After a lacklustre 2017, consumption set to revive
Packaged consumer goods makers and manufacturers of consumer durables are pinning their hopes on the New Year for a recovery after a lacklustre 2017.
India’s consumption story in 2017 was muted, said Rajat Wahi, partner (management consulting) at consulting firm Deloitte India. First and foremost, the impact of demonetisation of high-value banknotes in November 2016 lingered on. “It had a continued effect and liquidity went out of the system,” said Wahi.
Agreed Aashish Kasad, partner and consumer products and retail sector tax leader at EY India: “While demonetisation had several positive outcomes per se, the consumer products sector was impacted negatively for several weeks due to a drop in purchases, especially impulse purchases which are typically driven by availability of liquid cash. The financial results of FMCG (fast-moving consumer goods) companies for the first quarter of 2017 reflected the same.”
Consequently, the growth rates for both consumer durables and packaged consumer goods were lower.
As the year moved ahead, the impact of the implementation of the goods and services tax (GST) was felt in the July-to-September quarter. “GST was not a consumption issue but a distribution issue. Brands, especially those that were wholesale-dependent, didn’t do well and felt the maximum impact,” Wahi said. GST was rolled out on 1 July 2017.
To be sure, both demonetisation and GST impacted the wholesale trade. However, urban markets were more resilient to the impact of demonetisation, but demand in rural markets was hit in early 2017.
Although the expectation from the rural market was high on account of a good monsoon last year, farmers’ income didn’t really go up that much.
It was a roller coaster ride for the consumer durables sector, too. Sunil D’Souza, managing director, Whirlpool of India, said 2017 was an eventful year… “We went through some ups and downs, given the two major reforms of demonetisation and GST. Both these reforms, while being in the right direction from a long-term perspective… did have some short-term impact on the economy and the industry.”
Arvind Singhal, chairman and managing director at retail consultancy Technopak Advisors, meanwhile, said overall consumer spending in 2017 was robust though the year was marked by two specific exceptional events.
“The year began in the shadow of demonetisation of November 2016 that made for a damp start to consumer spending in the beginning months of 2017. Then a bonus came for consumers in June when brands and retailers came out with heavy discounts to clear stocks before GST kicked in on 1 July. That led to an unusual spurt in consumer spending in June, which otherwise is one of the leanest months for most brands and retailers. The retail sector is estimated to have grown by about 10-11% in nominal terms in 2017. Categories that have shown higher growth include mobile phones and footwear,” he said.
Manish Sharma, president and CEO at consumer electronics firm Panasonic India, views the developments of 2017 in a positive light. “The implementation of GST, introduction of rural electrification scheme ‘Saubhagya’ and the increase in customs duty on consumer electronic items will contribute towards enhancing local manufacturing and improving the efficiency of business ecosystem in the country,” he said. “Favourable monsoons, taxation reform, hike in central employee allowance and a steady repo rate were some of the factors which pushed the consumer durable growth this year to 10%,” he added.
In fact, demand for packaged consumer goods and durables is expected to improve further. Packaged consumer goods companies are witnessing a revival in consumption, with companies such as Hindustan Unilever Ltd, Dabur Ltd and Marico Ltd reporting sales volume growth.
The industry is also expecting more money in the hands of the people in rural markets, riding on the back of government sops and increased spending on infrastructure and development projects. “There is a push in public spending and farm loans to put more money in the hands of the rural consumer. Besides, with 2018 being the penultimate year before national election in 2019, (there’s a) general expectation of government spending aggressively in the rural areas, which shall support rural growth… most FMCG companies shall benefit from rural revival…,” said a recent ICICI Securities Ltd report on the packaged consumer goods sector.
Given the assembly elections in several states are due in 2018 and the general election the year after, there could be a host of incentives or populist steps by the government, which could spur revival in demand and consumption, according to a Mint report in December.
The year ahead seems very positive on both business and consumption fronts. In terms of GST, 2018 will definitely be beneficial for the companies that are well-structured and tax-compliant.
“2018 should see private consumption (and, therefore, the retail sector) grow at about 12% (with real GDP growth rate estimated at 7% or a bit more). The product categories expected to outperform the overall market would be mobile phones, automobiles, clothing, and footwear,” said Singhal.
Wahi added that 2018 will see new brands come into the country. “Both single brand retailers and big retailers are looking for expansion. New companies will enter the market. Besides, India has moved several notches up in the ease of doing business in global indices,” he added.
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