New Delhi: The central government, Reserve Bank of India (RBI), and even the International Monetary Fund (IMF) may have raised their economic growth forecasts for India, but analysis by those in the financial sector and ThePrint shows public consumption remains weak and patchy. That is, not only is rural demand low, but so is urban demand in some segments.
This sluggishness of demand can be seen in the quarterly results of India’s biggest fast-moving consumer goods (FMCG), which have recorded low, single-digit growth in sales. Compounding this is the production data from the government’s Index of Industrial Production, which shows consumer goods have seen production falling in response to inadequate demand.
Even the government’s quarterly gross domestic product data (GDP) shows that consumption expenditure is forming a declining share of GDP. All of this means pressure remains high on the government to continue its big capital expenditure push, since private investment still remains low, consumption is subdued, and our foreign trade is shrinking due to a weak global economy.
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FMCG companies struggle to grow sales
Hindustan Unilever (HUL), one of India’s biggest FMCG companies, saw “flat” sales growth in the third quarter (October to December 2023) of the 2023-24 financial year, the company said in its results presentation earlier this month.
The company’s revenue from operations stood at Rs 14,928 crore in Q3 of this fiscal, down 0.3 percent from what it earned in the same quarter of the previous year. Over the first nine months of this financial year, HUL saw an anaemic 3 percent growth in its turnover.
These numbers are far lower than the 17 percent growth in turnover for HUL in April-December 2022, and 16 percent growth in sales in the third quarter of that year.
In its results presentation this January, HUL laid the blame for the subdued demand on the fact that the “operating environment remains challenging” due to an uneven monsoon, a “subdued festival season” brought on by “weak consumer sentiment” and a stronger recovery of the urban demand than rural, and of premium category products rather than mass products.
It’s not just HUL, other big FMCG companies like ITC and Marico also saw similar subdued growth in revenue this financial year.
ITC, for example, saw a 7.6 percent growth in revenue from its FMCG business, excluding cigarettes, in the third quarter of this financial year. Over the first nine months of this financial year, revenue from this segment grew 10.5 percent.
These might look like robust numbers, but when compared to the performance last year—of 18.3 percent growth in Q3 and nearly 20 percent growth over the April-December 2022 period—they look weak. In its results presentation, ITC too spoke of “subdued demand conditions”.
Marico saw its revenue from operations shrink 2 percent in the third quarter as well as the first nine months of this financial year.
“Consumption is rather uneven as per our assessment,” Aditi Nayar, chief economist at investors service company ICRA, told ThePrint. “In the rural areas, we see that demand is cautious given the overall rainfall, reservoir and sowing situation. In urban areas, there are pockets of high demand and pockets that are not so confident.”
Nayar added that the premium segment and new entrants into the workforce are both seeing robust demand.
“However, demand among the middle-aged, middle-income cohort does not appear to be that strong,” she noted. “This unevenness may persist in the near term.”
Govt data also shows consumption slump
The government’s GDP data for the second quarter of the ongoing financial year, released in November 2023, shows that private final consumption expenditure made up 56.8 percent of GDP in that quarter. This was not only lower than the 57.3 percent in the first quarter, but it was also notably lower than the 59.3 percent in Q2 of the previous year.
Reinforcing this is the fact that the production of a number of consumer goods, both non-durables and durables, has fallen or slowed.
“Among the 42 items of consumer non-durables or FMCG segment within the Index of Industrial Production, production of 24 items have registered moderation in growth during April-November 2023 compared to the same period of previous year,” Bank of Baroda’s economic research division said in a report released Monday.
It added that, for consumer durables, out of 27 items, 18 items have registered a drop in production.
The report did acknowledge that, for consumer durables, the slowdown in production could be because the ‘pent-up demand’ phenomenon for major white goods has gotten diluted. That is, people who had deferred their purchases during the pandemic and beyond have now purchased what they need to, and so demand has again gone down.
That said, the data did reveal some signs of strain in demand, it added.
“However, moderation in production of certain items such as essential wear, passenger cars and some daily items of household consumption such as hair oil, toothpaste, despite moderation in inflation reflect a certain degree of strain on the underlying demand conditions,” the report said.
IMF, government raise growth projections
Interestingly, despite these subdued demand conditions and the fact that they are not likely to improve in the near future, the IMF and the government have both expressed a rosy view of the economy’s prospects.
In a report titled ‘Indian Economy – A Review’ released Monday, the Ministry of Finance predicted a 7 percent growth in financial year 2024-25, chief economic advisor V. Anantha Nageswaran said: “It now appears very likely that the Indian economy will achieve a growth rate at or above 7 percent for FY24, and some predict it will achieve another year of 7 percent real growth in FY25 as well.”
He added that if this prediction for FY25 was correct, it would mark the fourth year post-pandemic that the Indian economy will have grown at or over 7 percent.
On Tuesday, the IMF raised its growth estimate for India in FY24 to 6.7 percent from its earlier prediction of 6.3 percent, and raised its growth predictions for FY25 and FY26 as well.
“Growth in India is projected to remain strong at 6.5 percent in both 2024 and 2025, with an upgrade from October of 0.2 percentage point for both years, reflecting resilience in domestic demand,” the IMF said in its World Economic Outlook January 2024 Update.
(Edited by Poulomi Banerjee)
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