Budget 2020

Government spending key to sustaining rural consumption growth

Consumer companies do not have much of a choice in passing on rising raw material costs in the form of higher prices because consumers’ incomes are under stress and could impact demand, says Arvind Singhal, Chairman & MD, Technopak Advisors

During the lockdown period there was definitely a change in consumer behaviour when it came to buying a lot of products in bulk. Has this continued even after things eased out quite considerably?
In terms of what trends have continued post the lifting of lockdown, online shopping is going to be there. It got a boost, especially online grocery shopping. Other categories that have been growing include online shopping for fashion, lifestyle, consumer goods, electronics and mobiles. But grocery shopping is certainly going to stay.

Coming to ordering food, that trend is continuing as far as the post Covid trend is concerned. There is not much of a difference there. Having said so, from what we see on the ground, in the absence of any real stimulus, consumer spending is beginning to show signs of stress across the board. The December numbers do not seem to be very good for retail by and large. There would be some exceptions. We will have to look at the next quarter — January to March 2021 – to see whether recovery is sustained or whether it was just a blip for the festival and the recovery is not really there.

What about rural versus urban growth? Do you expect rural to outpace urban in terms of demand and growth going forward?
A lot depends upon the kind of public spending which the Government of India and the various state governments take up in the next 12 month. Urban growth has been compressed significantly more than rural growth because of the Covid impact. There was less lockdown and economic disruption in rural India. The first nine months of the current financial year on a relative basis showed the rural economy doing better than the urban economy.

That did not mean that both rural and urban were growing. It was the urban economy which was under bigger stress. Going forward, unless the money in the hands of the farmers and money in the hands of people who are living in rural India increases significantly, I do not think the rural economy can continue to be the growth driver for the overall economy in the coming year. Government spending is probably the key to see how the rural economy’s growth or consumption growth is sustained. This budget will be there for a very important budget. We have to see if it is an aggressive budget or a defensive budget.

How is increase in raw material prices affecting FMCG companies? Is that prompting you to expect more price hikes?
In my opinion, the companies do not have much of a choice because consumers’ incomes are under stress. While raw material prices are increasing, if any company were to make an attempt to pass on the prices to the consumers, they might see further pressures on demand. I suspect that the larger companies will want to take a hit on the margin to the extent possible and refrain from passing on any of the input cost increases to their consumers.

So by and large, while it is a cause of worry from the point of view of those companies themselves on their balance sheets, in reality it is Hobson’s choice. Any attempt to pass on the price increase to the consumers could make further negative dent on their balance sheets by demand compression.