Shrinking Middle Class And The Grim Reality Of India Inc’s Slow Sales In September Quarter. Who Are The Winners And Losers In 2024 And Where Are We Headed?

The middle class, long regarded as the engine of India’s economic growth, is now under strain, with its very existence being questioned. Over the years, it has been the reliable engine powering India’s growth story, especially for sectors like FMCG. But recent signals from India Inc paint a worrisome picture– the middle class is shrinking, and the consequences are spilling over into the economy.

A Slowdown, or Something More?

For the first time in 16 months, India Inc has reported slowed revenue growth, breaking its previously unyielding upward trajectory. While some analysts dismiss this as a cyclical hiccup, the reality is that large-cap, small-cap, and even mid-cap companies are showing revenue de-growth. Large FMCG players, in particular, are struggling to keep pace.

Consumption patterns are shifting drastically. While automakers might be breathing easier with margin expansions, sectors like the tyre industry and microfinance are struggling to stay afloat. Add to this the looming shadow of constrained consumer credit and inflationary pressures, and you get an economy that’s feeling the strain.

The Shrinking Middle Class and Inflation’s Double Whammy

The middle class, long the bread-and-butter demographic for FMCG companies, is undergoing a transformation. CEOs across sectors report a stark polarisation in demand. In metro cities, premium products are thriving as affluent consumers indulge in lifestyle upgrades. Meanwhile, the demand for mid-tier products – traditionally a stronghold for the middle class – is declining.

At the other end of the spectrum, low-income consumers continue to prioritise essentials. This divergence leaves FMCG companies in a tough spot: catering to the two extremes of the consumer pyramid while grappling with waning sales from their traditional base.
The rising cost of living, coupled with stagnant wages, has squeezed the middle class like never before. Inflation, particularly in raw materials like coffee, has forced companies such as Nestlé to hike prices, further eroding the purchasing power of middle-income households.

Suresh Narayanan, Chairman and Managing Director of Nestlé, highlighted the harsh reality: while these price hikes are essential to maintaining business margins, they inevitably alienate middle-class consumers. As they tighten their belts, the FMCG sector feels the pinch – a trend evident in the decline of some once-popular products.

Are Longer Economic Slowdowns Becoming the Norm?

Narayanan’s insights raise a larger concern: are we entering an era of prolonged economic slowdowns? Unlike earlier downturns, which were often short-lived, the current stagnation seems entrenched. For businesses relying heavily on mass consumption, this means navigating a market where disposable incomes are shrinking, and the dependable middle-class buyer is becoming scarce.

Under the Lens
The Indian economy is undeniably under scrutiny. From shrinking corporate revenue growth to slowing sales in major industries, the September 2024 quarter paints a mixed, albeit concerning, picture of India Inc. While some sectors show resilience, others struggle with significant headwinds.

Let’s break down the trends shaping the economy

The Tyre Industry, Running Out of Steam?

Once a star performer, the Indian tyre industry seems to be losing its traction. Revenue growth is projected to clock in at 7%-8% this fiscal, driven by a modest 3%-4% increase in realisation, marking the second consecutive year of single-digit growth. This pales in comparison to the 21% annual growth it enjoyed between 2021 and 2023.

Automobile Sector, A Mixed Bag

While the broader auto industry remains in decent shape, the cracks are starting to show. Passenger vehicle sales plunged 19% in September 2024, with inventory levels swelling to 780,000 vehicles valued at a staggering ₹77,800 crore.
This slump raises questions about the sector’s ability to sustain its growth trajectory. Even though some consider this a seasonal adjustment, the road ahead appears far from smooth for automakers.

Corporate Revenue Growth, Slowing to a Crawl

Indian corporates posted revenue growth of just 5%-7% for the September quarter — the slowest pace in 16 months. According to Crisil, this slowdown is primarily due to weak performance in the cement and steel sectors.

–Cement Sector: Revenues declined by 3% year-on-year, weighed down by pricing pressures and a high base effect.
–Steel Sector: Weak demand and volatile pricing contributed to the overall drag on corporate earnings.

