Rabindra Dhaggad, a farmer in Ambanagar village of Madhya Pradesh’s Vidisha district had a bumper kharif crop for the second consecutive year. The 22-year-old commerce graduate, who took over his father’s farm, wanted to buy an SUV. With two years of good rains and the government marginally increasing minimum support prices (MSP), Dhaggad saved enough to afford his dream car.
But since then, Dhaggad has postponed his SUV plan indefinitely. “Fuel prices have risen over 90%, so have fertiliser prices. I am not sure when the recent fertiliser subsidy announced by the government will actually benefit us. Therefore, I need to be cautious... Saving enough money for healthcare is a priority now. Many people lost their lives as they couldn’t afford quality healthcare,” says Dhaggad.
For Hemendra Kumar Kaaldev, a sugarcane farmer from Uttar Pradesh’s Jaffarpur village, the recent MSP [(in UP, it is referred to as SAP or state advisory price] hike of ₹25 per quintal is hardly reason for celebration. The three-fold increase in farm input prices has offset the MSP hike and the sugar mill he sells his produce to, refused to compensate him. “Sugarcane prices have not increased at the same rate. Diesel prices and electricity bills are shooting up and it is becoming difficult to manage. My production costs have gone up 10-15%. I am forced to cut down on monthly consumption to check expenses.”
Dhaggad and Kaaldev bring out the ongoing dilemma in rural consumption. Despite a good harvest and financial support for the rural poor under the Pradhan Mantri Jan-Dhan Yojana, and MGNREGA making their way into people’s bank accounts throughout the Covid period, there is hesitance to spend. But, things are quite different in urban India. Ever since lockdowns were lifted and companies started hiring, there has been a spurt in consumption during the festival season, which according to experts, is primarily driven by pent-up demand. Will the trend sustain? The answer to that could well decide the urban consumption story.
Unlike urban India, rural areas were relatively untouched during the first wave of the pandemic and bounced back faster when the lockdown was lifted. But the spread of infections during the second wave coupled with increase in prices of essentials have forced consumers to think twice before spending. “Around 53-55% of the cost appreciation has been caused by fuel prices. It played a big role in muted consumption in rural India,” says Sachchidanand Shukla, chief economist, Mahindra Group.
According to the Reserve Bank of India’s consumer confidence index, the current situation index (as of September 2021), is at 57.7, much better than July’s 48.6, aided by optimism in the economic situation and employment scenario. While the decline in Covid cases certainly helped in elevating sentiments, the increase (between 7 and 20%) in prices of products across categories due to an unprecedented increase in commodity prices has been a dampener. Palm oil prices are up 1.8 times since March 2020 while polyethylene has risen 1.6 times. Edible oil prices have gone up 60-70%, and diesel and petrol rates have hit the roof. “We have not seen this kind of inflation in years. When consumer confidence is high they consume more. In the near future, consumption will remain muted as Covid fear remains, plus inflation is high and there are job cuts,” said Sanjiv Mehta, chairman and MD, Hindustan Unilever, while announcing the company’s Q2FY22 results.
Farzana Mir, a home-maker in Bilkheria village near Bhopal confirms this trend. Her husband, a daily wager, was without a job for over a year after the factory where he worked shut down. Their only source of income during the past year has been from the kirana store her son runs in the village. However, as grocery costs shot up, patrons have been down-trading. “If they bought a litre of oil earlier, now it is half a litre. They have stopped buying fairness creams or talcum powder. This has affected our earnings as well as lifestyle,” explains Mir.
Madan Sabnavis, chief economist, Care Ratings, expects spending by rural India to be cautious for some time to come, though the cut in prices of edible oil and fuel will bring some relief. “Agriculture has seen good harvests and there has been a minimal increase in MSP (2-4%) for kharif crop. So there is stable income. But agriculture is around 40-50% of the total rural economy. SMEs and micro entrepreneurs got hit in both waves. Those units are not back on their feet yet and that will impact consumption.”
