Sticker shock in the aftermath of Covid is the primary reason why consumer demand across the product range fell below trend line in the last 5 years in India. Consumption slowdown eventually weighed on stock market sentiment, leading to sharp downturn between September2024 and March 2025. Revival in the market from March lows can be attributed to the bottoming out of the economy, the sustainability of which will be driven by structural improvement in affordability.
Prices of wide ranging products increased 40-50% between FY19-23 including motorcycles, airfare, hotel rooms, and petrol. Wage growth didn’t keep pace, consequently, demand collapsed. Demand for FMCG, autos, paints etc. grew around 3-5% annually in FY19-25, well below 8-10% growth achieved in the prior decade. Unprecedented price rise in FY19-23 period can be attributed to a combination of 3 factors 1) lingering impact of Covid induced supply disruption 2) sharp rise in geo-political conflicts including Russia-Ukraine war, Israel war, Indo-Pak conflict and US led trade war, and 3) dramatic rise in regulatory cost on account of energy transition, emission norms, and the rising need of self-reliance.
Rising affordability will likely be an enduring theme from here on and will be driven by (1) plentiful availability of cheaper solar power (2) cheaper borrowing cost driven by softening of inflation of food, energy among others, and (3) easing of tax burden as govt has achieved bulk of its fiscal tightening goals. Table below shows that electricity tariff and petrol haven’t gone up for two years now, and may remain flattish in coming years. Prices of motorcycles, airfare, hospital beds, and hotel rooms are unlikely to rise by more than 2-3% in coming years as per most companies we have interacted with. Key caveat is wage growth though, as inadequate job generation along with advent of AI is capping wage hikes. Still, the combination of declining borrowing cost, income tax cut along with moderate rise in cost of most articles is likely to boost disposable income.
Stock market typically does well in periods of rising disposable income. Lesser pace of fiscal tightening versus recent past will also help. Thus, nascent recovery in the stock market from March lows appears to have legs. Best time to revisit John Templeton quote “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria”.