Bloomberg News

India’s Middle Class Hit as Rupee Plunge Pushes Up Prices

September 06, 2013

India Rupee

Indian rupee banknotes and coins of various denominations sit in a bowl at a chili vendor's stall in Mumbai on Aug. 28, 2013. Photographer: Dhiraj Singh/Bloomberg

Mumbai taxi driver Saiyad Ahmed Ali has cut back on fruit and fish, from about twice weekly to once a month these days as prices surge. He’ll tell you the culprit: India’s weakening currency.

“The rupee’s value has been falling, gas is getting more expensive and fewer people want to take cabs,” said Ali, who has seen his daily income fall by about a third, to less than 400 rupees ($6.05) after the costs of running his taxi. “Life here in the big city has become more difficult.”

A 17 percent plunge in the rupee this year has driven up the cost of imports such as petroleum and chemicals used in packaging. As a result, companies have raised prices for consumer staples like cooking oil and soap to compensate for imported raw-material and transport costs.

In Mumbai trading today, the rupee climbed 1.1 percent, to 65.3950 to the dollar at 2:50 p.m. For the year, the Indian currency has been the second-worst performer, after the South African Rand, among 24 emerging-market currencies tracked by Bloomberg.

Shoppers have trimmed purchases of goods from meat and fruit to cigarettes and cosmetics. Growth in private consumption hit a record low in the last quarter, according to Nomura Holdings, posing a further threat to an economy poised to expand at its slowest annual pace in more than a decade.

“The urban poor are the worst hit,” as they receive less federal aid than villagers, said Shubhada Rao, chief economist at Yes Bank Ltd. (YES)

Rao’s bank recently cut its economic growth forecast for the year ending March 31 from 5.2 percent to 4.8 percent, versus the country’s annual average of about 8 percent over the past 10 years. The median forecast of 30 economists surveyed by Bloomberg is 5.3 percent, down from 5.7 percent in June.

Curried Vegetables

As the expansion over the past decade lifted more people into the middle-class, companies such as Hindustan Unilever Ltd. (HUVR), L’Oreal SA (OR) and Procter & Gamble Co. (PG:US) sold more higher-end packaged foods, shampoos, and lotions. Now, with the rupee weakening and inflation rising, some of those consumers are likely to switch to cheaper substitutes, said Arvind Singhal, chairman of consultant Technopak Advisors Pvt.

“Earlier everyone wanted to sell premium products,” he said. “That strategy won’t work anymore.”

Mumbai’s crowded Antop Hill neighborhood, where taxi driver Ali lives with his extended family of nine in a brick hut, offers a window into the effects of the weakening economy and plunging rupee. Money is so tight that most meals consist of just rice, bread and curried vegetables.

Shantytown Renovations

Around the shantytown of tin and brick shacks, most with electricity and cable TV but no running water, there’s a common refrain: Prices are rising while salaries aren’t. Homemaker and grandmother Noor Jahan says government- subsidized stores often run out of rice, sugar and wheat, forcing her to buy from neighborhood markets at a higher price.

“Don’t ask about fruit,” she says with a laugh. “Apple prices just shot up, and bananas also. What can we do?”

Bharat Tiwari, who runs a local shop selling roofing materials, steel rods and cement, says residents are delaying renovations, and sales of some goods at his store have fallen 60 percent from last year.

Jewelers lining the road beneath a new railway line say ever more customers are pawning family trinkets and heirlooms, and virtually no one is buying.

India’s expansion has hit a roadblock as investment has slowed and inflation saps consumer spending power. The prospect of reduced monetary stimulus from the U.S. Federal Reserve has also prompted capital outflows from emerging nations. The currency hit an all-time low last month when it fell to almost 69 rupees per dollar.

The economy expanded 4.4 percent last quarter from a year earlier, the least since the three months ended March 2009, as investment and consumer spending moderated.

Coke Bottles

Nearly everything in Indian supermarkets has some reliance on imported goods, from the plastics in Coca Cola Inc. bottles to palm oil in Procter & Gamble shampoos, according to AC Choksi Share Brokers Ltd.

While companies would need to raise prices by up to 6 percent on average to offset the rupee’s recent drop, the weak economy makes it hard for companies to push through such increases, CLSA Asia Pacific Markets analysts wrote Aug. 30.

Worst-Hit Companies

Hindustan Unilever (ULVR), the Indian unit of Anglo-Dutch consumer goods giant Unilever, and rival Godrej Consumer Products Ltd. (GCPL) are likely to be among the worst-hit consumer companies because of greater dependence on imported raw materials, CLSA said.

Hindustan Unilever has reported its slowest sales growth in more than three years. ITC Ltd. (ITC), which makes cigarettes and soaps and runs luxury hotels, posted lower-than-estimated sales growth as room occupancy dropped and shoppers reduced purchases of non-essentials such as tobacco and high-end soaps.

Prasad Pradhan, a spokesman for Mumbai-based Hindustan Unilever, and Godrej Consumer spokeswoman Deepti Shetty didn’t reply to an e-mail seeking comment.

As the middle-class reins in spending, companies are offering freebies and introducing cheaper variants. McDonald’s Corp. (MCD:US) and Yum! Brands Inc. (YUM:US)’s KFC are both selling low-cost potato burgers for 25 rupees and chicken burgers for less than 40 rupees to attract consumers avoiding pricier restaurants. Cookie maker Parle Products Pvt. is offering 20 percent more in its 5-rupee Monaco biscuit packs. Bajaj Corp. (BJCOR) is giving out free tubes of toothpaste with its premium almond hair oil.

Sales of most goods are “much less than few months ago,” said Rajaram Chaudhry, who runs a grocery store called Maharashtra General in central Mumbai. “People don’t have enough money to last the month.”

To contact the reporter on this story: Adi Narayan in Mumbai at anarayan8@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net


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  • PG
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