Can Diwali festive demand brighten prospects for Indian businesses amid recession fears?

Optimism is strong despite of slowing economic activity in the country as consumer spending traditionally spikes during the Hindu festival

People shop at a crowded market ahead of Diwali, the Hindu festival of lights, in the old quarters of Delhi, India. Reuters / Anushree Fadnavis

Businesses in India are looking forward to a much-needed boost from the Hindu festival of Diwali this month, which is traditionally a time when consumer spending spikes in Asia's third-largest economy.

Optimism is strong despite recent signs of slowing economic activity in the country and steep inflation, as well as fears about the global economy slipping into a recession.

“Consumption tends to spike significantly during Diwali,” says Ram Kalyan Medury, founder and chief executive of Jama Wealth, an investment advisory. “Even [the risk of] an inflation-ridden recession on the global front cannot dampen the festive spirit.”

“Sales, discounts and across the board increase in footfalls in shops and digital footfall for e-commerce websites alike means demand increases. More festive demand means more to cheer for the businesses.”

Diwali, often referred to as the festival of lights, is widely associated with the goddess of wealth, Lakshmi, and many Indians wait until this time to splash out on big purchases, from jewellery to televisions, new cars, and even homes.

The five days of festivities this year begin on Saturday, with the main day of Diwali falling on Monday.

As a consumer-driven economy, Diwali is a critical time of the year for many sectors in India. Alongside the retail sector, manufacturing and other industries also benefit from the uptick in spending.

“People, irrespective of their socio-economic condition, go out and purchase goods,” says Sonal Jindal, founder of Medusa Exim, an international supply chain management company.

The Confederation of All India Traders forecasts that, with Covid-19 curbs lifted, sales during Diwali this year will be up 30 per cent compared to 2021 for the industry group's 80 million small and medium-sized businesses, which generate more than $1.5 trillion in sales annually.

“Businesses in India are preparing to celebrate the peak festive season by expanding their staff, looking to launch new products or services, especially since the Covid restrictions are finally removed,” says Ms Jindal.

“Businesses like ours, which are running in co-ordination with a number of vendors and associates, can heave a sigh of relief as owners look forward to a good show in the market.”

India's gross domestic product grew by 13.5 per cent in the quarter between April and June, the fastest pace in a year, according to government data, as the economy bounced back from the harsh impact of the pandemic.

But the economic environment has become more challenging in recent months. Inflation hit a five-month high of 7.41 per cent in September, driven by higher food prices and Russia's invasion of Ukraine, pushing up commodities prices globally.

Soaring inflation prompted India's central bank, the Reserve Bank of India, to deliver its fourth consecutive interest rate increase in September. This makes borrowing costs higher for consumers and businesses and can dampen spending trends.

Purchasing managers’ surveys reveal that activity in India's services and manufacturing sectors moderated in September because of inflationary pressures.

Most agencies have been lowering their growth forecasts for India, with the International Monetary Fund on Tuesday cutting its GDP growth projection for the country for the current financial year until the end of March to 6.8 per cent from an earlier forecast of 7.4 per cent. But given its relatively fast growth amid a challenging global environment, IMF managing director Kristalina Georgieva described India as a “bright spot on this otherwise darker horizon”.

Despite the challenges, the latest Consumer Pyramids Household Survey by the think tank Centre for Monitoring Indian Economy shows that consumer sentiments rose to a 30-month high in September.

“There is a lot of positivity in the air this year,” says Meenakshi Kalsi, managing partner at Metro & Metro Shoes, based in Agra in north India. “There is reason to cheer as consumers are indicating willingness to spend more.”

“Festival seasons are very important for the Indian economy as the spending increases multifold involving a huge boost to the economy of the country,” she says.

Business was tough for the footwear industry during the pandemic, she explains, as schools and offices shut, and people were not attending celebrations and gatherings.

Ms Kalsi says that not everything is rosy, however, as companies like hers face challenges, including high transport costs and some difficulties procuring raw materials. Nonetheless, she remains optimistic about an improvement in demand.

“I’m in hope for economic revival,” says Ms Kalsi.

Many companies are gearing up for a pick-up in demand during the festival period.

“We are anticipating a double-digit growth in the sales percentage as compared to the same period last year,” says Harsh Shah, founder of Rupa Steel Centre, a manufacturer of utensils in India. “We have prepared in advance with supplies in place to cater to a sudden rise in demand during the festival.”

However, Mr Shah says that he is noticing that the market dynamics are changing amid a trend towards online purchasing compared with shopping in brick and mortar stores.

“Ahead of the festive season, we have seen a lean demand from the retail market,” he says. “The retail industry is facing some brunt due to lesser walk-ins. A known contributor to this phenomenon has been the e-commerce space.”

The move towards online shopping could have an effect on any small and medium sized traders who are dependent on sales through physical stores, Mr Shah says.

Jewellers in India are among those who are anticipating a festive boost this year. The first day of Diwali, known as Dhanteras, is when many Indians traditionally purchase gold.

“We are expecting good numbers this Diwali,” says Ketan Chokshi, managing director and jewellery designer at Narayan Jewellers.

“Though there is [the] impact of inflation, we see a growth from last year.”

Given the economic conditions and global uncertainty, some people are “a little sceptical and are saving more,” Mr Chokshi says.

He adds that India is "doing well" and has "not been as tough as the last two years have been”.

“Indian retailers and e-commerce players are expecting a bumper Diwali,” says Shrikant Nibandhe, managing director at One World Logistics.

“The Diwali sales are expected to surpass previous highs and make up for the lacklustre sales during the pandemic years.”

Prospects brighten for India's real estate industry during Diwali period. Home sales have seen a robust recovery this year. The number of homes sold across India's top eight cities was up 15 per cent in the quarter between July and September, according to property consultancy Knight Frank.

However, the latest RBI interest rate increase of 50 basis points, which makes home loans more expensive, will affect affordability, says Shishir Baijal, chairman and managing director of Knight Frank India.

“This might slow down home buying decision for a short to medium term,” he says. “However, we hope, India’s steady economic growth and revival in consumer’s sentiment towards the economy will bring back confidence amongst the end users and support their home buying activities.”

Rohit Gera, managing director of Gera Developments, a property developer based in Pune, says he remains “cautiously optimistic in the near term”.

“The sales momentum overall for the real estate industry has picked up and that is a trend that is here to stay during the festive season as well,” says Mr Gera.

The outlook for Diwali may be relatively bright for India, but financial experts warn that there are significant economic challenges looming, which could mean that the momentum does not continue for too long after the festivities are over.

“Inflation will catch up eventually and since the West is likely to be in [a] recession, the demand outlook for most of India’s exports is also expected to go down,” says Jama Wealth’s Mr Medury.

“This could put a brake on consumer spending but is unlikely in October and during this Diwali.”