Our goal with The Daily Brief is to simplify the biggest stories in the Indian markets and help you understand what they mean. We won’t just tell you what happened, but why and how too. We do this show in both formats: video and audio. This piece curates the stories that we talk about.
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In today’s edition:
- Indian consumers are finally starting to spend
- It’s party time for the sugar industry
- It’s sunshine and rose for the Indian hospitality sector
- Daikin wants a piece of the red-hot Indian AC market
Indian consumers are finally starting to spend
The government recently released economic data for the first quarter of this financial year, and there are some interesting trends to note. Real GDP growth came in at 6.7%, which was below the RBI’s forecast of 7.1%. In the previous quarter, GDP growth was 7.8%. The slowdown can be attributed to the elections and heat waves, both of which we have discussed in previous episodes. These factors disrupted economic activities across sectors, from construction and agriculture to overall consumption.
However, what stood out was the uptick in the Private Final Consumption Expenditure (PFCE) and Gross Fixed Capital Formation (GFCF).
Let’s break down these terms:
Private Final Consumption Expenditure is a term used to describe the money households spend on goods and services for their own use. It’s a good indicator of consumer confidence—if consumption is strong, it generally reflects a healthy economy.
Gross Fixed Capital Formation refers to investments in physical assets like buildings, machinery, and infrastructure made by businesses and governments. This gives us an idea of whether businesses are confident enough to invest in their operations.
Now, let’s dive into what’s happening.
Starting with private consumption: It accounts for about 60% of GDP. This means that if households aren’t spending, it can have a significant impact on GDP growth. Since the financial year 2020, consumption growth has been weak, excluding the COVID-induced drop and subsequent recovery. The pandemic was a huge shock that not only impacted incomes but also altered spending patterns. It’s not entirely clear if people have fully recovered, psychologically, from that shock.
Following COVID, we faced a massive inflationary shock, particularly in food prices, which further strained household budgets. Much of the money that households would typically spend on other goods and services was instead directed towards essentials like fuel, energy, and food, with the added burden of higher EMIs due to rising interest rates. To make matters worse, the rural economy suffered from poor monsoons and severe heatwaves, complicating life even further. The last three to four years have been a case of “when it rains, it pours.”
You might be wondering, if households were in such dire straits and not spending, how was the Indian economy still growing at 7-8%? The answer lies in government spending. Over the past few years, the government has made significant investments, which have largely driven the positive GDP numbers we’ve seen. However, the previous quarter coincided with the elections, so government spending was minimal. This meant that private consumption and private investments had to carry the weight. In the last quarter, private consumption grew by 7.4%, the highest in seven quarters.
This is good news because durable economic growth isn’t possible without robust household spending. The government can’t continue to prop up GDP numbers indefinitely through spending. So, the question is, will consumption growth remain strong?
There are some positive signs
The rural economy appears to be doing well. Sales of two-wheelers and tractors—often leading indicators of rural demand—have been strong compared to passenger vehicles, which have also performed relatively well.
Enrollment in the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGA) has been declining, suggesting improving rural employment conditions. Additionally, monsoons have been favorable, and sowing activity has been good.
In the recent earnings season, nearly all FMCG companies were optimistic about rural demand.
Food inflation seems to be under control, and the RBI is likely to start cutting rates in the next few meetings.
However, there is a downside. Urban consumption appears to be declining. So, while rural consumption is picking up, urban consumption is falling. The question is, will these trends cancel each other out?
Another significant factor is the global economy, which is slowing down—a potential headwind for India. We’re already seeing a sharp decline in China’s growth, a major engine of global economic activity, and the U.S. is also expected to slow down.
Now, let’s move on to Gross Fixed Capital Formation, or investment growth, which indicates whether businesses are feeling confident enough to invest in new projects. This grew at a robust rate of 7.5% in Q1, compared to 6.5% in the previous quarter, despite the challenges posed by elections and heatwaves. This suggests that private companies are starting to invest again. If you recall from our previous discussions, investment growth had also been a concern, as Indian companies were not investing enough. But it seems this trend is beginning to reverse.
So, will India be able to maintain a 7% growth rate? The odds are challenging, but not impossible. There were positive signs in Q1, but the big question is whether this is just a one-off or the start of a sustained trend.
It’s party time for the sugar industry
The Indian government recently made a significant announcement, lifting the restriction on sugar mills producing ethanol from sugarcane and paddy. This is a major development, considering that India is the world’s second-largest sugar producer, and this decision is expected to have ripple effects on the country’s demand for crude oil.
Source: Statista
But you might be wondering, what exactly is ethanol, and why does it matter? Let’s break it down.
