Budget 2022 unlikely to spur consumption in the short-term

Will Budget 2022-23 spur consumption? Not really, say experts. With absolutely no concessions in taxation, the Budget is unlikely to increase the spending power of the average Indian. However, the increased allocation of spending on infrastructure driven by roads, railways, airports, ports, mass transport, waterways and logistics infrastructure, could lead to substantial amount of job creation in the medium to long-term and that could lead to higher consumption. Increased focus on start-up funding as well as support to MSMEs are also likely to create jobs. In the agriculture sector, 1,208 lakh metric tonnes of Rabi and Kharif produce is expected to be procured and ₹2.37 lakh crore MSP (minimum support price) would be transferred directly to the accounts of the farmers. This would also mean more money in the hands of the rural consumer, but none of it would translate into consumption in the short-term.

“This is purely an investment-oriented Budget. There will be no immediate impact on consumption,” points out Madan Sabnavis, chief economist, Care Ratings. “Putting money in the hands of consumers really helps, as they go out and buy products. That was something that the industry expected, either by tax cut or by increasing the slabs tax brackets or by probably increasing the standard deduction limit. Not much has been done there,” agrees Mayank Shah, senior category head, Parle Products.

Most FMCG manufacturers have experienced a dip in growth in rural markets. Shah says he would have been happier had the government increased the allocation of MNREGA rather than taking up MSP prices. He believes that increasing MSP would lead to higher inflation. “If you increase the MSP, that eventually is going to increase the cost of agri-products (primary input in food processing). Probably placing this money in the hands of consumers through MGNREGA or DBT would have ensured demand to remain robust."

However, Anjali Bansal, founder of Avana Capital, considers Budget 2022-23 to have laid the foundation for India at 100 (100th year of independence). “With a continuing theme that underscored inclusive growth through digitisation and sustainability, the Budget focuses on creating long-term growth.”

“The intent of this government is growth and job creation across sectors, with an impetus on infrastructure development however the success lies in the execution for a sustainable economic momentum and growth,” adds Gautam Hari Singhania, chairman and MD, Raymond.

Prioritising Needs

FMCG giant, Hindustan Unilever, has been posting low volume growth for the past few quarters and the company has been attributing it to the unprecedentedly high commodity inflation. The company was forced to take calibrated price hikes in most of its brands and it also resorted to grammage cuts. The price hikes had an obvious impact on rural consumers, who either bought lesser quantities of soaps and detergent bars and completely stopped buying categories such as fairness creams or deodorants. Though HUL saw growth coming back in urban markets on the back of premiumisation, its rural volumes dipped to 2%.

Other FMCG companies also witnessed similar trends and rural volumes for most of them actually degrew. However, Adani Wilmar CEO, Angshu Mallick in a recent interview with Fortune India claimed that while there was certainly a dip in growth in its edible oil portfolio, the surprise element was its branded staples portfolio, which according to him witnessed a 25% growth especially in rural markets. Covid-19 led to an increased appetite in the average rural consumer to eat clean, healthy food. Unlike earlier when she bought staples such as atta, dal and sugar loose as it was cheaper to do so, in the Covid-19 era she embraced packaged staples and was willing to pay a slight premium for it. While on one hand, she has cut down spends on soap and detergent, on the other hand she is happy to spend extra on packaged staples.

With the Rabi and Kharif crop being good, the average rural consumer does have the spending power, but is being careful. A lot of spending is allocated to healthcare and even categories such as farm mechanisation products that could help them increase yield.

However, Covid-19 did have an adverse impact on the MSME sector which led to large-scale unemployment in rural and urban India. This had a severe impact on consumption across categories. So, when jobs return consumption would be spurred, but that’s not going to be immediate.