Demonetization and FMCG industry: no lasting impact

Discretionary consumption may see some impact as consumers with a liquidity crunch may become choosy on where they spend


Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

The impact of the government’s move to eliminate current high-value currency notes on FMCG (fast moving consumer goods) companies can be seen in two parts. One is on the distribution channel as small retailers—who make up the bulk of sales—mostly deal in cash. While consumers will recover relatively quickly as the new currency notes become available, trade channels may take a few weeks as their transactions will be of higher value. If their purchases decline, that will affect sales growth reported by companies.

The second impact is at the consumer level if the move causes a liquidity crunch. Consumer staples may not see a sizeable impact, though some down-trading to lower value packs may be seen.

Discretionary consumption may see some impact as consumers with a liquidity crunch may become choosy on where they spend.

The current quarter may, therefore, show some impact of this development on sales growth of companies. This comes even as some pockets of revival in growth are becoming visible. If the rural economy revives as expected, then the headwinds from the government’s move will be easier to manage. Even otherwise, it does not appear as if FMCG companies will face any lasting impact because of this decision. Even then, the BSE FMCG index was down by 2.1% on Wednesday.

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