Indicus in News

Inflation impact: Trimming the frills
There is a curse. They say: may you live in interesting times.
The end of last month marked the WPI scaling a new peak of 12.44 per cent for the week ended August 02, marginally higher than last week and the highest since April 1995. The historic ramparts of the Red Fort too echoed with concern over inflation as PM Manmohan Singh observed that these indeed were trying times. To compound matters, the high-level Chaturvedi Committee has recommended consistent increases in petrol prices till March 2009 and diesel prices till 2010 to eliminate subsidies on the two fuels.
It has been around five months since India's inflation rate crossed the central bank's tolerance limit of 5 percent. Inflation now is on its way to being passé but its impact is slowly but surely setting in. The RBI has raised key interest rates, producers have hiked prices, people are losing jobs, loans are becoming dearer and the government is busy playing shrink. But how exactly has the consumer reacted? Surprisingly, the consumer has responded rather well.
On the whole, most FMCG players like HUL, Marico and Colgate-Palmolive have reported an increase in net profits in the second quarter of 2008 as compared to the same period the last year. This is particularly interesting since this quarter also marked price hikes in the wake of spiraling input prices. Economic theory dictates an inverse relationship between prices charged and quantities consumed. Despite this, an increase in profits indicates resilience in terms of volumes.
The consumer has responded calmly and rationally to the intimidating inflation rates. The Indian consumer has cut frills but is consistent with essentials. The sale of premium consumer durables like high-end air conditioners, microwaves, washing machines fridges and televisions have recorded a drop with these accounting for 15 to 20 per cent of total sales as compared to 25 to 30 percent last year. The Indian consumer has also resorted to down trading whereby he/she does not avoid a product but settles for a cheaper brand.
The middle income groups have curtailed expenditure on entertainment, eating-out, leisure and jewellery but their spends on necessities and tobacco consumption are intact. The gold-fond consumer is holding back with sales declining by 45% this quarter.
Also, inflation so far has only affected the masses with discretionary spending of the higher income groups remaining unscathed.
The ripple effect of rate hikes by the central bank is coming through in the form of expensive home and personal loans.
The Cabinet nod to the awards of the 6th Pay Commission translates into an average income increase of 21% for a central government employee and the minimum pay is now Rs. 6000-7000 per month. On one hand this will spell increased personal disposable incomes hence consumption and on the other an increased burden on the fiscal deficit to the extent of 0.5% of GDP.

Trends in Financial Behavior of urban India

Indicus Analytics along with Outlook Money conducted a survey of nearly 2,000 urban Indians on their financial behaviour - OLM-INDICUS ANALYTICS SPIRIT OF FREEDOM SURVEY . The key findings were as follows:

INCOME
Our average monthly household income, as our survey indicates, rose from Rs 19,952 in 1998 to Rs 42,676 in 2008. Those of us who live in Delhi, Mumbai and Bangalore are in the Rs 48,000-51,000 range, while in Kolkata, Chennai and other cities we would possibly be earning Rs 37,500-41,000. With higher confidence in our earning potential, more of us are taking the risk of striking out on our own, as the swelling ranks of the self-employed corroborate

TAXATION
The proportion of people not filing tax returns has fallen from 9.4 per cent to 3.1 per cent, although it could be in part because of the growth of income incomes has far outstripped the progression of tax slabs. As for e-filing, among the metros it seems to have gained greatest currency in Bangalore-10.2 per cent of the respondents used this-perhaps predictably, with its large number of tech-savvy individuals. Kolkata was next with 9.20 per cent.

CONSUMPTION
We are more likely to know someone who has been on a holiday abroad than we would have been in the past. Today, 79.90 per cent of us own a computer compared with 17.60 per cent 10 years ago, registering a more than four-fold growth. With it has come the proliferation of the Internet with 70.80 per cent of respondents connected to it compared with 11.50 per cent earlier. The other gadget that has caught our fancy is the telephone-the average number in a household has more than trebled from 0.8 to 2.7. Today, just 1.4 per cent of us did not own some kind of telephone compared with 45.70 per cent a decade ago. Personal transport also seems to be fairly high on our list of purchases. Car ownership has doubled, while that of two-wheelers is one-and-a-half times the number it used to be.
The digital still or moving image camera, too, has become ubiquitous with half the respondents owning one. Those apart, four-times the number of people in 1998 have air-conditioners installed at home, double the number have washing machines, the refrigerator trails only the mobile phone in ownership rankings, and about half the respondents have microwave ovens.

INSURANCE
Compared with almost 60 per cent of the population without a cover in 1998, the number has gone down to about 22 per cent now. Overall, we are terribly underinsured. While minimum life cover should be at least five times our gross annual income, which has about doubled over the decade, the average insurance covers has increased from Rs 11.39 lakh to Rs 13.31 lakh-marginally at best. Worse, 56.7 per cent of us have covers less than Rs 10 lakh, which is certainly not enough to give financial security to someone who survives an earning member.
However, we are becoming aware of health insurance. From 15.8 per cent who had health insurance, the number has trebled to 47.7 per cent. Given the rising healthcare costs, that still leaves about half the population concerned completely exposed to risk even though they can well afford to protect themselves against it.

BANKING & CREDIT
We have, along with the traditional channel of access, the branch, started using the many alternative channels that banks have made available to us over the years. The automated teller machines, or the ATM, is a prime example: compared with 22.10 per cent of us who used it in 1998, 86.5 per cent use it today. The increase of online access, stories of security breaches notwithstanding, has increased five-fold-plus, from 12 per cent to 64.2 per cent over the same period.
29.2 per cent of us have taken personal loans, a chunk even bigger than the 21.6 per cent who have borrowed to buy homes. A bulk of these seem to be bridging the gap between asset-backed loans and expenses to be incurred over and above that amount. What comes as a bit of a surprise is that we are still depending on friends and relatives as much as personal loans for bridge funds. The positive thing is that the proportion of us borrowing to finance non-asset-creating activities, such as weddings, has remained almost flat over the decade.

INVESTMENTS
We are not fixated on fixed income instruments as much as we used to be. The non-investing population among us has also declined from about half to a fifth, which shows that more of us have enough to take care of our needs and then some-and we are investing the surplus.
We have parked our money in a variety of options. Half of us have invested in mutual funds, a huge shift from the 17 per cent in 1998. Of them, the top priority seem to be equity funds, with tax breaks (34.2 per cent) and without tax breaks (37.9 per cent). To that extent, we have our priorities right. Balanced and debt funds do not find much favour with us. Nor, unfortunately, do exchange-traded funds, which usually have the lowest expenses among mutual funds.