Consumer confidence sees virtuous cycle take hold in India

Buoyed by optimism about the economy, six out of 10 Indians said they were inclined to splurge on shopping that had been put off during the slowdown, supporting increased output and economic growth.

A potential customer eyes LCD televisions at an eZone retail showroom in the Jayanagae area in Bangalore, India.

The German car giant Mercedes-Benz delivered its biggest bulk order last month: 150 cars worth a total of 650 million rupees (Dh53m).

The order came not from financial tycoons and industrial leaders, but from a small group of mostly middle-class Indian professionals, including doctors and lawyers, in Aurangabad, a sleepy industrial town in western India best known for its ancient caves and arid farms.

Just before the Diwali festival, the group got together to order swanky new models of the car, which is priced at between 2.5m rupees and 9m rupees.

Wilfried Aulbur, the chief executive of Mercedes-Benz in India, said: "The deal is representative of the face of a new India, where smaller cities are driving economic prosperity."

The deal, observers say, is not just a sign of the growing wealth in India's small towns, but also growing consumer confidence amid the world's second-fastest pace of economic expansion.

With rising incomes and aspirations, millions of upwardly mobile middle-class Indians are shedding the spartan lifestyle of previous generations and adopting a new attitude to spending.

Straight after the global economic meltdown, India's free-spenders, facing the dour prospects of job cuts and shrivelling salaries, tightened their purse strings. But with a much-improved economic outlook - the economy is poised to grow at 8.5 per cent this year - the lost consumer confidence is returning.

It is providing a much-needed stimulus to the country's retail market, which is expected to grow next year to more than US$400 billion (Dh1.46 trillion), according to India's Associated Chambers of Commerce and Industry.

With 129 points, India topped the market researcher Nielsen's global consumer confidence index in the third quarter of this year, 12 points ahead of Thailand in second place.

Globally, consumer confidence fell three points to 90 amid growing concerns in developed economies about poor economic recovery.

A consumer confidence level below the baseline of 100 on the index "reflects the reality that consumers around the world remain largely pessimistic about job prospects, personal finances and their ability to buy the things they want and need over the next year", says Nielsen in its global consumer report released this month.

Consumer confidence declined in 19 of the 53 countries surveyed by Nielsen but the mood was strikingly different in the booming Asian markets. Nine out of the top 10 countries on the ranking are in the Asia-Pacific region.

According to Euromonitor International, a global business research company, consumer expenditure in emerging market economies such as India, China and Brazil grew by 66 per cent to $7.5tn between 2000 and last year. This year, consumer spending is expected to touch $8tn.

In India, nine out of 10 people surveyed by Nielsen expressed satisfaction with their job prospects in the next 12 months. Eight out of 10 expressed similar sentiments about their personal finances for the same period.

Buoyed by optimism about the economy, six out of 10 Indians said they were inclined to splurge on shopping that had been put off during the slowdown.

"Indians appear to have loosened their purse strings compared to previous quarters," said Justin Sargent, the managing director for consumer research at Nielsen India.

"While some of this propensity to purchase can be attributed to the advent of the festive season, a combination of factors will lead to greater spending and more enthusiastic buying behaviour as marketers tap into the confidence that the Indian consumer seems to be exuding."

India, experts say, is in a virtuous long-term cycle in which rising incomes lead to increasing consumption, which in turn creates more business opportunities and employment, further fuelling GDP growth and reducing poverty.

McKinsey India, a subsidiary of the international consultancy, produced a report in 2007 which said: "Private consumption has already played a much larger role in India's growth than it has in that of other developing countries." McKinsey India expects the country's retail industry to grow fourfold by 2025.

Fewer than three in 10 of India's 1.2 billion people are classified as middle class, which the New Delhi-based National Council of Applied Economic Research defines as earning between $4,500 and $22,000 a year. This group accounts for 75 per cent of major consumer goods sold in India.

With the formidable spending power of the middle class, consumption soared to 17tn rupees and was expected to peak at 70tn rupees by 2025, vaulting India into fifth place among the world's largest consumer markets. India's retail market was ranked by the consultancy AT Kearney as this year's most attractive emerging market for investment. Retail trade comprised between 8 and 10 per cent of the country's GDP in 2007. With the development of the organised retail segment, retail's share rose to 12 per cent last year.

To tap into the growing market, the advertising spending of companies on placements in the mainstream media - television, newspapers and magazines - grew by almost a third to $1.9 million in the second quarter compared with the same period last year, among the highest growth rates in Asia, according to Nielsen's recent survey on media ad spending.

But despite the exuberance, many Indians are concerned about rising food and utility prices. India's headline inflation, which the Reserve Bank of India says is a "dominant concern", touched 8.6 per cent last month, higher than the central bank's prediction of 6 per cent.

In a bid to tame fast-rising consumer prices, the central bank this month boosted the repurchase rate, the interest rate at which the central bank lends to commercial banks, and the reverse repurchase rate for the sixth time this year.

Expressing concerns over inflation, 65 per cent of respondents in the Nielsen consumer survey said they put their discretionary income into savings and investments. That figure represents a 2 percentage point increase from the second quarter.

Mr Sargent said: "Indian consumers are confident about their economy and have shown similar confidence levels as [in] the second quarter of 2010. However, these levels have not increased like they did in the first two quarters of 2010.

"This reflects the fact that consumers are wary of the uncertainties that surround global economic conditions."