Ethanol is a clear, colorless liquid commonly used as a solvent, fuel, and even as alcohol found in alcoholic beverages. It is typically produced through the fermentation of sugars by yeast or via petrochemical processes. Ethanol is widely used in various industrial applications, from manufacturing pharmaceuticals to being a key component in alcoholic drinks. However, in the fuel industry, ethanol is particularly important because it is blended with gasoline to increase octane levels and reduce emissions, making it a crucial biofuel.
Ethanol’s significance lies in the global push to transition away from fossil fuels. Since we can’t just snap our fingers and switch to green energy overnight, the interim strategy involves making our existing fuels less harmful. This is where ethanol comes into play, as it is blended with petrol and gasoline to reduce their environmental impact.
Here’s where the recent policy change becomes interesting. Previously, ethanol was merely a byproduct of sugar production, making the process inefficient. With the new regulations, sugar mills can bypass sugar production altogether and convert sugarcane juice directly into ethanol.
This shift is a big deal for several reasons:
- For Sugar Mills: It opens up a more profitable avenue. Mills can now decide whether to produce sugar or ethanol based on which is more lucrative at the time.
- For the Global Sugar Market: If India ramps up ethanol production, it will export less sugar, potentially driving up sugar prices worldwide. This is already happening, as the government has banned sugar exports.
- For India’s Ethanol Program: This change gives a significant boost to India’s ethanol ambitions. The government aims for 20% of gasoline to be ethanol by 2025-26, a goal that is now much more attainable. India achieved 10% ethanol blending in 2022 and is currently ahead of schedule.
- For Farmers: Increased demand for sugarcane could lead to more stable incomes for farmers.
You might be wondering, “Why didn’t they implement this sooner?” Well, it’s not that simple.
Just last year, in 2023, India actually tightened restrictions on using sugarcane for ethanol production.
Why? There were several reasons:
- Heatwaves were disrupting sugarcane production, given that it’s a water-intensive crop.
- Red rot disease was affecting crops in Uttar Pradesh, India’s largest sugar-producing state.
- A tight global sugar market had the government concerned about the trade-off between sugar for consumption and sugar for fuel.
Because of these factors, the government restricted ethanol production. But now, in 2024, circumstances have changed, prompting the government to restart the ethanol blending program.
This policy shift is part of a much larger plan. India has been working on blending ethanol into petrol since as far back as 2003 through the Ethanol Blended Petrol (EBP) program. Initially, progress was slow, but in recent years, the pace has picked up. Currently, India blends about 13-15% ethanol into petrol, with a target to reach 20%.
There are several reasons for this push:
- Reducing the oil bill: India imports over 80% of its oil, and ethanol helps reduce this dependency.
Source: [The Hindu](India's crude oil import bill falls, but import dependency hits new high - The Hindu imported 232.5 million tonnes,to 87.7%25 in 2023-24&text=India’s crude oil import dropped,new high%2C official data showed)
- Supporting farmers: Increased demand for sugarcane translates into more income for farmers.
- Environmental benefits: Ethanol is cleaner than pure gasoline, which can help reduce carbon emissions.
However, there are also concerns:
- Food vs. Fuel: Some worry that using more sugarcane for fuel might lead to sugar shortages or price hikes.
- Water usage: Sugarcane is a water-intensive crop, and in a country already dealing with water scarcity, this is a significant concern.
- Focus on advanced biofuels: Critics argue that India should concentrate more on second and third-generation biofuels, which are made from waste or non-food crops, instead of relying on food crops for fuel.
So, there you have it—a seemingly simple policy change that could have wide-ranging effects on global markets, farming practices, and energy use. We’re already seeing the impact, with sugar stocks experiencing a surge in the last three months, while alcohol stocks have been subdued due to questions over ethanol availability.
Source: Tijori
This is a bold move by India, balancing economic, environmental, and social factors. Will it pay off? Only time will tell.
It’s sunshine and rose for the Indian hospitality sector
The big fat Indian wedding season is fast approaching, along with a string of festivals, making this a particularly lucrative time for the hotels and hospitality industry. With multiple weddings and an influx of festival-related holidays, hotels are gearing up for a significant surge in demand.
As we head into this festive and wedding season, it’s a good time to take a closer look at the Indian hospitality industry. Currently valued at around ₹82,000 crore and growing at a rate of over 10% annually, the industry is on a robust growth trajectory. To put things into perspective, India hosts between 8 million to 10 million weddings each year, contributing to an industry worth approximately $130 billion.
One of the most interesting trends is that the demand for hotel rooms is growing faster than the supply. Demand is increasing at a CAGR of about 10.8%, while supply is growing at only about 8%. This gap between demand and supply allows hotels to charge higher premiums, which in turn boosts their profitability. Even if we set aside the COVID-induced dip, average hotel room rates in India have increased by about 12% from pre-COVID highs.
