In India, it's suddenly 'save, save, save'
ANUJ CHOPRA
Special to The Globe and Mail
October 23, 2008
theglobeandmail.com
NEW DELHI -- A year ago, buoyed by the tumultuous rise of the Indian stock market, Jitendra Nikam invested 500,000 rupees ($12,349) in shares - a year's worth of his salary as a manager at an insurance company.
The Nikam family celebrated Diwali, India's festival of lights, last year by buying a sleek 50-inch plasma TV and a portable DVD player.
Everything is different this year. In the shadow of the global financial turmoil, the Indian stock market tumbled and the value of Mr. Nikam's investments shrank by more than half, forcing him to tighten his purse strings. He's not planning to hit New Delhi's dizzyingly lit malls to splurge on shopping with his family. Instead, the festive season looks unusually muted for them.
"These are uncertain times," says Mr. Nikam, 34. "We need to refrain from spending and save more."
Riding the wave of India's torrid economic boom, the Nikams are among millions of upwardly mobile middle-class Indians who in recent years shed the Spartan lifestyle of previous generations and adopted a spending attitude.
Rising incomes and the easy availability of credit gave rise to a 300-million-strong urban population of consumers. But as the recession from the West knocks on India's doors, the economic slide is pinching the country's free-spending middle class, who are coming down from their huge spending spree.
"As the economy slows down, the popular urban middle class cry of 'spend, spend, spend' will change to 'save, save, save,' " predicts Rajesh Shukla, a senior fellow at the New Delhi-based National Council of Applied Economic Research.
India's nationalized banks are said to be insulated from the global meltdown, but the financial crisis has virtually paralyzed the country's money markets. India's choppy stock market has lost half its value this year, a liquidity crisis plagues Indian banks and financial institutions, inflation soars near 12 per cent and slower growth looms.
India's Prime Minister, Manmohan Singh, this week declared that as the "ripple effects" of the worldwide financial crisis hit India, economic growth would decelerate from its growth trajectory of 9 per cent to about 7.5 per cent this year.
Earlier this month, because of a credit crunch scare, depositors of one private bank, ICICI, made frenzied withdrawals, some sweeping clean their entire accounts. India's mutual fund companies, too, are facing an acute liquidity shortage, with a large number of middle-class customers claiming redemptions out of fear of accruing losses. A net of 43 billion rupees ($1-billion) have been pulled out of mutual funds since September.
In a bid to ease liquidity, quell inflation and "kick-start growth," India's central bank cut the rate at which it lends to other banks this week by one percentage point to 8 per cent.
The rate cut follows the injection of about $20.4-billion (U.S.) of liquidity into the financial system through a reduction - for the first time in five years - of the amount of money banks must keep with the central bank.
Mr. Shukla says despite government measures, the economic downturn is causing a seismic shift in middle-class attitudes from a few months ago when the economy was on a roll, incomes were rising and Indian consumer confidence was among the highest in Asia.
Less than 30 per cent of India's population of 1.2 billion can be classified as middle class, which the National Council for Applied Economic Research defines as earning between $4,500 and $22,000 a year. But the group accounts for 75 per cent of consumption of high-end goods.
India, experts say, is in a virtuous long-term cycle in which rising incomes lead to increasing consumption which creates more business opportunities and employment, further fuelling growth.
"Private consumption has already played a key role in India's growth [more] than it has in that of other developing countries," the office of international consultancy firm McKinsey & Co. said last year.
Some experts say it's unlikely the middle class will tame immediately their inflated expectations.
"People are buying less this year," admits a sales agent at a New Delhi mall, who didn't want to be named. "But the boom has spawned a large appetite for gadgets, swanky cars, and expensive kitchen appliances that can't just be wished away."
Despite the slowdown, "the reception to Emporio has been pretty good," says Sudeep Chabbra, the mall manager of Emporio, a large luxury mall that opened in New Delhi in August. But the lower segment of India's burgeoning middle class is reportedly deferring purchases, and financiers are logging a drop in loans.
Inside a posh shopping centre in New Delhi, opera singer Sunanda Rao, 32, is loading up on Diwali gifts. She has her eye on a chestnut corduroy shirt for her husband.
After she inquires about the price, she hesitates, mutters "maybe next time," and exits the store.
By the numbers
28 per cent
Current amount of disposable income for Indians; up from 14 per cent in the 1960s
$1.7-trillion
Level that India's consumption is expected to reach by 2025 - making it the world's fifth-largest consumer market, up from about $421-billion currently
1.8 million
Number of households in India earning $100,000 (U.S.) or more a year
<30 per cent
The percentage of India's 1.2 billion people who are considered middle class, defined by the National Council for Applied Economic Research as earning between $4,500 and $22,000 (U.S.)
75 per cent
Amount the middle class accounts for in sales of high-end goods such as cars, air conditioners, TVs and appliances such as washing machines |
