The consumption paradox: Yes FMCG companies are feeling the pinch, but hope is around the corner

At 8.2%, India’s FY24 GDP growth is the talk of the global economy. And the economy will continue to grow at a healthy clip despite the increasing base. The Reserve Bank of India, for instance, has upped its FY25 growth forecast from 7% to 7.2%. But it’s not as if there aren’t gaps in this growth story. For long the subject of discussion among economists, the consumption economy is evidence that this growth is uneven. And this uneven growth—where the upper end of consumers spend higher amounts while the mass market and rural economy are yet to come back to pre-pandemic levels—continues to affect consumer-facing businesses.

The FMCG sector, seen widely as the barometer of the consumption economy, is still coming to grips with the stress in the mass- consumption and rural segments. India’s branded FMCG market, valued at Rs 5 lakh crore and the world’s fourth largest, has been feeling the pinch, with volume offtake having fallen continuously since 2022. Inflationary pressures and a weaker-than-expected monsoon affected the FMCG sector in FY24 as well. However, the upper end of the market, not just in FMCG but also in consumer durables and cars, has continued to grow. High-end TVs are witnessing robust demand, while carmakers are seeing higher sales of SUVs even as smaller passenger cars see dipping sales. This paradox is also reflected by studies like the PRICE ICE 360° survey, which shows that the average annual household income among the poorest 20% has fallen by 21% from Rs 1.4 lakh in 2016 to Rs 1.1 lakh in 2023. Adjusted for inflation, the real income levels in 2023 are even lower. On the other hand, the average annual household income of the upper middle class has risen 33% and that of the richest 20% by 51%.

In our cover story, Arnab Dutta and Surabhi take a close look at the consumption conundrum that FMCG and other consumer-facing businesses are facing. But there is optimism since green shoots are visible of late. Data from Nielsen IQ shows that while volume offtake in the rural market for FMCG products remained muted till March 2023, things have begun to improve. From 4% in July last year, rural volumes have grown by 5.8% in December and at a relatively fair rate of 7.6% in the March quarter. Though volume growth in the rural market in January-March outpaced the urban volume growth (5.7%), it took more than three years for this to happen. There is cautious optimism now, and hope that with increased government spends aimed at the bottom of the pyramid and a good monsoon, this uptrend could continue.

Talking of government spends, Surabhi and Richa Sharma get you glimpses of what Modinomics 3.0—the economic agenda of the new NDA government—could contain. The consensus among experts is that fiscal consolidation will remain a priority, but with greater dependence on allies like the TDP and the JD(U), the government will have to look at measures to keep them satisfied. All eyes will be on the Budget now.