However, average room rates don’t tell the whole story. Occupancy is just as crucial for hotels. For instance, if a hotel with 100 rooms only sells 40 rooms in a day, the remaining 60 rooms generate no revenue. That’s why the industry relies on a metric called RevPAR (Revenue Per Available Room), which considers both the average room rate and occupancy rates. Fortunately for the hotels and hospitality industry, RevPAR is also showing significant growth.
Adding to this positive outlook is the growth of India’s aspirational class, whose incomes and willingness to spend on luxury and comfort have been rising. As we’ve discussed in previous episodes, there’s a clear trend toward premiumization, and hotels are capitalizing on this by offering add-on services like food and beverage options, salons, spas, fitness classes, and even bicycle rentals. According to a report by Axis Securities, hotel food and beverage revenue is growing by nearly 20% year over year, driven by in-house restaurants and banquet hall events.
Another major growth driver is the MICE (Meetings, Incentives, Conferences, and Exhibitions) segment, which contributes about 20% to the hotel industry’s incremental growth. Additionally, domestic travellers account for 50% of this growth, while foreign tourists contribute about 30%.
The hotels are also heavily targeting India’s $130 billion wedding market. The demand for wedding-related services is so high that weddings alone book over ₹5,000 crore worth of hotel rooms each year. Recognizing this opportunity, leading hotel chains have launched marketing campaigns to position themselves as the go-to venues for weddings. Hyatt has its “#PerfectlyYours” campaign, Marriott runs “Shaadi by Marriott Bonvoy,” and Taj promotes “Timeless Weddings.”
Despite a sluggish start to FY25, with the hotel industry’s revenue per room growing by just 4–5% year-on-year in Q1 due to headwinds like general elections, heatwaves, and fewer wedding days, the outlook for the coming quarters looks strong. With these challenges now behind us, the industry appears poised for a robust performance in the upcoming festive and wedding season.
Daikin wants a piece of the red-hot Indian AC market
India is heating up, and I’m not just talking about the weather! As temperatures soar and heatwaves become more frequent, air conditioners (ACs) are slowly transforming from a luxury item into a necessity for many.
According to Voltas’ annual report, the Room AC market in India is expected to grow at a CAGR of 12% and reach ₹50,000 crore by 2028-29. One company keenly eyeing this growing opportunity is Daikin, the world’s largest AC manufacturer. They recently announced plans to establish a massive 33-acre manufacturing unit in Sri City, Andhra Pradesh, marking their third facility in India. This new plant will focus on producing compressor units for ACs, and by 2030, Daikin plans to manufacture 5 million AC units in India, with 4 million earmarked for the domestic market.
But why is India suddenly such a hot market for AC makers? Let’s break it down:
- Rising temperatures: As mentioned earlier, increasing temperatures and severe heatwaves are driving demand for ACs. What was once a luxury is now becoming a necessity for many households.
- Untapped market potential: According to Kanwal Jeet Jawa, CEO of Daikin India, about 93% of Indians still don’t own air conditioners. With a rising class of aspirational Indians who have more disposable income, this represents a massive market opportunity.
- First-time buyers: The market is teeming with first-time buyers. The MD of Blue Star, another major AC manufacturer, noted that around 95% of the current AC market consists of first-time buyers. What’s even more interesting is that 65% of these buyers are located in tier 3, 4, and 5 cities, highlighting the growing demand in less urbanized areas.
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Source: Finshots
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Room for growth: India’s per capita power consumption for cooling is only about 25% of the global average. This means there’s significant room for growth as more Indians adopt air conditioning.
Source: Ozonecell
Now, back to Daikin: They’re not just excited about India’s population and market potential; they’re also optimistic about the benefits of India’s Production Linked Incentive (PLI) scheme. Let me explain:
Until 2020, a significant portion of India’s AC demand was met by imports. Foreign manufacturers supplied around 30% of the country’s fully assembled units and critical components. However, domestic players only captured about 15-20% of the market. To address this, India banned the import of ACs with refrigerants in 2020, aiming to boost domestic manufacturing. While this was a setback for foreign manufacturers, it didn’t fully resolve the issue because domestic companies lacked the capacity to meet the growing demand.
To further support domestic manufacturing, the government introduced the PLI scheme in April 2021. Under this scheme, selected manufacturers receive a 4-6% rebate on additional sales compared to the previous year, provided they meet specific conditions. This initiative has had a notable impact—within just 18 months, domestic value addition in the AC industry increased from about 25% to 45%.
Daikin, as the world’s largest AC manufacturer, is among the 13 foreign-owned companies that have committed investments under the PLI scheme for ACs and LED lights. This makes them eligible to benefit from the scheme and accelerate their growth in India.
In summary, India’s AC market is heating up faster than ever, with both local and foreign players vying to capitalize on this opportunity, which is shaping up to be a goldmine. It’ll be fascinating to watch this space in the coming months, and I’ll be sure to keep you updated as new developments unfold.
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