Fuel Shocks, Rising Prices Threaten India’s Consumption Growth

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“Spending by the Indian middle class will be a big question mark this year,” Madan Sabnavis, chief economist at Bank of Baroda said, referring to how households are wary of cost pressures. “This would have otherwise been a year we were expecting prices to be stable and consumption to continue picking up.” 

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Mumbai-based Vivek Mhatre rides around 18 kilometers (11.1 miles) to work everyday on the only vehicle in his household, a Honda Activa 125 scooter. The middle-aged accountant said he has cut back on his evening Vada Pav, a spicy potato patty in a sandwich, and other snacks to save money for fuel and other rising expenses. He said he spends 1,500 rupees on petrol a month, without saying how much he earns. 

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“What else do I do? I can’t stop going to work,” he lamented, as he parked his scooter after returning from work. 

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Retail Inflation

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India, with a population of more than 1.46 billion, has a large and diverse middle class of roughly 400 million; this is the group with spending power that companies large and small are mostly trying to sell their goods to. 

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Retail inflation in the country edged up to 3.48% in April, the highest in 13 months, and is expected to accelerate due to the Middle East war and higher energy costs. Food inflation was higher at 4.2% in April, due in part to rising animal-feed costs and unfavorable weather patterns.

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The four fuel price hikes in May increased retail gasoline and diesel prices by around 7.8% and 8.6% respectively in total. 

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A Mumbai-based car dealer who owns six showrooms said about a quarter of prospective buyers have postponed their purchases since fuel prices began rising. Sales this month will bear the brunt, he said, asking not to be identified discussing private information.

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The stress is apparent even among buyers who have committed to purchasing vehicles. In New Delhi, one car dealer said the time taken to convert a booking into an actual pickup has stretched from roughly five days to eight or nine, because customers are hesitating at the final step. He said the number of walk-in customers has thinned, and new bookings for both two- and four-wheelers are slowing, with entry-level purchases from the most price-sensitive buyers being hit the hardest.

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Bright Spot

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Dealers say the one bright spot in showrooms is electric vehicles, with two-wheeler conversions accelerating as high fuel prices push more buyers toward battery power. In four-wheelers, interest in electric SUVs has spiked after recent government signals on clean energy, turning the fuel-price shock into an unexpected tailwind for dealers already stocks with EV options.

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Satish Rahate, a private driver in southern Mumbai, said he has started taking up gigs on ride-hailing app Rapido on weekday evenings, in addition to working on weekends — to cover for surging inflation. The 300-400 rupees he makes off ferrying customers around his neighborhood help him cover some expenses.

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An about 10% slump in India’s benchmark stock index this year, as well as the slumping rupee are also hurting consumer confidence. “The wealth effect is kicking in,” Sabnavis said, adding that some big ticket purchasing like real estate and cars would likely be put off as a result.

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Cash-strapped consumers may also shift more toward buying smaller package sizes of everyday essentials if retail prices keep climbing, said K. Ramakrishnan, managing director for South Asia at Worldpanel by Numerator. “So each time they go to shop, they will spend less,” or shift to cheaper brands or unbranded products, he said. 

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—With assistance from Ruchi Bhatia.

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