Expectations are high that the budget will have good news for rural folk, who have been crushed under the weight of crop failures and falling prices of farm produce. Packaged consumer goods companies will be waiting to see if the budget puts cash in their hands, either in the form of higher allocations for the rural employment scheme or through some other means. That could give some raise to demand and lift the cloud of deflation that hangs heavy over the sector.
A Mint report on Monday said the government is set to boost spending on agriculture, doubling allocation for insurance and irrigation. Insurance will protect farmers from crop failure the next time it happens, and irrigation will lower the dependence on rains. That’s good but it does nothing to alleviate rural distress. And rural distress has affected the masses’ ability to consume, dealing a blow to products of mass consumption.
A common refrain among mass consumer goods’ companies is that rural demand has been consistently slowing in FY16, while urban demand is showing signs of recovery. A reversal in trend is being seen, where once rural growth was commanding the sector’s sales growth. Some years ago, companies expanded their distribution reach into rural markets to drive sales growth higher.
Even now, growth is not bad. Volume growth is at decent levels— for instance, Hindustan Unilever Ltd’s volume growth was 6% in the December quarter from a year ago period. Now, part of this growth is attributable to a recovery in the urban demand. Also, it is coming at a high cost as companies slash prices to pass on raw material costs and on top of that, are spending heavily on advertising and promotion to drive sales growth. That is not sustainable.
Companies are turning their sights to the urban markets, where they appear to be sniffing a revival in the works. They may be right. Consumer durable production data suggests purchases are picking up and personal loans are picking up too. Dabur India Ltd said it plans to sell more of premium products to drive sales growth, a strategy that works chiefly in urban centres.
Rural demand is a vital ingredient for a sustained recovery for consumer goods companies. If the budget does put some extra money in the hands of the rural consumer, it will be good news. Also, consumer companies’ expanded rural distribution network could mean they may reap the benefits with a shorter time lag, than in previous years.