Indian economy: premium segments thrive, low-income groups struggle

India's domestic economy is experiencing a notable divergence, with premium and luxury goods seeing robust demand. In contrast, essential goods face headwinds owing to high inflation, according to Amnish Aggarwal, head of research at equity research and advisory firm Prabhudas Lilladher.

The firm's latest report states that all eyes are now on festive demand in the coming months to sustain market momentum. The report also notes that the second quarter of 2024 is expected to reveal the impact of volatile monsoons, flash floods in July, and the delayed recovery in rural and consumer demand in specific segments.

The economic landscape in India is marked by mixed demand, with strong interest in premium and luxury goods from the upper and upper-middle classes. At the same time, the lower-income segments appear to be facing some pressure. The recent volatility in weather conditions and higher food inflation during the quarter have significantly impacted consumer sentiment.

Discretionary spending on travel, tourism, and jewellery continues to perform well. However, the prevailing economic conditions have adversely affected sectors such as quick-service restaurants (QSR), apparel, and two-wheelers. Passenger vehicles (PV) continue to report substantial numbers, reflecting the varied trends across different consumer segments.

Global commodity markets remain highly volatile, affecting agriculture and crude oil-linked segments. Commodities, in general, appear to have touched the bottom of the barrel. Still, poor spatial distribution and the El Niño weather phenomenon are expected to influence prices of several agricultural commodities in the coming months. Palm oil, in particular, is anticipated to face price fluctuations.

Further, the report said geopolitical tensions in the Middle East will introduce further volatility in oil prices shortly, adding another layer of uncertainty to the global economic landscape.

The report also touched on the performance of India's benchmark Nifty index, which has delivered a modest 1.2 per cent return over the past six weeks. The cautious stance has been attributed to factors such as the impact of El Niño on crops and inflation, the slim likelihood of an interest rate cut in India, the expected increase in interest rates in the United States, and impending political uncertainty ahead of the Lok Sabha elections in India.

The report concludes that the market's headwinds have intensified in recent weeks, driven by the spike in crude oil prices and rising geopolitical tensions related to the conflict in Israel. Despite these challenges, the report suggests that risk-reward dynamics remain evenly balanced, with the Nifty price-to-earnings (PE) ratio trading at a discount of 16.7 per cent compared to the long-term historical average.

According to the report, the outcome of the 2024 elections in India and the stability of the incoming government, along with the continuation of economic policies, are the factors expected to play a pivotal role in guiding markets to new heights.