Declining volume growth across key sectors of the economy
It is fairly well known in the investor community that few markets or product segments in India, like FMCG, two-wheelers, among others, have been sufficiently penetrated. The incumbents in these markets have witnessed muted growth in terms of volumes and the dynamics in the domestic markets have compelled them to look for greener pastures in foreign territories.
They have addressed the challenges fairly well though. Be it through shrinkflation in FMCG or premiumization in automobiles, the Indian companies have been able to deliver decent growth (in value terms) in domestic markets over the past decade or so.
However, there seems to be a similar trend emerging across various other sectors, one of which is Pharmaceuticals.
As per the data by AIOCD-AWACS, a pharmaceutical market research organization, for calendar year 2022, the price-driven growth for pharmaceutical companies came in at 6% while growth from new product launches stood at 1.7%. What’s remarkable is that the volume-driven growth came at 0%.
Economic growth not broad-based
When we look at the sectoral data from automobiles, FMCG and Pharmaceuticals, it appears that the growth in the Indian market is not broad-based and may be plateauing.
The data needs to be read in conjunction with some of the key macro dynamics taking shape in the country.
Growing income divide in the country
The demonetization policy and then the adoption of Goods and Services Tax by the government of India in 2016 squeezed out money i.e. cash from the unorganized sector of the economy majorly comprising lower strata of society. This segment has been the most affected from the economic challenges brought about by the successive waves of COVID in 2020 and 2021.
According to Raghuram Rajan, the former Reserve Bank of India Governor and Professor of Finance at the University of Chicago Booth School of Business, the inequality between rich and poor has risen post-pandemic in India. In fact, he goes on to say that India will be lucky if it gets 5% growth in 2023. He said
Pandemic was part of the problem but we were slowing before the pandemic. We had gone from 9(%) to 5(%). And, we haven't really generated reforms which will generate growth
In this context, the Organisation for Economic Co-operation and Development mentions in a 2014 Working Paper that
Income inequality has a sizeable and statistically negative impact on growth, and that redistributive policies achieving greater equality in disposable income have no adverse growth consequences
Negative growth in real wages
The situation is further aggravated due to tepid growth in wages. India Ratings, in September 2022, came out with a research note that highlighted that the households’ nominal wage growth declined 5.7% between financial year 2017 and 2021 from a high of 8.2% between financial year 2012 and 2016. This translates to just 1% growth in real terms. The wage growth in real terms i.e. after adjusting for inflation, stood at -3.7% and -1.6% for urban and rural areas, respectively, in June 2022.
Unemployment issues
In addition, the unemployment rate was 8.3% - a 16-month high in the quarter ending December 2022. This is the highest level of joblessness in India since the pandemic.
Decaying unorganized sector
The unorganized sector has been the largest employers of workforce in India. There is increasing formalization in the economy, one that is not being natural in transition but rather forced to a large extent. Now, this sector is shrinking and the wealth is getting transferred to the formalized private organizations. This distribution is perhaps not a democratic one with likes of larger organizations eating away a major chunk of the wealth. The large organizations are getting even bigger on account of their close access to the government and influence over public policies.
End note
Going forward, the government has been taking several measures to boost domestic production, improve ease of doing business in the country and kickstarted important reforms such as Goods and Services Tax, among others. These steps may improve provide necessary fodder to the economy but until and unless the economic divide between rich and poor and high industrial concentration remains, it is difficult to get a broad based recovery in the India market.
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