Consumer spending and consumption to be severely impacted by COVID-19 crisis

INDIA-FARMERS/STRIKE Representational image | Reuters

The COVID-19 crisis is expected to severely impact the overall consumption trend and consumer spending in India. Following the COVID-19 outbreak and subsequent lockdown in the second fortnight of March, all segments have faced the brunt, albeit with varying magnitudes.

Discretionary spending has also been hit hard with sales coming to a grinding halt for a few companies, though some companies in the food and beverages(F&B) and home and personal hygiene categories have benefited from panic buying and stock piling by consumers. Experts point out that all the consumer segments have been hit hard due to Covid-19.

In its monetary policy report, the Reserve Bank of India has expressed serious concerns about consumption and consumer spending in India due to the COVID-19 pandemic. The RBI's monetary policy report says that COVID-19 would directly impact economic activity to the lockdown, and also through second-round effects operating through global trade and growth. The impact of COVID-19 on inflation is ambiguous, with a possible decline in food prices likely to be offset by potential cost-push increases in prices of non-food items due to supply disruptions.

RBI's report observes that private consumption in particular is at serious risk from the pandemic, notwithstanding improved rabi prospects, the recent rise in food prices, and the rationalisation of personal income tax rates in the Union Budget 2020-21 along with measures to boost rural and infrastructure spending. It says that the aggregate demand is expected to be impacted adversely by a likely recession in the global economy, caused by disruptions in global supply chains, travel and tourism, and lockdowns in many economies. RBI says that in the near-term, the challenge will be to mitigate the adverse impact of Covid-19.

As per a report by Kotak Institutional Equities, there has been a complete loss of sales with shutdown of retail outlets and consumer discretionary players have been the most impacted due to a complete shutdown of retail outlets (zero sales post lock down for most players). The report says that while lockdown measures seem to be working in reducing the spread of the COVID-19 pandemic globally, the associated loss of income for a large section of the society in India could hurt consumer spends. The Kotak report stated that there is a broad based expectation from the Indian government to look at additional fiscal measures to counter the effect of the likely slowdown in the economy.

While the current quarter has started on a weak note, companies are indicating bigger shocks if the lockdown is extended beyond April 14, 2020, observed the report.

In another recent report by Emkay Global Financial Services, the COVID-19 disruption seems to be wide and deep, and unlike demonetisation, the impact on consumer incomes appears significant with the hit on daily wagers and pay cuts across companies. The report points out that while consumer demand was already slowing down before this disruption, it is likely to weaken further, thereby reducing growth forecasts. There has been severe disruption for consumer companies with a sharp 50 percent plus drop in sales during the ongoing lock down. It is expected that retailers may see the impact continuing beyond the lockdown.

The Emkay report further observes that the COVID-19 impact is unlikely to be short-lived and the near term impact has been significant with channel checks indicating a sharp drop of about 50-70 in sales across the FMCG segment in the first 10 days of the lockdown due to plant shutdowns, supply chain disruptions, shortage of labour and 70 percent of outlets being shut. The report further observes that the ongoing lockdown and disruption across sectors will likely have an impact on consumption demand due to the hit on daily wagers, paycuts across companies and weak consumer sentiment. The report points out that rural growth was already under stress and with this disruption it is unlikely to recover without a huge government stimulus. While consumer demand remained somewhat resilient after demonetisation, the COVID-19 disruption seems more wide and deep and may result in a slow recovery.

The report states that many companies are operating at extremely low capacity utilisation, if any, in some plants and this is improving slowly and is likely to remain at substantial lower utilisation until normalcy returns. The report observes that unlike demonetisation where the trade channel was largely hit, the COVID-19 disruption is also impacting the low and middle income consumers due to the loss of pay or pay cuts. This may impact demand for a longer time and result in a slower recovery than the one witnessed after demonetisation.

It also says says that every disruption is different and consumers may react differently. For instance paint companies were less impacted during demonetisation due to the low wholesale presence. However, in this disruption, consumers may remain cautious even after the lockdown is lifted, which may drive postponement in painting activity. Even fashion retailers may see an extended impact due to lower footfalls and increased preference for online buying.