India’s Inflation: How Are Consumers Reacting?

Talk of Inflation has been dominating the airwaves when fuel prices across India reached new highs a few weeks ago- reflecting a growing concern for Indian consumers.

Yet high rates of inflation have always been a problem in India. According to Euromonitor International’s Countries and Consumers’ research, in 2011, inflation reached a wallet squeezing 9.1% despite government measures to hike interest rates and government intervention to reduce prices of essential products.

It is not fair, however to say that inflation has touched consumers across India the same way- due to the dramatic differences in living standards in the country. At the same time, rural consumers were crushed by high inflation and uncertain financial situations while urban, middle-class consumers were only slightly better off, focusing on finding ways to get better value for their money. Low-income consumers, on the other hand, focused on somehow just surviving.

In the longer term, Euromonitor International predicts that India will continue to see sustained growth in disposable incomes and a climate of confident spending, a trend reflected by a slew of multinational corporations investing in the country. According to Goldman Sachs’ Chief India Economist, India’s youthful population (over half under the age of 25) will continue to drive consumption demand, and over the next decade, as this population earns, saves and consumes more, they could contribute about 4% annually to India’s GDP.

In fact, a Reserve Bank of India (RBI) consumer confidence survey conducted at end of 2011 revealed that “65% of the respondents reported that the economy has potential to grow above the current level”. The survey went on to note that “More than half of the respondents reported optimistic perceptions about employment scenario in the economy. Overall consumer confidence appears to have improved marginally, both for current and future periods”.  Among those who went on to add that their household finances were better than they were one year prior, more than one-half said the improvements were due to rises in salary and business income.

In addition, government measures to address the country’s broader economic issues are also expected to significantly affect the day-to-day lives of Indian consumers. For example, Financial Inclusion is expected to improve the situation of rural consumers trapped in the vicious cycle of illegal lending. Officials are also trying to encourage consumers to avoid pessimism and to have faith in the ability of India’s strong macroeconomic fundamentals to support economic growth in coming years.

Overall- while inflation continues to pose a growing concern to Indian consumers, they are still, on a whole, optimistic when it comes to assessing the outlook of their financial situation.