The Hindu Business Line : On a fast move

THE FINDINGS OF a survey by Assocham, the leading industry chamber, should warm the cockles of many a heart in the Fast Moving Consumer Goods (FMCG) sector considering the rough weather it has been going through over the past two years. According to the survey results released last week, the FMCG industry should grow by 40 per cent over the next five years to reach revenues of Rs 50,000 crore, up from Rs 38,5000 crore now. Even more assuring is the survey's optimistic forecast that the urban market, which it holds to be one of the fastest growing segments, will double its demand to Rs 35,000 crore over the next five years. The future, according to the survey, seems quite bright, compared to the bleak past, especially in the urban markets.

For most of 2004, the industry was marked by a growth of just around 1.5 per cent in value terms, which may seem surprising to a casual visitor to any of the malls springing up in the suburbs of Mumbai, for instance, and the shelves sagging under the weight of multiple brands of the same durable. But behind this growth of choice for the consumer lay the challenge for manufacturers — consolidation of volume growth even at the cost of profit margins. Prompting this shift in focus was competition, with the entry of multiple brands over the last few years in many a sector. To take on the competition, large players resorted to price realignments that, in turn, put a squeeze on margins and, more significantly, led to a concentration of market share, often among the top two players. But a consequence of this emphasis on retaining some level of volume was that rather than launch new products, companies merely released more variants of the existing ones. Competition wrought changes of a kind never witnessed before, benefiting the consumer not just in terms of choice but in prices too.

From a longer term perspective, this underscores the limits of the urban market; a trend the Assocham survey has not reflected upon in its prognosis of the future urban market growth. The future for FMCGs lies in newer markets and what better place than Rural India? Most FMCG players make their customary bow to the 700-million-strong potential market in Rural India but with the usual complaints about the difficulties in tapping it, poor infrastructure, for instance. An equally important factor that has to be stressed is the lack of disposable incomes among the vast majority of rural Indians. In tandem, the two not only hinder market growth for particular sectors such as consumer goods but also define the limits to future economic growth in general.

The FMCG story holds a macroeconomic lesson for all concerned and it is simply this: The magical figure of 10 per cent growth over the next three years that the Prime Minister, Dr Manmohan Singh, so fervently hopes for, will become a reality only if policymakers apply the same commitment to reforming agriculture and infrastructure as they did to those sectors of the economy that turned in eight per cent growth for two successive quarters of this year.