You can call it the “Rajan effect.” One of the measures introduced by Reserve Bank of India governor Raghuram Rajan, who on assuming office early September clamped a ban on all scheduled banks offering zero per cent interest on EMI-loans on consumer goods – has slowed down their sale, bringing it closer to a 10-year low. Alongside, a lethal combination of a weakening rupee, persistent inflation and slowing economic growth saw consumers tighten household spending across rural and urban India.
So much so, people have begun making deep cuts in spending and preparing for things to get worse amid high inflation and an economy that's yet to show any sign of revival. The domestic fast moving consumer goods (FMCG) companies do not have many options either. They are forced to raise the prices following the escalating raw material costs and putting a bigger squeeze on margins to somehow kick start a revival in demand and prevent customers from striking more items off their shopping lists.
Growth by value slowed to 7.3 per cent in August from 21.1 per cent last year, according to Nielsen, a leading agency of marketing surveys and opinion polls. While most companies have been posting slower sales growth for more than a year now, the overall FMCG segment grew nearly 11 per cent in the last financial year.
The metros have been hit the hardest while semi-urban and rural areas have also begun feeling the effects of slump. Says Nielsen India's executive director Vijay Udasi: “The FMCG market is growing the slowest in the metros, a clear indication of the impact of urban inflation. At the same time, rural and middle India are the most significant contributors to growth, they are not completely insulated by the slowing economy.”
India’s economic expansion slowed to a decade low of 5 per cent in 2013-14 (FY13) and a four-year low of 4.4 per cent in the quarter ending June, triggering a spate of downgrades in fiscal year growth forecasts.
Not all share this perception though. Experts aver that the government has rolled out a series of measures aimed at improving the investment climate. They are pinning their hopes on higher exports and a good monsoon giving a boost to the economy in the second half of the fiscal. Companies too are hopeful about India's long-term consumption story. Says Sanjeev Chadha, CEO of PepsiCo's Asia, Middle-East and Africa region: “Volatility is the middle name of emerging markets. The key is to bounce back. We will play the portfolio to aim for value share and quality growth. In terms of overall growth, I'm not happy with the current macroeconomic trends in India. But I am a believer in the long-term growth opportunity.”
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Market pundits hope good monsoon will bring in the harvest bounty and this should help consolidate rural consumption. They point out that rural India's spending is growing 4-5 percentage points faster than that of urban areas as consumers in cities shift from premium products to buying cheaper goods. Companies such as Dabur are taking advantage of this - it has more than doubled rural reach to 34,000 villages from 14,000 earlier. Although cars cannot be bracketed in consumable segment, they are nevertheless mass-buying products whose sales graph signify the economic health of any nation. As such, car sales in India have fallen 4.7 per cent in the first six months of the fiscal year, the sharpest decline in half-year sales since 2002-03, as per the data released by the Society of Indian Automobile Manufacturers.
Interestingly, the recently announced reduction in auto loan interest rates by certain PSU banks did not make a meaningful impact on auto sales, as per the last report of India Ratings, a leading rating agency, which goes to the extent of giving an outlook that auto sales during this festive season (October-December) would not be influenced by the prospect of lower interest costs.
Companies with mass-market portfolios also hope consumers will continue to buy staples, even as they check spending on discretionary or premium products. Much of the growth slowdown has been at the premium end, which contributes 25 per cent to the top line of Godrej Consumer Products, its Managing Director Vivek Gambhir reportedly said. Most consumer goods companies posted earnings that were below expectations in the June quarter with discounts and price cuts failing to lift sales by any appreciable degree. Domestic revenues of Indian FMCG players grew 10.6 percent in the first quarter, the slowest in the past 16.
While gross margin expansion in FMCG in the past few quarters was supported by softening raw material prices, the recent run-up in commodity rates will put pressure on this, more so for categories such as soaps and detergents. For instance, the price of linear alkyl benzene (LAB), used to make detergents and some personal care products, is now at its highest in rupee terms in the past nine years. "We had to actually sustain growth by offering a lot of price-offs and discounts last quarter, which is generally our peak season" said B K Rao, group product manager at Parle Products.
It appears that domestic FMCG producers are hoping the government's expectations that a second-half revival will come true and prove all critics and alarmists wrong.
However one can't count on hope for too long. Consumer firms are preparing simultaneously for a prolonged slowdown. “The growth confidence of consumer firms has moved. They are unsure whether this will last for six months or 18 months,” says Raghav Gupta of consulting firm Booz and Co, adding: “... companies are now looking at cost reduction and efficiency programmes a lot more seriously.”
