Zoo Station

Stephen Roach is back from his third trip to India. This time, he's ga-ga about the Indian consumer and India's domestic consumption-led growth model. In case you're wondering why an article by Roach matters, you certainly are underestimating the man's influence (for better or for worse) among the movers and shakers in finance and industry.

The consumption story -- the organic sustenance of sustainable growth and development -- casts India in a very different light. Don’t get me wrong -- the Indian consumer is hardly a powerful force on today’s global stage. As the accompanying chart shows, India’s per capita income and consumption levels are about half those of China’s. But it is growth at the margin that always drives powerful macro and market trends. And the Indian consumption story is, first and foremost, one of accelerating growth off a low base. The potential comes from the structure of the Indian economy: Private consumption currently accounts for 64% of Indian GDP -- higher than shares in Europe (58%), Japan (55%), and especially China (42%). India’s transition to a 7% growth path in recent years is very much an outgrowth of the emerging consumerism of one of the world’s youngest populations. The increased vigor of private consumption provides a powerful leverage to the Indian growth dynamic that is rarely found in the externally-dependent developing world.

This came through loud and clear on my recent travels through India. Over a span of four days, I met with a number of corporate executives, investors, and senior government officials. Everywhere I went, the focus was on the Indian consumer. I met with the managements of a good cross-section of India’s major consumer companies -- Hindustan Lever (softgoods), Pantaloon (retail), Raymond Textiles (clothing), and McDonald’s (fast food). I also spoke with executives from banks and drug companies -- all of whom have important consumer businesses. And I met with leading industrial companies such as Reliance, where a major five-year initiative has just been announced for the development of nationwide chain of hyper-stores and super-markets. I even went to the Phoenix shopping mall in Mumbai, which was bustling with activity. I have made similar trips to malls in China. There was one key difference between these two experiences -- the locals were buying in India. This is consistent with what I heard from most of the consumer companies I saw -- solid acceleration in same-store sales comparisons over the past six months.
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Most of India’s major consumer players are looking for an imminent consolidation of the country’s highly fragmented retail sector. Currently, there are over three million retail outlets in India -- an industry structure that is ripe for efficiency enhancement. The threat of foreign competition is already spurring a big consolidation push. Wal-Mart is apparently poised to enter India as soon as restrictions on retail FDI are lifted. That appears to be no more than 18 months away. In the meantime, local players like Pantaloon and Reliance are scaling up in an effort to meet the coming Wal-Mart challenge head-on. The competitive juices are coursing through the veins of India’s consumer industry. Unlike other Asian economies, India’s entrepreneurs are eager to compete.

Roach certainly makes a good point of booming domestic demand in India, especially when compared to export-led (exports and fixed asset investment add up to 80%+ of Chinese GDP, growing at 30% pa) growth in China. Liberalisation of the retail sector can help consumption a lot more, which is why it should become a top priority for the Indian government.

If you've gone to the Morgan Stanley website, you'll notice the article I linked to is missing the charts Roach refers to. If you'd like a PDF version of the Roach piece with complete charts, let me know and I'll mail it to you.