Mumbai: Consumer packaged goods firms are hoping for a budget miracle that will boost rural demand and, in turn, drive earnings revival. However, the government may not have enough legroom to increase its budget expenditure allocation for rural spending because it continues to struggle to meet its fiscal deficit target, say economists.
“It’s true that the government has limited room for increasing expenditure," Madan Sabnavis, chief economist of ratings agency CARE Ratings, said. “The Budget size has grown by 6-7% year on year and none of the expenditures can grow beyond this trend, unless the government re-allocates funds among sectors or reduces expenditure, which to my mind is difficult," he said.
This is because since 2014, the Indian government has been postponing its target to restrict fiscal deficit, the difference between its fiscal expenditure and fiscal revenue, to 3% of the budget.
“In the 2017-18 Budget, while the target was maintained for 2018-19, it appears highly susceptible once again," equities brokerage firm Motilal Oswal said in a note dated 23 January. “Considering that the government is almost certain to miss its 2017-18 budget estimates (BE) of fiscal deficit of 3.2% of GDP, we believe that the 3% deficit target will be postponed for the third time to 2019-20. According to our calculations, fiscal deficit for FY18 could be revised higher by up to 20 basis points (bps) to 3.4% of GDP, and it could be pegged at 3.2% of GDP for FY19," the note said.
India’s largest FMCG firms, including those with high exposure to rural markets such as Hindustan Unilever Ltd (HUL), Dabur Ltd and Emami Ltd, are waiting for a boost in rural demand to help revive sluggish growth in volumes and earnings, according to analysts tracking their stocks.
Equities analysts said that the industry is counting on measures including higher spending on rural infrastructure and employment schemes, including MGNREGA to help boost rural income and consumption, Mint reported on 17 January.
However, the increase in this spending may be limited. Budget allocation for the MGNREGA scheme may rise by only about 10% year-on-year to Rs50,000 crore, according to Motilal Oswal estimates in the note cited above.
“Although the industry is asking the government to allocate INR600b (Rs60,000 crore) for MGNREGA in FY19, some serious thinking is required, in our view," the note said. “This is because rural spending of the central government has a serious impact on rural wage growth. However, we also note that rural wages have a direct correlation with inflationary pressures in the economy. Higher growth in (real) rural wages coincides with higher inflation," the note said, adding that the government will have to balance higher rural wages with controlled inflation.
Both farm and non-farm wages are growing at around 6% compounded annual growth rate (CAGR) compared to 7-19% growth rates in 2004-2014, according to data compiled by the Reserve Bank of India (RBI) and brokerage firm HDFC Securities.
After nearly two years of sluggish growth in which rural markets lagged urban ones, FMCG firms are still reporting only a gradual recovery in rural demand, saying that it may not yet be a trend.
“The rural growth this quarter was better than urban. But I don’t want you to jump to conclusions because in the base quarter rural had been impacted more severely because wholesale channel had got impacted," Sanjiv Mehta, chief executive officer and managing director of HUL, said in an earnings call on 17 January. “So, I would say that, yes, the growth has been there, and we are pretty happy with it, but we don’t want to call out a very definitive trend. So, wait for another couple of quarters before we can conclude that yes, the trend of rural growing faster than urban is there to stay."
“The demand has not yet reached pre-GST (goods and services tax) levels in our opinion," K.B.S. Anand, CEO and MD of Asian Paints, said in an earnings call on 22 January. “The overall economy growth has still not reached the numbers it was reaching earlier. We are definitely not happy with the volume growth we are getting. However, our value growth is reasonable. We don’t think we are losing market share, but the growth in the paints industry has not been good enough for us to grow higher."