According to Naveen Chauhan, head, sales and after sales, Hero MotoCorp, the contribution of rural demand witnessed an uptick in FY21 due to limited impact of the first Covid wave in the hinterland, but got moderated during the current fiscal due to the severe impact of the second wave and late monsoon resulting in delayed harvest. “Price hikes in the past two years, first with the transition from BS-IV to BS-VI and then inflationary trends on the input cost side, have had an impact on the industry. The retail finance penetration is on an upward trajectory and it has been the highest ever for us during the recent festive period.”
Urban Revival
Urban India has been an outlier in the consumption story. “In urban areas, companies have started hiring. IT, finance and BFSI sectors are doing well. Balance sheets of banks look better and there is a lot of liquidity. All this is helping revive consumption,” says Mahindra’s Shukla. Lifting of the lockdown led to people stepping out of homes. Delhi and Mumbai witnessed surge in consumer durables, smartphones and apparel spends.
“In 2020, the median salary increase was 7.5%, in 2021, it was 8%. In 2022, we are projecting a median salary increase of 9.3%. Business sentiment has improved significantly and that is reflected in compensations,” says Rajul Mathur, consulting leader India, T&R, Willis Towers Watson.
Demand has been decent despite consumer durable prices rising 15% over the last year, says Nilesh Gupta, director, Vijay Sales, which has the maximum number of stores in urban areas. “One factor could be EMI offers. About 60-70% of sales this year have been through EMIs.” The retailer has seen a 20-22% year-on-year growth in value terms so far this year.
Panasonic India, which generates most sales from urban markets, witnessed 30% growth this festival season over last year. “Growth has been led by demand for appliances such as Smart 4K Android TVs, connected ACs, refrigerators, washing machines, microwaves and lifestyle appliances. Supply side constraints have been an issue for the industry, but Panasonic has been able to tap into its global network to mobilise components, raw materials and process goods at local factories,” says Manish Sharma, chairman and CEO, Panasonic India and South Asia.
In FMCG and groceries, discretionary categories such as hair colour and cosmetics are playing an important role in driving growth in urban markets. “In discretionary category, growth comes from a lower base, which was impacted last year. As people didn’t step out of homes, they didn’t feel the need to colour their hair or wear cosmetics. Now growth is back,” says Sunil Kataria, CEO, India and Saarc, Godrej Consumer Products. “Many markets had a considerable proliferation of modern trade, which was shut. Now modern trade is also back.”
Urban markets have favoured car companies too. Demand has been higher for SUVs. According to Shashank Srivastava, executive director, Maruti Suzuki, demand for sedans in the last couple of years has dipped from 24% to 14%, while SUVs has gone up from 26% to 39%. Veejay Nakra, CEO, automotive division, Mahindra & Mahindra, echoes Srivastava’s views. M&M’s XUV 700 got over 70,000 bookings within a month of launch. “In August, SUVs sold more than sedans. Unlike earlier, when offroad consumers opted for Mahindra, in recent years millennials want to buy our automatic transmission SUVs to drive around the city.”
But, is urban growth here to stay? Not necessarily, say experts, who believe this growth is driven by pent-up demand. “Whatever consumption had to happen, happened as pent-up demand during the festival season. The next few months would see residual spends. We have to wait till March-April to see if there is actual revival, whether consumption that happened has actually sustained,” says Sabnavis of Care Ratings.
According to Harsha Razdan, partner and head, life sciences, consumer markets and Internet businesses, KPMG, the current high in urban India has a lot to do with surplus liquidity that can be seen in investments in start-ups and the IPO frenzy. “This may spur consumption in the short-term, but in the long-term, unless the government really invests in infrastructure and job creation, there could be a challenge. For the next couple of quarters, consumption could be better, but after that it may again be muted.
Mindset Change
Consumption growth in rural India is muted, but there is optimism. The rural consumer wants to spend, but is cautious. She is buying what is required and is happy to pay a premium for it. “Sentiments are back to normal. If they have ₹100, they want to keep ₹20 for health emergencies,” points out Ramesh Iyer, MD, Mahindra Finance. A key indicator of growth is loan repayment. “From July our collections have gone up over 90%. Also, the follow-up visits to people’s homes have gone down dramatically, which means people have money to pay,” says Iyer.
