Monday’s headlines on India Meteorological Department (IMD) projections of below normal rains in August may affect the kharif crop yield, and that news has put the spotlight back on stress in demand for consumer goods in rural markets. It has also triggered apprehensions about escalation in food prices.
More stress foreseen on rural consumer demand
Just last month, the market research and polling company Ipsos’ in its monthly survey, What Worries the World, had said that inflation and unemployment worries had receded somewhat in July. While releasing the survey, Amit Adarkar, CEO, Ipsos India, had said the reprieve in inflation and unemployment was a good sign, though the enormity of the issues remains, exacerbated by global economic slowdown, the war in Ukraine and local factors like floods and the havoc wreaked by excessive rainfall. The situation, he had said, may stabilize in the next quarter and some states may see a bumper crop.
But the IMD prediction seems to have thrown a spanner in the works. Adarkar now admits that lower rainfall in August will play a spoilsport in terms of rural consumer outlook.
There is additional fear of food inflation if the crop yield is poor. “Though the prevailing consumer inflation is within the RBI’s tolerance zone, lower rainfall will impact prices of perishables such as fruits and vegetables,” he says.
The country has adequate grain stocks and is a major exporter of food items, but the reality is that food prices were creeping up, Adarkar says. The cost of rice, for instance, has gone up by 10% over the last one year. “But what gets noticed and talked about are the prices of perishables shooting up within a short span, such as, tomato prices which have gone up by 400% within a few weeks. To that extent, food inflation has ramifications beyond just the price increase. More importantly, it affects sentiment,” he says.
The IMD forecast comes at a time when consumers are already suffering the overhang of inflation. Last week, market research firm Kantar unveiled its Consumer Connections report for 2023 and said that though inflation rates are dipping, prices are still higher than earlier levels. Similarly, consumption is reviving but is yet to be back to normal -- pre-inflation. “The actual numbers on inflation may have declined a bit, but the hangover of inflation, the consumer sentiment and the consumption attitudes have not really come back fully,” K Ramakrishnan, managing director, Worldpanel Division at Kantar told HT.
Kantar tracks household consumption of FMCG, basically food, home and personal care items of daily use. Rural demand revival is sluggish, he says. Though rural households purchase fewer FMCG categories than urban households, this year fertilizer and farm labour costs went up for them leading to a moderation in expenditure on other things, Ramakrishnan says. He expects rural markets to perk up in the next few quarters.
The rise and fall in rural consumer demand will depend on monsoon shortfall over the next one or two months, adds Adarkar. Any impact of this stress on India’s villages will be reflected in muted festival spending, he says.
“Discretionary rural consumption (categories such as two wheelers, clothing, home-building or improvement, gold) is linked to festivals (including the wedding season). Consumption slowdown due to a sub-par monsoon will be visible in Q3 as most significant festivals fall in this quarter this year. For non-discretionary items (food, staples etc), rural growth is already subdued,” he adds.
Anuj Sethi, senior director, Crisil Ratings, said the urban segment, accounting for nearly 60% of the sector’s revenue, witnessed double-digit growth over the past two fiscals, in the post-covid period, and is expected to report 8-10% growth on the back of increasing disposable incomes, higher consumption with increasing contact-based services and deeper penetration of e-commerce channels.
However, in a note on the FMCG sector earlier this month, Sethi said the sector is likely to record 4-6% volume expansion this fiscal, supported by gradual recovery in rural demand (35-40% of overall demand), and steady urban demand (60-65% of overall demand). “That said, any adverse impact of El Nino conditions on rainfall patterns this monsoon season will have a bearing on rural demand and remains monitorable,” he noted.
Adarkar says since commodity and packaging prices have softened, marketers may be able to hold prices or take price drops to sustain rural demand.
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