India’s consumption story remains stressed

Though Dabur India Limited, known for its Chyawanprash, Honey, Red paste and Real fruit juice brands, reported slight increase in consolidated revenue and decline in net profit, it flagged inflationary pressures and dip in overall consumer sentiment

Despite a feel-good Union Budget earlier this month and the efforts therein to stimulate the economy, there seem to be no short-cuts to improving consumer sentiment in India. The fact is, Indians are not buying enough consumer products. High prices are affecting their ability to purchase items of daily use as well as more discretionary or non-essential products. Not just that. People in the villages are under far more duress than their counterparts in the cities.

laptop and shopping bags, online shopping concept.

This was underlined by several fast-moving consumer goods (FMCG) companies in their earnings recently as well as by analytics firm Nielsen IQ that released FMCG Snapshot for Q4 2022 (‘October-November-December 2022) on February 2.

Nielsen said FMCG industry grew by 7.6% in Q4 2022 but this was 1.6% slower than the last quarter (July-August-September). In volume terms, urban markets grew 1.6%, while rural India declined by 2.8%.

Though Dabur India Limited, known for its Chyawanprash, Honey, Red paste and Real fruit juice brands, reported slight increase in consolidated revenue and decline in net profit, it flagged inflationary pressures and dip in overall consumer sentiment. In the earnings release, Dabur CEO Mohit Malhotra said the impact of inflationary pressures was more pronounced in the rural markets as there was a marked shift to smaller and more affordable packs.

Amit Adarkar, CEO of research firm Ipsos, highlights two underlying themes. First, volume growth is lagging value growth and companies are focusing on maintaining or improving profitability through price corrections (increases), volume down-gradation (reducing grammage in packs) or portfolio right sizing. Second, most companies are increasingly worried about rural growth outlook in contrast to urban growth, he explained.

Pushan Sharma, director, research, at CRISIL Market Intelligence and Analytics, agrees with Adarkar that companies’ revenue growth has been price-led as commodities, raw materials and fuel costs shot up.

The March 2022 heatwave pushed up the wheat prices (used in biscuits, bread and refined flour products). Milk and fuel prices jumped, too, making products costlier, in turn, affecting their volume growth. “It’s not that people have completely stopped buying, but they’re buying less as companies are also putting out lower grammage packs,” Sharma said.

Since inflation impacts the bottom of the pyramid customers the most, stress in rural markets is higher. People are avoiding non-essentials items as they cost more. However, the silver lining is that the farmers could also sell their crops of wheat, cotton or those for edible oils at better rates. “But cultivation accounts only for about 40- 45% of the farmers’ income, and, to that extent, they have benefited. But then the remaining 50-55% income comes from wages or other means like remittances. There could have been pressure on those fronts,” Sharma explains.

Volume growth of non-essential products has been slow in urban India too as jobs have been under pressure.

But Adarkar doesn’t see the consumption slowdown as alarming. While urban and rural markets will show diverging trends, some of the measures in the budget are likely to put extra money in the urban consumers’ pockets and spur immediate consumption. The explicit focus on new tax regime should act as an incentive for consumers in India’s cities to spend and in fact, de-incentivise savings. “But this measure is unlikely to touch lives of rural consumers as most of them are not in the formal tax net,” he says.

He notes that the 2023 Union Budget has cut the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) allocation by 17.8% which may also impact rural consumption to an extent. There are also reports of El Nino impacting the monsoons this year. Overall, the urban- rural divide in outlook and consumption may stay for at least two quarters, he adds.

But Crisil’s Sharma is hopeful with kharif season harvest fetching good prices and Rabi season sowing looking promising, it could be a good summer for farmers, improving their sentiments.

In the earnings statement earlier, Dabur’s Malhotra had also said they believe that “the demand slump in rural has bottomed out…We are hopeful of rural demand reporting a smart recovery on the back of a record farm output and increased government spending.”

In Adarkar’s view job creation linked to the informal sector and investment in infrastructure should have some positive impact in the medium term, but these are not quick fixes for the short term.