Generating consumer demand is key to India's Growth

Anand Sat Aug 16, 2008 4:06 pm

During my final year of graduation at my college in South Mumbai, I started spending a lot of time observing what my friends were wearing and how they dressed up. My father and uncles were involved in dealing with fabrics at the nearby Kalbadevi market. But at college I realised that I was being witness to a revolution.

Earlier people dealt in 'fabrics'; in the new era, it was called 'fashion.' The change of a single word implied a new meaning and a metamorphosis in the very concept of clothing. People were becoming fashion conscious and dressing up was 'in'. Instead of going to tailors, they had started buying readymade brands.

As I explored this further, I discovered a larger story of value addition, employment and wealth creation. I studied how a bale of cotton was transformed from a commodity, into yarn and then into a fabric which was then stitched, distributed and sold as a branded readymade trouser at shops.

Being involved in this process helped hundreds of people earn their livelihood. From the bale of cotton at an agricultural field to the trouser at the shop, the value multiplied more than twentyfold. It was quite obvious that transforming a commodity into a value-added branded product created jobs and generated immense income for those involved in the process.

There on, I first set up a small manufacturing unit and then launched a few readymade shirt and trouser brands, followed by a distribution and franchisee network for these brands. As we were building this business, we started discovering new possibilities.

The 90s in India was marked by economic liberalisation. Income levels were rising steadily and consumer aspirations were changing at a rapid pace. We were moving from a socialist economy to a demand-led market economy. The demand for more value added branded products was evident not only in apparel, but in every product category.

That's how we decided to move into modern retail, first launching a department store, followed by hypermarkets and a number of other retail formats.

Modern retail introduces customers to brands and shifts consumer demand from commodities to value added products. So whether it is fashion, packaged food or furniture, it creates demand for value added, readymade products. It also provides an exciting environment wherein customers buy more than what they had initially planned to. In effect, it raises consumption of value added products across every category.

This demand for value added products has an immediate multiplier effect on GDP growth and economic development. It creates jobs in the manufacturing sector, which in turn raises income levels. Higher income levels lead to a further rise in consumption, thus setting in motion a virtuous cycle of consumption and economic development.

The economic growth witnessed in the past decade has largely been fuelled by the rise in domestic consumption. The mushrooming of shopping malls may be one of the most visible signs of this growth, but beyond the neon lights, elevators and air-conditioned showrooms, is a lesser documented story of transformation that modern retail brings into society as well.

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Apart from offering new business opportunities to a large number of suppliers, manufacturers and ancillary service providers, modern retail provides employment to a huge mass of youth. Not the youth who take up white-collar jobs, but the less educated, less privileged youth often living in the slums. More often than not, they are women from families wherein no other member has ever worked in the organised sector.

These women become part of a social change in their communities, by not only earning a livelihood but also a sense of respect and responsibility in their community. In turn, they also join the consuming class that fuels sales in the very shopping malls they work in.

It is not without reason that in almost every developed country, retailers are among the largest corporations. Retailers play a significantly large role in the economic and social transformation by creating demand and catalysing consumption and development. The same can happen in India provided we are able to strengthen the foundation for consumption-led growth in India.

India has among the highest savings rate anywhere in the world. Compared to less than 10% in almost every developed country in the world, our savings rate has actually gone up from around 21% during the first few years of liberalisation in the 1990s to above 35% now. More than two-thirds of the public savings are kept in largely unproductive liquid assets like cash, bank and post office deposits.

Such high savings rate is one of the biggest impediments towards strengthening a consumption-led economic model. One of the chief reasons for such high savings rate is our existing tax laws and public policy. Our existing tax laws not only encourage savings, but actually discourage consumption through a multitude of taxes - income tax, sales tax, service tax et al. This was relevant at a time when economic consensus was to create growth through public investments. The new economy requires new laws and public policy measures that boost domestic consumption.

At this stage, it is extremely crucial for us to generate larger consumption demand that helps in creating jobs and increase income levels for a larger mass of people. Facilitating the growth of the modern retail sector can be an important enabler for increasing domestic consumption. Along with this, we need to bring in policy and tax incentives that actually incentivise consumption. This can potentially help us not just sustain but also improve upon our rate of economic growth.

Is it really possible for the government to incentivise consumer spending through public policy measures? To quote Robert F Kennedy, "Some people look at things as they are, and ask why. But I dream of things that never were, and ask why not."

(The author is the group CEO of Future Group and best-selling author of It Happens Only in India. The views expressed here are personal)