Sunday, April 15, 2012

No economic theory please, we are Indians 
~~ T.C.A. Srinivasa Raghavan
People prefer to be seen differently from how they actually are. This presents a fantastic business opportunity.
That is why, as the above article shows, FMCG stocks, consisting about a third of cosmetics producing firms, have been doing so well. The BSE FMCG index, which tracks top FMCG companies, has moved up 50 per cent. In contrast, the Sensex has gained only 3 per cent over the last two years. Listed FMCG companies have even raised product prices without hurting demand.
And production numbers support this trend. The consumer non-durable segment of the IIP grew by 15 per cent between February 2010 and 2012 while the IIP as a whole grew only by 11 per cent. This phenomenon — of ever-increasing FMCG products in India — presents not only a business opportunity. It also shows (once again) how India is the graveyard of many economic theories.
The older graves:
My favourite grave is the theory of monopoly, which holds that monopolists restrict output to increase prices and profits. The Indian Railways has been doing the exact opposite for the last 40 years: It has lowered prices and expanded output despite being a monopoly.
Another favourite grave on which I regularly place flowers is the theory underlying the fiscal deficit. Someone at the IMF thought up the ‘ideal' level of deficit: 3 per cent.
Violate it, economists growled and fire and brimstone will rain down from the heavens on your country. They did and do — but not in India which not only merrily violates the ‘rule' but also grows cheerfully at almost 8 per cent.
A third, and more recent, grave is the vulgarised version of the Taylor Rule which says that in an open economy, the central bank can either control interest rates or exchange rates but not both.
But along comes India and kills the rule. Consider: If interest rates are high, the dollars ought to flood in and the rupee should appreciate. In India, it works the other way round.
No wonder the colonial Victorian priests thought we were devious, shifty, unreliable and, on the whole, not to be trusted.
And the new one…
Now the theory of elasticity has been beheaded in India. This theory says that the demand for inessentials is highly responsive to changes in price, whence elastic/elasticity. The reverse is also true in that the demand for essentials is not.
But as the case of FMCGs in the lead article on this page shows, India has quietly laid this theory to rest. The sales of the most of the inessential things ever, namely, appearance-care products, are growing at a very healthy clip.
This is happening in spite of their prices increasing, both in nominal and real terms — the latter because incomes are not growing at the same rate. The theory of elasticity of demand would have it the other way round.
Where shampoos are concerned, it seems the killer weapon is the sachet. There is no inventory cost and this helps with the family cash flow.
But creams don't seem to come in sachets and cost the earth. Yet women are as addicted to them are as men are to cigarettes.
Economic theory also says that there should be a shift to inferior substitutes when prices go up. But that's not happening, either. Instead, inferior substitutes are simply raising their prices and see their revenues soar as demand also soars. Point made.

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