By Anand Ramanathan, Partner and Consumer, Products and Retail sector Leader, Deloitte India
India’s consumer industry is witnessing massive transformation and is set to become the world’s third-largest by 2027, only behind the US and China. Being one of the world’s largest retail markets, India is expected to reach US$ 1.41 trillion by 2026.
India is poised to welcome more than 900 million new internet users by 2025, underpinned by affordable data plans and access to e-commerce, significantly altering purchasing patterns of Indian consumers. Consumer protection is gaining momentum as an imperative for the government and industries. Key driving forces behind this expansion include the increasing young population and a burgeoning middle class, predominantly concentrated in urban hubs.
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The middle class is the key stimulant of consumer demand and increasing expenditure. The business landscape is being reshaped with an emphasis on “experience” emerging as a pivotal factor influencing consumer preferences. While India’s consumer industry is witnessing an exponential expansion with the increasing young population and relatively progressive purchasing power amongst the population, there remains disparity in terms of consumption between the urban areas and rural areas.
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The focus has been on simplifying the tax structure and rationalise provisions. Moreover, the need of the hour is to provide certainty and visibility to taxpayers by clarifying ambiguous provisions and offering incentives to boost investments. Introduction of alternative dispute resolution mechanisms, such as Safe Harbour and APA, has strengthened the trust between the government and foreign businesses investing in India.
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Expectation #1: Promote investment and control in inflation
1) Support retail growth by taking steps to control inflation and increasing consumption
The country’s retail inflation, measured by the Consumer Price Index (CPI), cooled to 5.66 percent in March 2023. Inflation data on the Wholesale Price Index (WPI) (calculates overall prices of goods before selling at retail prices) eased to 1.34 percent during the period. In 2022, CPI hit its highest of 7.79 percent in April 2022; WPI reached its highest of 15.88 percent in May 2022. We could anticipate some schemes such as Pradhan Mantri MUDRA Yojana Scheme gaining focus, as they could be a good avenue to provide financial support to small-scale kirana, and brick-and-mortar stores.
As the pandemic pressure receded, we saw challenges emerge in the form of high inflation. This pushed up commodity prices to multi-decade highs in many countries, causing central banks to raise interest rates and slow down economic activity. The prevalence of inflationary conditions had an impact on consumer behaviour, leading individuals to be more frugal with their spending. This in turn, resulted in a slowdown within the consumer goods industry.
Directly visible measure will be improvement in the country’s consumer inflation index. The consumer inflation has been trying to correct itself for the past three quarters. However, due to the challenging international landscape pushing fuel prices to record levels, combined with strained geopolitical conditions in the Middle East, Ukraine, and Russia, containing the rising prices of even basic food items in India have become challenging.
2) Foster more avenues of global investments in retail, including food retail
India is poised to attain a remarkable US$ 850-billion status within the grocery and food retail segment by 2025.3 Given the immense potential of this sector, the government should revamp FDI policies, making them more attractive to investors and eliminating regulatory obstacles that have hindered foreign investment in the country.
At present, the government allows 100 percent FDI in food retail trading, including e-commerce, for food products manufactured and produced in India; this is subject to the government’s approval. Expansion to other products manufactured in India would make the sector even more appealing to foreign investors, thereby generating more investments in the value chain.
The government should consider allowing 100 percent FDI in multi-brand retail trade at least for products manufactured in India, addressing existing barriers to push for a seamless growth and for harmonious coexistence of traditional and modern retail. In this regard, implementing a unified national policy is crucial.
3) Increased investment on Open Network for Digital Commerce (“ONDC”) and digital network creation
The digitisation wave is yet to be seen in the digital commerce front. The launch of ONDC is planned to address that part of the economy. The government will keep investing in digital public infrastructure to drive digitisation in the Indian economy. India could see digital consumption surge five-fold to reach US$ 340 billion by 2030, with 500 million digitally transacting consumers. The network could be broader, with digital penetration across B2B companies reaching 8–10 percent. It could emerge as a more inclusive network with the scope to connect 80–90 million self-employed workers with demand and bring six-to-seven times more MSMEs into a buzzing, diverse ecosystem.
Business-to-business sellers lag behind the global average of 20 percent when it comes to digital penetration in India. Of the 165–190 million consumers5 who already use digital commerce, a much smaller number (10–15 million) are power users, typically living in urban areas and shopping across sectors.
Only 6 percent of MSMEs, for instance, actively sell on e-commerce platforms. To boost digital commerce, the government must reimagine it, with an ecosystem that eliminates or resolves challenges for stakeholders.7 Thus, a continued and significant investment in ONDC and digital infrastructure building is required for the country, to open a new fold of growth in the Indian economy.
Expectation #2: Strengthening rural consumption
Due to substantial rural unemployment rate and slow growth pace, expectations from the government to foster rural demand include continuation of policies such as increasing Minimum Support Prices (MSP) for agricultural produce, sustained investments in rural infrastructure projects, efficient implementation of Direct Benefit Transfer (DBT) schemes, and promoting robust crop sowing practices.
The government’s thrust on capital expenditure and private-sector manufacturing and service activity should also support income generation and bolster economic activities. The focus should be on the local implementation of government policies. This creates a conducive environment for good crop production to match demand, helps keep prices in check, and strengthens rural demand.
The government could continue focusing on the rural housing scheme or allocating a good amount towards improving rural infrastructure to drive consumption.
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