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NEW DELHI : Budget announcements could spur domestic demand for small appliances, packaged goods, as well as small cars and two-wheelers, but will do little to shore up demand in rural India, industry experts and analysts said about the government’s last full-budget before the general elections in 2024.

High inflation has long been plaguing the Indian household consumption, especially in rural markets, wherein consumers are trying to focus on daily expenses while shying away from discretionary spending.

While commodity inflation has softened of late, cost of raw materials such as cereals, milk, and pulses is still up 25-40% over last year.

Overall, firms were forced to pass on the price hikes to consumers, which in turn, hurt demand.Consequently, while sale of passenger vehicles was at record highs in 2022, demand for entry-level cars was on a decline.

“The adjustment in personal income tax rates will not have too much effect on demand for cars. (The additional saving) is not such a large amount. People have other uses for money, especially when they have been cutting down on necessities. The extra money in hand will not give them extra purchasing power. Benefit for people in the 15-lakh category is not significant. The impact of negative income growth and inflation has to be taken care of," R.C. Bhargava, chairman, Maruti Suzuki, said.The budget will promote investment and growth, Bhargava said. “We see some small demand coming from them scrapping of old government vehicles, but if the government can allocate some funds for replacing private cars, it will aid demand even more," he added.

Two-wheeler demand could see a boost with lower-income groups benefitting from the income tax cuts. However, the government’s decision to cut spending on rural schemes could effectively lead to lower cash-in-hand for rural consumers who form a large majority of two-wheeler buyers.

“The budget proposals around capital expenditure, agri-credit, infra development credit, and lower tax slabs will result in higher disposable income and help the growth of the auto sector," Pawan Munjal, chairman and CEO, Hero MotoCorp, said.

“The budget is progressive with a focus on growth, infrastructure investment and the agrarian economy," said Kamal Nandi, business head & executive vice president, Godrej Appliances. Large appliance sales remained muted last year. “Along with cooling commodity costs, it could reverse the trend this year," Nandi said.

The government on Wednesday proposed a significant jump in capital investment outlay for the year as well as offered a one-year extension of the PM Garib Kalyan Anna Yojana—the government’s free food grains program for migrants and poor.

However, others also pointed out significant gaps in direct benefits being doled out to rural households. Rural consumers account for over 35% of sales for FMCG makers.

Analysts at Jefferies pointed to a “lack" of any visible support for rural which they said is sentimentally negative for staples and other rural stocks. However, they said that cap-ex growth of 37% year-on-year is the single biggest positive surprise from the budget. Cap-ex spends, they said, drive rural job creation largely for construction workers.

Finance Minister Nirmala Sitharaman also announced changes to the income tax slab rates in order to provide some relief to the middle class--no tax would be levied on annual income of up to 7 lakh under the new tax regime. The minister also proposed a reduction in personal income tax levied on the wealthy from 42.7 to 39%.

Income tax cuts should add 2-4% additional income for tax-paying individuals below 15 lakh, analysts at Jefferies said in a note.

To be sure, demand for goods of daily use has remained depressed for several quarters now—overall FMCG volumes were negative in the December quarter, however, they did report sequential improvement.

Several surveys conducted prior to the budget said that households are expecting inflationary pressures to ease. They also hoped for a lower tax burden.

Mohit Malhotra, Chief Executive Officer, Dabur India Ltd, said the budget promises to put more disposable income in the pockets of the consuming class, particularly the middle class.

“The biggest positive, according to me, is the 33% increase in overall capital expenditure outlay on infrastructure development, which will take India towards becoming a true global powerhouse and help urbanise the hinterland. The government’s decision to set up a 10,000 crore per year Urban Infrastructure Development Fund to be used for creating infrastructure in Tier-2 and Tier-3 cities will go a long way in boosting overall consumer confidence, and also help generate employment," he said.

Meanwhile, others said that tax exemptions for the super-affluent could help drive urban consumption. Those who earn over 20 lakh per annum account for 50% of the country’s consumption, said Namit Puri, Managing Director and Partner who leads the retail and FMCG practice for BCG India. “Supply-side interventions and changes in the taxation structure that mitigate the impact of inflation, put more money in the hand of consumers and unlock consumption and arrest down-trading, especially with the aspiring households," he said.

With increased investments in the rural sector and reduction of personal income taxes, which the common man has been yearning for, the budget also bodes well for the FMCG industry, said Harsha Vardhan Agarwal, Vice Chairman & MD, Emami Limited. This will have a cascading effect in driving consumption in India, he said.

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