Soaring rates, prices may spoil the GDP party

MUMBAI: Rising borrowing cost and a spiralling price of consumer items across categories like basic grocery, durables, fuel and even automobiles, may erode consumer confidence, lower spending and even cast a shadow on an ambitious GDP growth target.

Manufacturers are worried that rising cost will prune disposable income of households and hurt demand. Consumers usually spend as well as borrow more when they feel richer.

Jagdish Khattar, managing director of Maruti Udyog said a large percentage of entry level (first time) car buyers may rework their priorities if the cost uptrend continues. “For a large number of Indian consumers, a car is an aspirational purchase. We are sensitising ourselves to this realisation and are looking at various ways to counter it
by offering fuel-efficient variants with a low cost of ownership,” he said.

Top retailers admit that even the upper middle class which constitutes a significant percentage of the consumer segment have tightened their purse strings. In a market which has till now witnessed good corporate earnings and stable employment levels, it’s worrying.

The fuel price will inevitably spill over to other segments of the economy and put a question mark on the growth story. Consumers are beginning to turn more cautious with spends, say retailers.

CK Ranganathan, CMD of CavinKare, said this is a matter of concern since corporates have shaped their growth plans keeping an upbeat consumer market in mind. “Even rural markets are looking up, but a persistent cost uptrend spell big trouble. Consumer purchases pick up only when sentiments are optimistic,” he said.

Since ’05, consumption across categories has been upbeat. The fast moving consumer goods (FMCG) market has been growing at 12-15% — the highest in recent years, while home appliances grew at over 8% and the automobile market at 10-12%. The point is will the good time last? More so, since cost of fund has hardened for financiers, after an era of abundant and plummeting interest rate which fell 500 basis points between ’00 and ’05.

Official rack rates on car touched 12% this year, as against 7% last year while that of home loans is around 10.5% this year compared to 7% last year. Car financiers say the impact on consumers has been softened by a heavy dosage of discounts from both car makers and dealers.

For insstance, car sales continue to grow at an average of 8-10%; two-wheelers have also reported a 13-14% growth. Basic grocery purchases like pulses, sugar and other household items have become dearer with manufacturers hiking prices, almost on a daily basis.