BackBudget 2016| Salaried middle class set to pay more
Diesel cars, SUVs, garments over `1,000, and jewellery will now cost more even as the budget strives to put more money in the hands of rural consumers
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Mumbai/Bengaluru: The Union budget 2016 does a lot for rural India, which augurs well for the consumer packaged goods (CPG) sector, which expects sales to pick up in the next 6-12 months.
Sales of CPG hit a five-year low in the December quarter following the rural slowdown, caused by two consecutive years of deficit monsoons and declining incomes.
Budget 2016 strives to put more money in the hands of rural consumers. “The key priority for CPG firms is volume growth, which has been muted for the past couple of years. As money comes into the hands of consumers, it will create consumption-led growth," said Neelesh Hundekari, partner, Consumer Industries and Retail at consulting firm A.T. Kearney.
Varun Berry, managing director at the country’s largest Biscuit maker Britannia Industries Ltd, agrees. “I think in the current scenario, the biggest downer for all consumer firms was consumption, especially that emerging out of rural pockets; we have not seen an uptick in demand in a long time."
The focus on agriculture and farmers’ welfare saw an outlay of ₹ 38,500 crore for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), the rural job guarantee programme. The allocation of ₹ 19,000 crore for the Pradhan Mantri Gram Sadak Yojana, the target of 10,000km of national highways and upgradation of 50,000km of state highways also augurs well for the rural economy as it will create jobs and increase spending. Moreover, the development of 300 so-called Rurban (rural plus urban) clusters that will have growth centres and provide jobs.
“Overall, this is a responsible ‘Rural First’ budget that attempts to revive demand, while continuing on the path of fiscal consolidation," said Vivek Gambhir, managing director, Godrej Consumer Products Ltd, and added that it supports the revival of rural and urban consumption.
Harsh Agarwal, director, Emami Ltd, concurs. “Government spends will boost demand in an otherwise depressed rural market," said Agarwal, who expects the trend to reverse by the second quarter of the fiscal.
Packaged goods companies get up to 50% of their revenue from rural markets.
However, what the budget has given, in terms of benefits for rural India, it has taken away, if only in part, by making the salaried middle-class pay more for many products. Diesel cars, sport utility vehicles (SUVs), garments that cost more than ₹ 1,000, and jewellery will now cost more.
“To me, consumption equals to development and from that point of view, this budget is a mixed bag of announcements," said Kishore Biyani, chief executive officer, Future Group. Still, one announcement that can prove to be a dampener is making the permanent account number (PAN) mandatory for any purchase above ₹ 1 lakh, said Biyani, while stressing that this is going to have a serious impact on consumption, especially of consumer durables.
The announcements saw stocks of most consumer firms with an urban focus fall. Shares of Titan Co. Ltd lost 4%, as the firm derives a major share of revenue from jewellery. Shares of Shoppers Stop Ltd lost 2%, and Aditya Birla Fashion and Retail Ltd, 5%. And the shares of auto firms such as Mahindra and Mahindra Ltd and Maruti Suzuki India Ltd closed lower.
CPG stocks did not fare well either. HUL fell 2.5%, Colgate-Palmolive India Ltd closes lower by 1.5%, Marico Ltd was down 0.4% and GCPL fell by 0.9%. Even BSE Ltd’s key benchmark index BSE Sensex fell 0.66% to close at 23,002 points. Rural India may drive sales, but urban India drives sentiment it looks like.
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