Union Budget 2023 is presented on 1st February, is less than 10 days away, and all the sectors, especially the consumer goods/FMCG companies, are eagerly awaiting to see the possible new initiatives that the FM will announce to boost consumption and drive growth in the sectors.
Rural markets continued to pull the FMCG sector down, recording a volume decline of 3.6 per cent in the September quarter in comparison to a decline of 2.4 per cent in the June quarter, according to NielsenIQ. This is the 6th quarter of flat to declining volumes, and contrast this to the pre-Covid years where rural consumption outstripped urban by more than 50 per cent (1.5x of Urban consumption).
Various reasons are contributing to this slow down, such as commodity and fuel price inflation, which has had a negative impact on disposable income; interest rate increases which continue to impact household expenditure and outlays on personal and home loans, and uneven rainfall through the year that has impacted crop yields.
While the overall FMCG consumption and volumes in India continued to be flat or even declined over the last 5 quarters, the sector has grown in value on the back of high single digit/low double digit price increases each quarter, adding further pressure on rural/urban consumption.
The overall price increases have ranged from 8 per cent to 11 per cent per quarter for FMCG sector for the last 4 quarters, the highest in the past 30 years, and has had a major impact on rural sales (which accounts for 40-45 per cent of total FMCG sales in India).
Major Government initiatives such as Make in India, various PLI schemes in the packaged foods sector, large scale infrastructure projects around transport & logistics, digital connectivity through Aadhar and UPI and direct transfer of benefits to the accounts of rural households, have ensured that economic progress is accessible to the wider population.
Growing awareness and aspirations of consumers, easier access to markets and finance, and changing lifestyles, have been the key growth drivers for the sector for the last decade, and semi-urban/urban and rural segments are expected to continue to grow rapidly in the next decade on the back of these trends.
The general expectation from the budget is for a push to help revive consumption in the sector, especially the rural markets, through more focus on schemes like Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), accelerating the investment in transportation & logistics sectors so as to provide easy access to markets, and providing aid to rural agriculture sector to double farmer incomes.
In addition, there is hope that budget’23 will give some relief in raw material prices through import duties and other subsidies to help bring overall prices of consumer products down.
Rural India has continued to switch to cheaper products/smaller pack sizes due to price hikes in the past two years. However, as inflation cools to 5 to 5.5 per cent, it will help FMCG companies gain lost ground and expand their rural sales as consumers will likely trade up to larger packs and increase their overall consumption.
The rural India per capita income being one-third of the urban per capita income, the consumption recovery is likely to be slow even as inflation cools down due to the impact on disposable income over the last few quarters for reasons mentioned above.
Government can help to increase the rural economy by creating more fiscal space to reallocate money towards existing rural schemes, including the PLI schemes, the rural jobs scheme MGNREGA, roads, infrastructure building projects, building new warehouses, and railway projects, some projects like building affordable homes under the Pradhan Mantri Away Yojana, PM Kisan Yojana and financing support to micro, small and medium enterprises, setting up new plants and expansion of manufacturing capacities. This will not only create jobs but will also boost consumption.
The budget for the previous fiscal year included funding for the construction of 25,000 km of national highways, allocated Rs.44,600 crore to expand irrigation systems, allocated Rs.48,000 crore to build affordable homes, allocated a procurement of food grains at minimum support price (MSP) has been raised to Rs 2.37 lakh crore. The higher MSP will give more money to farmers, which will lead to more disposable income, which would help to drive FMCG product consumption in rural areas.
Therefore, these major initiatives in the budget will help revive the rural economy and consumption, so that everything from FMCG products to automobiles and tractors to mobile phones can once again see a strong rebound in sales.
By Rajat Wahi, Partner, Deloitte India
