India's lipstick effect: Forbes 2nd January 2025

 The economics of the beauty industry in India is being shaped by post-Covid consumer demand and corresponding supply, the chief economist of Bank of Baroda, and author, Corporate Quirks: The Darker Side of the Sun, writes

he Indian economy is slated to grow at around 7 percent for the next couple of years, including FY25. At the same time, there have been some pertinent concerns raised on urban demand not quite keeping up. The rural economy, however, is slated to do better due to the good monsoon and kharif crop. If one were to look at sectoral growth trends, the picture is mixed. Those related to infrastructure tended to do better than consumer-related products. High inflation, in particular food inflation, has been a dampener.

Now interestingly, playing in the background is the ‘lipstick theory’ which broadly says that when the conditions are challenging for households, they take recourse to consumption of beauty products and services that improves the ‘feel good’ factor. How is one to interpret this phenomenon in our context, where it is believed that the recovery is shaped by the letter ‘K’?

The ‘lipstick’ theory or impact has been witnessed in the country post Covid, notwithstanding the fact that headline inflation has been high. There are several economic forces that have been working in this direction. First, the return to normal post Covid has meant that individuals have gotten back to their physical place of work, which in turn has made physical grooming an integral part of office life. With most companies now insisting on workers coming back to their desks, even if for a specified number of days in a week, the desire to ‘look good’ has returned. It may be recollected that during the lockdown phase of the pandemic, where work-from-home was the norm, all business was driven by Zoom and Microsoft Teams meetings. The change now has meant a return to normal.

 Second, the pent-up demand phenomenon has been witnessed everywhere in the economy. It started with people going out and buying physical goods and then spread more significantly to services in FY24 and FY25 (ongoing). This can be seen in the PMI (purchasing managers’ index) numbers too. An enhanced demand for services has included travel and tourism, as well as hospitality. Intuitively it can be seen that once people start moving out to revel in these services, there is a tendency to also dress-up for the same, which has led to demand for beauty products. In fact, an interesting phenomenon post Covid has been a rapid rise in the supply of entertainment, which can range from movie releases to international concerts like those of Coldplay or Dua Lipa, besides the conventional classical music and Indian language concerts. This has enhanced the ‘outings’ of almost the millennials and Gen-Z groups. This has also increased demand for such products as appearance is more important than the subject when attending these concerts.

Third, the pricing of these products has also been rather different from other products. To begin with, beauty product companies did not raise prices even though input costs rose in 2022, when there was an attempt to hold back on price hikes to ensure that customers were not affected. Subsequently, there has been an attempt to increase the prices, albeit gradually, as can be seen within the category of inflation on ‘personal care and effects’. But this has been well absorbed by users. The main reason is that while consumption increases, the expense bill is still small given the quantities that are used. This does not reflect in family budgets, unlike the vegetable or cereals basket. Hence, in a way, consumers have fairly inelastic demand to these products and services. In fact, the higher price may induce the demand through the ‘snob effect’.

Fourth, the income distribution pattern of the country has changed. While there is high inequality, those at the bottom and mid segments have witnessed improvement in their incomes and several jobs have been created at the lower level in industries, like delivery services. Therefore, the consumption class has increased. Here, the famous theory of ‘demonstration effect’ enunciated by Thorstein Veblen (formalised by economist James Dusenberry) has a role to play, where individuals would like to follow what the ‘other influence groups’ do. This has led to demand, especially for services in beauty parlours, which includes services like tattooing and grooming, and also includes male customers. A couple of decades back, such products and services were largely consumed by women.

Last, with demand for such products increasing, there has been a sharp increase in their supply. This can be seen by both the mushrooming of beauty parlours even in slum areas, besides the rural and semi-urban regions, as well as the rise of the informal sector producing these beauty products. This has made these products and services more affordable, as the prices tend to be lower than those of the organised sector.

 Therefore, the lipstick effect or theory has worked quite decisively in the Indian context, with both sides of demand and supply working well, with each force-feeding into the other. This symbiotic relationship holds promise for the future too as the economy continues to grow and create more jobs where consumption of such products becomes a habit.

 

Key Global And Indian Economic Themes For 2025: Free Press Journal: 3rd January 2025

 As we step into 2025, five crucial economic themes will dominate the global landscape. These themes, with their respective sub-themes, will shape the global economy over the year, even as the world remains in a state of flux. While global growth is expected to be steady, decisions made in the West and China will have significant repercussions on other economies, particularly emerging markets like India.

1. The Policy Approach of the USA
The first theme is the policy approach of the United States, which remains a key driver in global economic affairs. Despite the decreasing level of globalization, where nations interact more as individual players than as one cohesive group, the shadow of the USA looms large over every corner of the world. This influence is not just about warnings against de-dollarization or the imposition of tariffs but also about the broader economic policies that a new US President may initiate. These policies will inevitably affect countries worldwide, particularly through trade relations, inflation, and fiscal policies.

