Inflation shrinks Indian firms as rural millions cut spending

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NEW DELHI – Rising inflation is forcing many poor Indians to rein in spending, threatening a recession for companies like Godrej Appliances, which recently saw bumper sales in March and April when a brutal heatwave boosted demand for its cool products.

Global prices have risen due to the Ukraine crisis and the disruption of the global supply chain, but people in developing countries like India are more at risk for even a small cost increase that could ruin their meager budgets.

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“Demand has been declining since May,” Kamal Nandi, business head of Godrej Appliances, one of India’s leading home appliance manufacturers, told Reuters. “These are early signs of the impact of inflation on discretionary spending.”

Demand fell sharply in March after mass demand “zoomed up” and remained good in April, he added.

India’s wholesale and consumer prices accelerated at the fastest pace in a year in April, prompting the central bank to raise interest rates at an unscheduled policy meeting this month, with another possibility next month.

Godrej, who built India’s first domestic refrigerator in 1958, aims to raise prices whenever possible to offset the cost of the product, but concerns that could reduce demand for rural homes in two-thirds of India’s 1.4 billion population.

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“In the future, there will be a price increase every quarter and this will affect the demand below the line,” added Nandi, who said the price hike of the product has exceeded the price of stickers.

Godrej’s skepticism is familiar to many Indian companies trying to strike a balance between margins and demand, a worrying sign for the economy that has recovered from the recent quarter after being hit by the COVID-19 epidemic.

Dabur India Limited, a major retailer of everything from shampoos and toothpastes to honey and fruit juices, said in an earnings call this month that demand will remain soft in the coming quarters.

“There is a strain on the rural consumer’s wallet … there is a contraction in suffering,” said Mohit Malhotra, chief executive. “I think it’s a wait-and-see situation, which is very volatile because food prices and inflation have not come down.”

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Hindustan Unilever Limited, owner of brands appearing all over India, such as Dove, Vaseline and Horlicks, said late last month that volumes were declining rapidly, mainly in rural areas.

“Necessary issues are being prioritized over the consideration section,” it added.

Across Asia, “the ability of companies to absorb high input costs is declining,” said Priyanka Kishore, head of investment services at Macro and Oxford Economics consulting firms in India and South Asia.

U.S. retailers Kohls Corp., Walmart Inc. and Target Corporation have also warned of inflation, weakening consumers’ spending power.

Inflation is a headache

Inflation promises to be a major headache for Prime Minister Narendra Modi’s government in the run-up to and after this year’s Indian state assembly elections, especially in his western state of Gujarat.

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However, demand in Indian cities has improved, according to several companies.

Electronics retailer Vijay Sales, including city-centric activity, saw sales in March and April rise 30% to 40% compared to pre-epidemic levels this month, its director Nilesh Gupta told Reuters.

Easy access to financing may be a factor, he said, but confidence among urban consumers has generally been strong in recent months.

Voltas Ltd, a major equipment maker at Tata, said it had raised prices last quarter but was offering incentives such as extended warranties and easy financing to maintain sales of products such as air-conditioners and air-coolers.

India’s largest carmaker Maruti Suzuki and others have reported long-awaited lists for some mid-market and premium models, but sales of popular entry-level products are declining in small towns and villages.

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The rural economy has struggled to recover from last year’s wave of delta infections that killed millions without health insurance, infected millions and burned through millions of savings.

Inflation has added headwinds to a fragile rural recovery, says economist Kishore.

“The downside risks of growth are increasing as the supply of intermediate goods from China, the deterioration of global inflationary pressures and the financial situation become less tolerable,” he said.

Godrej’s Nandi said as the rupee’s record low against the dollar pushed up the cost of imported raw materials, India’s inflation could accelerate further.

“If this trend continues, even festival demand will be affected for the masses,” he said, referring to the autumn holiday season.

(Reporting by Krishna N. Das and Aftab Ahmed; Editing by Clarence Fernandez)