Sales data from 100 companies revealed a modest growth of 5.6%, compared to 5.8% the previous year. Interestingly, the top 10 companies, which account for over half of the total sales, grew by only 3.2%, down from 3.7% the year prior.

Quick Commerce Eating into the Pie

One theory gaining traction is the rise of quick commerce platforms, which are shifting consumer habits. By promoting small, local brands over larger players, these platforms are decentralising consumption.

Take Zomato, for instance. The company clocked an impressive 71% growth in the September quarter, with revenue hitting ₹4,799 crore. Its stock price reflects this momentum, surging 129% over the past year to ₹270 per share.

While quick commerce boosts smaller players, its impact on larger brands, particularly in FMCG, is evident. The secularisation of consumption patterns is reshaping the marketplace, presenting challenges for traditional big-brand dominance.

Contrasting Stories

The stock market has been volatile, with the Nifty 50 and Nifty Midcap 100 indexes each down 7% over the last two months, and the Smallcap 250 index plunging 11%.
–Large-Cap Companies: Revenue growth slowed to 6.5% at ₹23.86 lakh crore in the September quarter, reflecting weak consumer demand.
–Small-Cap Companies: Sales dropped to 5% at ₹2.97 lakh crore. Many of these companies had earlier thrived on government contracts, but the irregularity of such projects has hit their growth prospects.

–Mid-Cap Companies: The standout performer, mid-caps grew 10% to ₹6.25 lakh crore. Their ability to navigate tough market conditions underscores their growing importance in India’s economic landscape.

Hence, the consumption slowdown isn’t sparing anyone. From food to footwear, demand has softened across categories. Notable companies like Tata Motors, Prestige Estate, and Voltas reported sharp declines in growth compared to the previous year. While some of this can be attributed to cyclical factors, the broader trend indicates that consumer sentiment remains fragile.

The September 2024 quarter reflects an economy in transition. While certain sectors like mid-caps and quick commerce show resilience, the overall picture is one of caution. With inflationary pressures easing and commodity prices expected to stabilise, the coming quarters may offer some relief. However, businesses must adapt to shifting consumer preferences and the growing influence of quick commerce to stay competitive.

What Are the Fund Managers Saying?

Fund managers are painting a mixed picture of India’s economic prospects, attributing the recent decline in broad markets to Foreign Institutional Investor (FII) outflows. A significant factor behind FII selling is the perception that Indian companies may face a slowdown in sales, prompting a shift to other global markets.

The prospect of Donald Trump returning to power and persistently high long-term yields in the U.S. are making American markets a preferred destination for investors. FIIs are also exploring opportunities in regions that currently appear more stable or lucrative than India.

Domestically, Indian fund managers are more optimistic, viewing the current slowdown as part of a cyclical pattern. They argue that the September 2024 quarter faced a high base effect, skewing comparisons.

Data Backs Optimism

According to an October 2024 Crisil report, among the top 10 sectors that account for three-fourths of the revenues, eight have reported EBITDA margin expansion. EBITDA margins are projected to recover by 50-150 basis points in fiscal 2025. Cooling commodity prices and volume growth are expected to provide relief.

Sectoral Price Trends – Steel & Cement: Prices have declined by 9% over two years.
Aluminium & Iron Ore: Prices have risen by 5% and 34%, respectively, but analysts believe they are unlikely to increase further, helping companies manage costs.

The Shrinking Middle Class and Implications for the Economy:

The broader economic implications of a shrinking middle class are a growing concern. A robust middle-income segment has historically underpinned India’s consumer-driven economy. Its erosion could have far-reaching consequences.

1. Deepening Economic Inequality
The disappearance of the middle class risks exacerbating economic disparity. With consumption polarising between essentials for the lower-income groups and premium products for the affluent, the divide between economic groups could widen.
A more economically divided society may face reduced social mobility and heightened tensions, potentially destabilising the political and social fabric.

2. Decline in Consumer Spending
The middle class has traditionally driven demand for FMCG products and mid-tier goods. Its shrinking presence is altering consumption patterns, with growth now concentrated at either end of the spectrum:

Premium Products: Enjoying rising demand among wealthier consumers.
Essentials: Continuing to sell among lower-income groups.
This shift challenges industries reliant on middle-tier products, threatening stagnation and slowing economic growth.