Donald Trump, who has made his economic stance clear during his election campaigns, is expected to implement many of his proposals. His position on migrant labor, for instance, could lead to a labor shortage in the US, pushing wages higher and fueling cost-push inflation. Additionally, his plan to cut taxes for corporations, although designed to stimulate investment, will likely increase the US deficit and borrowing, resulting in higher interest rates and global inflationary pressure.

Trump’s aggressive tariff approach, especially towards China, is another factor to watch. His rhetoric suggests that no country, not even traditional allies, will escape his wrath, with a 10-20% tariff on all imports from various countries. This will exacerbate inflation and will compel the Federal Reserve to consider a different approach to interest rates. Bond yields, which are often affected by US Treasury bond movements, will likely continue to fluctuate, making global markets more volatile.

2. The China Factor
The second theme revolves around China, whose economic recovery post-Covid will be a pivotal aspect of global economic dynamics. The Chinese government, having enacted both fiscal and monetary stimulus, is eager to rejuvenate the country’s economy. However, its relationship with the USA remains fraught, particularly concerning exports. Any drastic action by the US against Chinese exports could disrupt global supply chains, creating a ripple effect that would affect economies worldwide.

China’s growing assertiveness in other regions, particularly in Africa and parts of Asia, could be the result of its efforts to offset any trade restrictions imposed by the US. While India’s economy is more reliant on domestic demand, China’s growth remains highly export-driven. This means that India, too, will need to monitor China's actions closely, as any significant policy shift in China could impact the supply of key commodities, such as rare earth metals, that are vital for various industries worldwide.

3. The Union Budget of India
The Union Budget, set to be announced in February, will be another crucial theme in 2025. Unlike the previous year, where the budget was split into an interim and regular budget, this one will cover the full fiscal year, providing a clearer roadmap for the nation’s economic policy. The budget will focus not only on numbers but also on policy directions. For instance, the government’s fiscal roadmap, including its target for a 4.5% fiscal deficit ratio for FY26, will be keenly scrutinized.

With inflation having eroded the real purchasing power of many taxpayers, there will be an expectation for some form of relief on the taxation front. This could take the shape of income tax cuts or other relief measures designed to boost disposable income. Another area of focus will be the government’s capital expenditure plan. How much will be allocated to infrastructure and development projects? This will give insights into how the government plans to drive growth and create jobs in the coming year. Additionally, the government’s borrowing program will be under the spotlight, with the markets looking for any signs of fiscal consolidation.

4. The Credit Policy and Inflation Management
The fourth theme is the Reserve Bank of India’s (RBI) credit policy for FY25. The last credit policy of the fiscal year, which is expected to be more critical than the April policy, will be shaped by several factors. A major shift will be the appointment of five new members to the Monetary Policy Committee (MPC), whose perspectives on repo rates and the growth-inflation dynamics will be key in shaping policy. The guidance given on inflation and growth in this policy will set the tone for the next financial year, particularly regarding rate cuts.

While the inflation data may not change significantly, the RBI’s interpretation of this data will guide future actions. This will be important not only for the RBI’s monetary stance but also for borrowers and lenders, who will be watching for signals about future interest rates. If the RBI’s stance indicates that inflation is under control and the economy can bear rate cuts, there could be a downward trajectory in rates, helping ease borrowing costs. For now, it appears that deposit rates have peaked, and there is unlikely to be much upward movement in the short term.

5. GDP Growth Projections
The final theme concerns GDP growth projections for FY25 and FY26. Multiple estimates will emerge from January onwards, but the most significant projections will likely come from the government’s Economic Survey, the Union Budget, and the RBI’s own growth forecast. This year’s growth numbers are particularly interesting as the final number for FY24 was a surprising 8.2%, a significant upward revision from earlier estimates.

The expectations for FY25 are more tempered, with estimates ranging between 6.5% and 7%. This number will have profound implications for the government’s fiscal planning and the markets. The final growth number, expected in May, will provide clarity on the overall health of the economy and how well it has withstood global pressures.

Additionally, the combination of the growth forecast from the Economic Survey and the Union Budget will provide insights into the government’s expectations for FY26. These numbers will be important not only for economists but also for markets, including stock, money, and foreign exchange markets. The interplay between these projections and actual outcomes will be closely monitored by investors and policymakers alike.

In conclusion, these five themes—US policy, China’s economic recovery, India’s Union Budget, the RBI’s credit policy, and GDP growth projections—will play out through 2025. While some of these issues, such as the budget, are fixed events, others, like US-China trade dynamics and inflation management, will evolve throughout the year. The key question for India will be whether its economy can sustain a higher growth trajectory in FY26, driven by these themes and other emerging global factors.

As we enter this new year, these economic themes will provide the framework for much of the global discourse, influencing policy decisions, investment strategies, and market dynamics across the world.