India became easier and more hassle free. The Dubai based Landmark group forayed into India with the Lifestyle department stores and later expanded to include Max and Home Centre. Its stores drew in the crowds, especially those from the higher income bracket and gave Lifestyle, a premium positioning.

2000s: As the 2000s approached, fear of the Y2K bug made the US corporations outsource all the equipment and upgrading work to Indians. As a result, the modification of all the codes and software, which were initially designed till a date of 1999 was to be edited and huge work was outsourced to the Indian IT industries. Accenture, Yahoo Inc, Dell, Google and Cisco opened their technology development centres, R&D centres, globalization centres. Certain companies like IBM and SAP further invested in the country.