Rural demand remained stressed in the December quarter for the FMCG sector on the back of general inflationary pressures and rainfall deficits in some States. However, some moderation in inflationary trends, expectations of a good harvest, and continued government spending on rural infrastructure are expected to aid rural growth recovery, especially in FY24, as per analysts. All eyes are also on the upcoming budget in terms of a likely stimulus for rural regions.

In a recent report, Abneesh Roy, ED, Institutional Equities, Nuvama Group, noted that rural demand did not improve in Q3. He stated that while overall rainfall has been ample, there has been a rainfall deficit in populous states such as Uttar Pradesh, Bihar, West Bengal, and Jharkhand. “General inflation and rainfall deficits in some populous States remain the key challenges that have affected rural disposable income. Rural FMCG demand remained weak in Q3FY23, but would look optically better only due to the base effect (as the rural slowdown started in H2 FY 22),” he noted.

Weak demand

Dabur India stated in a regulatory filing that demand trends for the FMCG industry remained weak during the December quarter, with rural markets continuing to remain under pressure. However, it noted that early signs of recovery in rural markets were visible towards the end of the quarter, and this could be further bolstered by the upcoming harvest season, MSPs, and expected spending by the government.

“Recovery in rural demand was not as discernible as retail inflation stayed at elevated levels. Easing of commodity inflation, higher crop realisations, ongoing government interventions, and likely stimulus from the upcoming Union Budget augur well for the sector in the forthcoming calendar year,” stated Marico in its recent quarterly update for Q3 on the BSE.

As per various estimates, rural India contributes in the range of 36–40 per cent to the FMCG sector. Over the years, FMCG companies have stepped up their focus on direct distribution in rural regions to grow category penetrations and leverage the shift from unorganised to organised segments. Amidst inflationary pressures, FMCG companies have also bolstered their smaller pack to portfolio.

Recently, CRISIL Ratings stated that it expects higher minimum support prices for key crops, a good harvest, and increased spending on rural infrastructure by the government to aid rural growth in the FMCG sector and help a gradual recovery in rural demand in FY24.

Grammage cuts

Industry observers said that moderation in inflationary trends in some commodities has already led to a reversal in grammage cuts in categories such as biscuits and soaps. There are expectations that more FMCG companies will start reversing grammage cuts and price hikes which will help boost volumes.

Roy of Nuvama Group said that rural India may recover only in FY24, with expectations that sops for rural consumers are likely to remain high due to elections in many states and general elections in six quarters. “The pace of rural recovery, the outcome of the union budget in February, and INR depreciation continue to be key variables worth monitoring,” he noted in a report released on January 2.

Published on January 8, 2023