3. Policy Interventions
To address these challenges, policymakers must focus on strengthening the middle class through:
Income Growth and Job Creation: Especially in industries that cater to middle-income households.
Investments in Education and Healthcare: Building a more resilient workforce.
Inflation Control: Ensuring essential goods remain affordable for all.

Could Regressive Taxation be a Compounding Factor in Middle-Class Struggles

India’s tax structure continues to pose challenges for the country’s middle class, a demographic essential to economic stability. A recent Oxfam study underscores the disproportionate burden of the Goods and Services Tax (GST): the poorest 50% of the population contribute nearly two-thirds of the total GST collected, while the richest 10% account for a mere 3-4%.

As an indirect tax, GST is levied uniformly on all consumers, regardless of income levels. This uniformity places a heavier strain on middle- and lower-income groups, compounding financial struggles for families already grappling with rising costs of living. Adding to the disparity is India’s unique tax policy, where corporate income tax rates are lower than the highest individual income tax brackets, further widening the economic gap.

The shrinking middle class, vital for sustaining consumer-driven industries, necessitates urgent tax reforms. A more equitable system would alleviate the growing financial pressure on this demographic, ensuring balanced economic growth and mitigating risks of deepening inequality.

Winners and Losers in September 2024

1. Cement Industry: A Mixed Bag
The Indian cement sector witnessed contrasting trends. While the industry achieved a decadal high in organic capacity addition during FY24, individual companies reported revenue declines due to weaker pricing and high base effects from the previous year.

Shree Cement: Revenue fell by 15% YoY in Q2 FY24, compared to an 18% rise the previous year.
Ultratech Cement: Revenue dipped 2.4% YoY in the same period.

Despite these short-term pressures, the sector is experiencing significant consolidation. Since April 2014, 116 million tonnes of capacity deals have been executed. Larger players continue to widen the gap with smaller competitors, benefiting from superior cost efficiencies and larger market presence.

2. Real Estate: A Stellar Performer
The Indian residential real estate (RRE) sector has emerged as a bright spot. Inventory levels, once exceeding 30 months pre-pandemic, have dropped below 18 months and are projected to stay under 15 months over the next two years.

DLF: Reported a 46% YoY increase in revenue and a staggering 197% jump in PAT to INR1,043 crore. Its stock rose by 23% in the past year.
Future Outlook: Aggregate bookings and collections for leading players in FY25 are anticipated to grow 15%-20%, surpassing INR130,000 crore and INR80,000 crore, respectively.

3. Financial Sector: Consistent Growth
Certain financial companies, such as HDFC AMC, Angel One, and BSE, have consistently delivered strong results.

HDFC AMC: Rationalised distributor commissions across 12-13 equity schemes, positively impacting revenue yield in Q2 FY24. Further benefits are expected in Q3.
Angel One: Despite regulatory headwinds leading to a short-term revenue dip, customer additions are on track to offset the impact within a quarter or two.

4. Automotive Industry: A Mixed Outlook

The automotive sector showed a mix of resilience and decline.

Tata Motors: Revenue dropped 3.7% YoY.
Ashok Leyland: Reported a 2% decline in revenue.

A report by BNP Paribas highlighted increased financing penetration, which has driven demand for two-wheelers since Q4 FY22. However, a potential slowdown in financing availability could dampen demand, posing risks to the growth trajectories of manufacturers like TVS Motors, Hero MotoCorp, Bajaj Auto, and Eicher Motors.

The Final Words

So, what’s next? Commodity prices are expected to ease in the next quarter, offering a glimmer of hope for struggling sectors. But beyond immediate relief, India Inc must address a deeper question: how to adapt to a market where the middle class – their once-steady growth engine – is under threat.

Whether through recalibrating strategies to target premium buyers or doubling down on affordability for low-income consumers, businesses will need to evolve rapidly. But the broader challenge remains, can the economy revive the middle class and, with it, the robust consumption that drives growth?

The answers to these questions will determine not just the trajectory of India Inc but also the very fabric of India’s economic future. The pain is real, but whether it leads to lasting change or a deeper crisis remains to be seen.