There is a lot of money in the share market but not enough in your pocket

There is a lot of money in the share market but not enough in your pocket
Indian consumers have been saving less and less for a while but now, they are earning lesser too.
  • The average purchasing power in India is depleting fast that is likely to affect consumer demand.
  • However, benchmark indices Sensex and Nifty have recently hit record levels thanks to a surge in corporate profits, most of which came from cost cutting.
  • The sustained fall in household savings, both financial and physical assets like gold or real estate, over the last five years has been worsened by the fall in wages.
  • This has led to a sharp fall in consumer confidence and that is bad news for companies looking to sell cars, jewellery, home appliances, and even shares and other financial investments.
Forget gross domestic product (GDP) and the high-as-a-kite stock markets. Even the Narendra Modi government likes to cite the country’s purchasing power when cornered. But even that is on a slide, a not-so-merry one.

It’s hardly a surprise given the knockout punch that the COVID-19 virus has delivered. Businesses looking to protect their bottomline have laid off a lot of employees, and many of those who still have jobs aren’t earning as much as they used to.

On the other hand, Sensex has kissed new highs because corporate profits have surged in the latest quarterly statements. However, as Mahesh Vyas from the Centre for Monitoring Indian Economy, a business information firm, pointed out, between July and September 2020, corporate profits grew over 20%, the rebound in wages was just 3.8% after a sharp fall in the preceding quarter. And this is likely to be a continuing trend.

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As Vyas put it, “The lockdown has taught companies a lesson or two on running business with fewer human resources. These lessons are unlikely to be forgotten.” That’s bad news for companies looking to sell cars, jewellery, home appliances, and even shares and other financial investments.

There is more evidence of where the profits are flowing from. All the companies analysed by broking firm Motilal Oswal, put together, saw a decline of 7% in sales but a 16% jump in profit after tax. Simply put, most of the profit came from cost cutting and not a rise in demand.

Consumer insights firm Nielsen recently explained the phenomenon. The Indian consumer is trading down in certain segments, those who can are buying larger packs to save money, and opting for more private labels. And that’s visible in the gross margin ⁠— before costs like wages, advertisements and promotion are deducted ⁠— of some of biggest names in consumer products.

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CompanyJuly-Sep gross margin change (basis points)
Bajaj Consumer-74
Agro Tech Foods-183
Jyothy Labs128
ITC-163
Dabur9
HUL-128
Emami55
Marico-163
Nestle56
Colgate344
Godrej Consumer-57
Britannia176
Varun Beverages-149
Tata Consumer Products-269
Aggregate-220
Source: IIFL, Change compared to same period last year

Rational people spend more on discretionary items like cars and appliances when they save more. And the larger pessimism is visible in the consumer confidence data, put out by the Reserve Bank of India (RBI), which is breaking the charts on the wrong side. People do not expect to spend more on non-essential items even in the next one year.

There is a lot of money in the share market but not enough in your pocket
Indian consumer's expectation of spending on non-essential items is abysmally low.Business Insider India

The Indian consumer’s ability or willingness to spend had started eroding long before the pandemic. And, on an average, there has been a steady decline in household savings in India, to a point that this year’s estimate is the lowest since at least 2012.
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The pinch is much worse for people who are retired, many of whom living on their savings lying at the banks. The interest on long-term fixed deposits make less money compared to the savings account, which is much lower than the current inflation. Essentially, people are paying banks rent to keep their money safe instead of earning from it.

There is a lot of money in the share market but not enough in your pocket
India household savings, both financial <span class="redactor-invisible-space">and in physical assets like gold, are sharply down in the last five years.</span>Business Insider India

This should concern markets as well as policymakers. "GDP is an aggregative indicator of economic activity and hides the extent of human misery and the loss of social and human capital caused by the health crisis. Nonetheless, if the projections hold, the GDP would have fallen approximately 6% below its pre-COVID level and it may take years to regain this lost output,” Deputy Governor of the RBI and a member of the Monetary Policy Committee Michael D Patra recently said.

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The gloom, too, shall pass eventually. But to experience a boom people need jobs, good wages and a feeling of certainty. And that will only come from new corporate investment that can generate employment. And it has to happen sooner than later. Else, India’s famed demographic dividend would have been squandered.

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