In today's FirstScroll, we break down why the Finance Minister is telling Indian brands to stop focusing only on rich customers, and why record profits for luxury goods might be a trap for the economy.
The Story
Imagine a shopper standing in a supermarket aisle in Pune or Kanpur this week. They are reaching for the 10kg sack of flour or the family size pack of biscuits to save a few rupees on the unit price.
They are not looking for artisanal organic crackers or a luxury smartphone. They are calculating exactly how much value they can squeeze out of every rupee before the festive season hits its peak.
This is the reality for most of India's 1.4 billion people. While luxury cars and premium apartments are selling at record rates, the average household is being very deliberate about where they spend.
On Tuesday, Union Finance Minister Nirmala Sitharaman took note of this divide. She told India's top business leaders that it was time to look beyond premiumisation and start building for the wider market.
And here is the strange part. Companies have been making massive profits by selling expensive things to the wealthier segment of the population, yet the government is sounding an alarm.
So here's the question: if selling expensive things to rich people makes companies more money, why is the government telling them to stop?
You see, the problem is not that people are buying nice things. It is that the engine of the economy, the mass market, is being neglected by the brands that should be serving it.
Think of the Indian economy like a massive ship. Premium sales are the fancy lights on the top deck, but the mass market is the engine room. If the engine room loses power, the lights will eventually go out for everyone.
Currently, consumer goods firms expect demand growth of 9 to 11 percent through the festive period. But this growth is not coming from a broad splurge. It is coming from value seeking.
In fact, industry experts say customers are making unit purchases jumping 20 percent in some categories. This is because people are stocking up on larger packs to get a better deal, rather than spending more per unit.
So who wants what here? Brands want high margins, which they get from premium products. The government, however, wants a broad recovery that creates jobs and long term stability.
This is why you see brands like Reliance selling ice cream for ₹10. They know that while luxury is tempting, the real scale is at the bottom of the pyramid.
The Finance Minister is pushing for this scale. She argued that the next 20 years will require businesses to move beyond just startups and focus on spending on research and development to build durable, mass market enterprises.
Now, premiumisation might look like a corporate success story, so why should you care? Because if brands stop competing for the common shopper, inflation can stay sticky.
In August, retail inflation hit a 20 month high of 4.82 percent. When prices rise, the central bank has to keep interest rates high, which changes what the repo rate actually does to your monthly loan payments.
But here is the twist. While companies are trying to keep the mass market interested by absorbing costs, the pressure is mounting. In some sectors, cocoa costs jumped 48 percent in just one quarter.
Brands are currently "eating the cost" to protect their volumes during the festive months. But this is a short term strategy, not a permanent fix for the rising cost of commodities.
The global environment is not helping either. Every $1 increase in crude prices can raise India's oil bill by around ₹18,000 crore. This is why the government is so determined to protect its energy interests, even if it means india's russian oil habit just hit a record high recently.
External shocks are real. With the West Asia conflict continuing, crude oil prices topped $100 per barrel, adding to the pressure on India's refiners and, eventually, the consumer's wallet.
Now to be clear, the government is still confident. Sitharaman noted that the 7.8 percent growth seen in the June quarter shows that the economy is resilient despite these global headwinds.
So, is the premiumisation debate about brands being greedy? Not really. It is about whether Indian companies can scale up to serve 1.4 billion people instead of just the lucky few at the top.
India already has the demand. Whether its brands can learn to prioritize value over luxury to keep the economic engine running is something only time will tell.
Until then…
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