Revival in Discretionary Spending on Cards?

Thu, 4 Aug Pre-Open

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The popular perception is that; the cities drive majority of consumption while rural markets account for little. However, on an average, consumer goods makers sell almost 40-45% of their products in rural markets. The past few years have been tough for both urban and rural consumers alike; it is their discretionary spending pattern though that has got the consumer goods makers worried. India has witnessed below par rainfall in the past two years. This coupled with bad weather has led to suboptimal food production for the farmer. This in turn has adversely affected his gross income.

High inflation has eaten away the savings of both urban and rural mases. Thus, rising costs have squeezed their discretionary spending power. According to a data released by IMRB, a market research firm, fast moving consumer goods (FMCG) growth has slowed down by a percentage point in both volume and value terms as compared to last year. This is not encouraging considering that most companies had slashed their prices to help boost sales.

Firms like Hindustan Unilever, Dabur, Godrej Consumer, ITC are however cautiously optimistic about the future. While the reported financial performance for the June 2016 quarter was disappointing, expectations of plentiful rains and the higher pay and pension benefits from the seventh pay commission for central and defense employees are key variables to look out for. The Indian Meteorological department had forecasted that the monsoon rainfall in the country will be 106% of the long period average, averaged across the country. With monsoon season through midway, the country looks set for normal rains this year. A better monsoon will help improve yield and increase production which in turn will benefit the farmers, increased food production will help keep inflation in check thus enabling savings which will help improve discretionary spending of the consumers

Consumption will also benefit from the implementation of the seventh pay commission and the passing of the goods and services tax legislation. . The revised pay scale will be enforced from August, with arrears from January 2016 paid in full. The transformation of the rural spending patterns over the years is an interesting phenomenon. The rural demand has now moved out of basic food products and while the consumption of aspirational products is comparatively lower than in cities, it is a growing market. There is an increasing demand for such products in smaller packs which is an encouraging sign for the FMCG companies.

While, the future growth looks optimistic, competition from aggressive entrants such as Patanjali Ayurved and rising commodity prices will need to be monitored closely, going forward. We think, India is well placed among its global peers and there are encouraging signs of a revival in discretionary spends to help boost consumption.

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