FMCG woes: How Budget 2020 pushed demand revival further down the road

The Budget's incentives have ignored a large section of middle-class buyers

Fast-moving consumer goods (FMCG) companies are waking up to a new reality: The consumption slowdown could extend a little longer than expected since the Budget on February 1 has not given the middle class much room to loosen their purse strings just yet. 

Instead, as many FMCG executives say, it has pushed “hard choices” on people. “They have given money in one hand and taken it from the other,” says Adi Godrej, chairman, Godrej group, while speaking of the cuts in personal taxation for earnings up to Rs 15 lakh per annum.

The cuts in personal taxation across income brackets were expected to be an important lever to spur consumption. The government, though, has opted to be cautious on that front.

“The income tax cuts for those earning up to Rs 15 lakh annually can be availed of only if tax exemptions in the bracket are forgone,” says Godrej. “What good does that serve? We need bold measures to boost consumption. That has not happened,” he says.

Encouraging the middle class to spend some more is important because it is the backbone of the economy, says Ankur Bisen, senior vice-president, retail and consumer products, Technopak. Industry estimates have pegged the size of India’s middle class at 350-400 million. Their incomes could vary from anywhere between Rs 3-5 lakh per annum at the bottom of the pyramid and Rs 25-30 lakh per annum on the top, they say.

And while those drawing up to Rs 15 lakh per annum have been given some tax breaks, those above the Rs 15 lakh per annum threshold have been passed up for now. This means, says H K Pradhan, Professor of finance and economics, Xavier School of Management, that these people would be a tad slower in making key purchase decisions. Many continue to keep cutting household expenditure wherever possible, including on everyday items from soaps to biscuits.

As Sanjiv Mehta, chairman and managing director, Hindustan Unilever, said, “The market conditions are challenging in short term. But I remain hopeful of a revival in the medium to long term. It is important to put money in the hands of people to kick off a virtuous cycle of growth.”

Experts say that the challenges of growth revival have been left to the market. “The Budget has not addressed the demand slackening appropriately or taken measures to revive rural consumption, which is a key cause for the current slowdown,” he says.

Varun Berry, managing director, Britannia Industries, says that the levers that the government has activated, including rural, infrastructure and entrepreneurship, would take time to fire up, a point that has been reiterated by many CEOs following the Budget.

“There is a structural demand issue in the market. And any sign of a revival would show up with a lag. It would depend on a number of factors, including the monsoon, post-harvest crop and festive demand,” says Madan Sa­bnavis, chief economist, Care Ratings.

In other words, most FMCG CEOs and experts are now pointing to a revival in the third quarter of FY21 versus the fourth quarter of FY20. Even the Reserve Bank of India (RBI) in its bimonthly monetary policy meet last week had said that a demand revival could come about in the second half of 2021, specifically in the third quarter when the gross domestic product (GDP) growth rate would touch 6.2 per cent from 5 per cent now. 

For market research agency Nielsen, this is a worrying sign since it had forecast a demand revival for the FMCG market in the January-March 2020 period, saying the sector had bottomed out after reporting its slowest growth in six quarters during October-December 2019. 

Nielsen data shows that the FMCG market growth stood at just 6.6 per cent in the December quarter from a high of 16.2 per cent in July-September 2018. That is a decline of nearly 60 per cent, the agency said, pointing to how bad the slowdown has been in recent months. Rural areas have grown at an even slower pace to overall market growth in the December quarter, it said, at 5.2 per cent versus urban areas, which have grown at 7.4 per cent during the period.

But can companies afford to hold back on their launches and initiatives in the absence of a meaningful upturn in the economy? Not at all, says Mohit Malhotra, chief executive officer, Dabur India. “The strategy for us would be to stay the course and to invest strongly behind our brands,” he said in an investor call last week. “We will continue to expand our distribution footprint and enhance our competitiveness in the market.”

In an investor update last week, consumer goods major Marico said that it would focus on reviving sustainable growth in its brands by redirecting funds from trade promotions to consumer pricing. The company also said that it would upgrade its distribution infrastructure in urban general trade and expand direct reach to rural areas.

Nielsen says that companies are focusing more on entry-level packs and price points in keeping with the trend of lower household consumption. Some experts say that low-unit packs in an FMCG company’s portfolio has grown by 20-25 per cent in the last few months versus 10-15 per cent earlier. That trend, they say, will not slacken any time soon.