We were recently in a conference and one of the speakers, Ridham Desai, gave a very interesting reasoning for why the Indian economy should go through a consumption boom over the coming years. If the consumption boom, as predicted, does happen then many of the listed companies should benefit immensely. As such, shareholders of these companies, either directly or through Mutual Funds, will also benefit.
Here is the argument that was presented.
- The current annual per capita income of the average Indian is about $ 1,800 , or roughly Rs 126,000, Of this, nearly $ 900, or RS 63,000 is towards ‘basic needs’ like food. The remaining $ 900 is spent on other aspects of life, which are broadly categorised under ‘discretionary expenses’. This can be your personal transport, education, better house, consumer durable, and various other expenses excluding ‘basic needs’ like food.
- The per capita income itself is growing at about 10% annually. On the other hand, ‘basic needs’ like food has already been met for most of the population and will not grow at the same pace. Most likely, basic needs will grow in line with inflation or less.
- As a result, the incremental earnings will go predominantly towards ‘Discretionary Expenses’ and since overall income is growing fast, people will spend a lot more on discretionary expenses. In fact, it is believed that spending towards such expenses will increasingly grow at rates higher than 15%.
- Moreover, similar behaviour patterns have been witnessed in many other countries which are ahead of India in terms of per capita GDP. The chances, therefore, of this story playing out, as envisaged, are very high.
If this were to actually be the case, then the companies addressing the needs of discretionary expenses will benefit immensely. Many leading companies in India address such needs and the investor should benefit as these companies participate in this consumption boom.
If you also believe in this hypothesis, do invest, and stay invested, in the Indian equity markets – either directly or through equity mutual funds.