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Should a recession affect your purchasing decision making?

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Is the reduction in purchasing decisions/actual purchases made a good thing or a bad thing during recessionary times. While technically, India is still motoring along at over 5.5% GDP growth and is tipped to be the 2nd fastest growing economy in the world for 2009 (a miserable year for other world economies), should the discerning consumer cut down on his purchases of items?

As detailed by plain economics concepts, there are different types of items consumers buy – some are necessary and some are luxury. Needless to say, it is logically right for the consumer to hold back on luxury item purchases and do necessary due diligence and consultation with others involved in the decision making before making luxury item purchases.

Necessary items are those such as FMCG goods, etc. (Soaps, detergents etc.) – those that you will need and can not do without. The exact economics defintion is not so important as long as you get the concept.

Similarly, in any country and for any consumer/family, necessary monthly outflow can not be prevented. ex: the monthly trips to the groceries, the stocking of food grains for the month, the car basic minimum fuel to cover travel, the rent bills/the monthly mortgage payments, the various loan payments for the month, children’s bills (if any) for the month, the bills (telephone, Internet, Electricity etc.) are all necessary items. Your monthly budget has to include those.

Luxury items can be classified into two categories – depending on your pressing needs for the same. ex: if you have been contemplating purchasing say a good stereo system or a home theater or a computer for your home and have done the necessary and sufficient research (for a few months at least) on product attributes, brand, quality etc., it makes no sense to delay it unnecessarily. Yes, this is provided you have the necessary financial resources to make the buy without straining your monthly budget.

Some other items like fancy Chinaware, a Rolex watch or some golden bracelet can be delayed because all it does is suck a lot of money out of your pocket and not add genuine value.

I am also a believer that in times of recession, there are two holistic approaches:

1. If you are a innovation centric company, innovate – you get the best of talent for competitive rates and you will be able to carve out or identify blue oceans where you can earn super normal profits! Remember Craig Barrett’s words during the tech recession of 2001 – when everything/everyone is looking down, you need to innovate yourself out of that (he was Chairman of Intel Corp. – Nasdaq: INTC).

2. If you are an individual, you have the necessary resources to make the buy and have done your due diligence, other than a threshold that you set for yourself for big ticket items, you should not cut down on spending. Why? Consumer spending in an economy such as USA/India etc. accounts for a significant portion of their GDP – in USA, it is over 2/3 of the GDP of that country). If consumers hold back their purchases, there is no money flowing in the system, goods and inventory levels go up, importers of goods would cut down on import of goods since there is no domestic demand for them, factories would be forced to cut down production, losses will go through the roof as the plants become inoperable due to cutdown in business spending, money flow in corporates will dry up, cost of money will go up, job losses will mount, less money will reach the consumer in terms of wages and they, in turn, would further cut down on their spending, and the vicious circle repeats impacting the real economy – leading to a spiral effect of reduction in consumer spending. This is a recipe for disaster. This is why it is important that when everything is looking down, spend wisely. No one says, spend foolishly. Spend as you would during any other time but ensure there is sufficient justification for spending. Involve more parties in your spending decision making so the justification is not biased. Once done and convinced, don’t look back. India is technically NOT in a recession at all.

(This is what even P Chidambaram said sometime back when he was Finance Minister of India).

Yes, we will feel the slowdown effects but we need to learn to differentiate what is affecting our real economy and what is not. Just because people in US are downbeat, we have no reason to be. In fact, we should be proud that we are still steamrolling at over 5.5% GDP growth.

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Written by Naveen Athresh

March 1, 2009 at 9:12 am

One Response

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  1. You raise a very valid point here. On the other hand, for us living in countries NOT with a 5,5% GDP growth, the situation indeed is dire. We may not even find any products we want to consume, as the post in my link indicates. Nonetheless, not spending IS a recipe for disaster, but maybe we should spend with the money we have (cash) and not with the money we not have (credit), which is what brought the world into this situation the first place. In my mind THAT is surefire recipe for sustainable development.

    Jan Husdal

    March 1, 2009 at 5:26 pm


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