Bhupen Dangi, a farmer from Barrighat village on the outskirts of Vidisha, Madhya Pradesh, recently exchanged his old 40 HP Mahindra tractor with a 50 HP one. He also rented a rice transplant machine from the local Mahindra Krish-e dealer at ₹650 per hour, and now plans to invest in his own rice transplant machine. The machine has increased his yield by 2.5-3 quintals. “I want to invest in farm mechanisation to increase yield and also cope with labour shortage,” says Dangi. While one would have thought that large-scale reverse migration in the first wave of Covid would have solved the farm labour crisis, it actually didn’t. “Labourers get ₹197 per day under MGNREGA and that has made them complacent,” cribs Dangi. Sabnavis of Care Ratings adds, “MGNREGA allocations are close to being fully used. It was supposed to help during the two cropping seasons, but due to Covid, the government made it available throughout the year. People are now used to the higher income and are taking it easy.”
However, this mindset of needbased spending saw a 27% growth in tractor sales last fiscal. “Reverse migration last year led to an increase in the size of the whole industry. People holding jobs in urban India started investing in farm mechanisation. They realised they need to invest in techniques to run their farms despite labour shortage,” says Ramesh Ramachandran, senior vice president, farming as a service, and head, farm sector strategy, Mahindra & Mahindra. The delayed harvest has rocked the boat a bit, he adds, but, there is optimism due to the way rabi sowing has started and the government’s recent fertiliser subsidy announcement.
Mahindra tractor dealer of Vidisha and the sarpanch of Maniakala village, Surendra Singh Raghuvanshi, says in the last few months, six families in the village have invested in electric scooters. They are not buying big brands, instead opting for locally assembled ones, which cost ₹60,000- 70,000, or half the price of branded electric scooters. Consumers are lapping them up as they find the sharp increase in fuel prices unsustainable. Jitendra Sahoo, who has a Sahara Evols dealership in Sanchi, claims to have sold 16 electric scooters in the last two months. “After charging for four hours it can be driven up to 70 kilometres. Consumers want to buy electric scooters for daily errands and conserve fuel for tractors and farm equipment,” he explains.
The last year saw a decline in sales of cars, bikes and consumer durables in most Tier III and IV markets. Kamal Nandi, vice-president at Godrej & Boyce says the festival season has not led to any significant increase in demand. In the second quarter of FY22, business has grown 10-12% year-on-year, aided by some pent-up demand during the quarter.
“If I look at Q1FY20, then there is a 40% drop in demand over the period.” The subdued demand can be attributed to de-growth in rural and semiurban markets hit hard by the second wave of the pandemic, adds Nandi. Madan Padiki, CEO and founder of rural distribution start-up 1Bridge, says enquiries for consumer durables in rural India dipped 80% during Covid 2.0. “Consumers were at most buying fans or gadgets that were below ₹2,000. But with Covid cases dipping, I see the mood changing,” adds Padiki.
Nakra of Mahindra & Mahindra says though there has been a dampening of rural and semi urban sales, the dip in demand is mainly due to short supply of semiconductor chips. “We have 160,000 bookings pending because of semiconductor shortage.”
Maruti’s Srivastava claims an upside in rural growth between April and September this year. “In FY21, we sold 584,000 units against 547,500 in FY20 in rural India. In this fiscal, we have already sold 385,000 units.”
Grocery Consumption
While urban India embraced online grocery shopping and kirana stores adopted technology in a big way, rural India has seen a major shift in its grocery basket towards packaged food and staples. Gone are the days when they bought staples loose. “Rural consumers want branded packaged food, with an FSSAI [Food Safety and Standards Authority of India] stamp and expiry date details. Covid has created a health scare and consumers don’t want to compromise. If they have to pay a premium for the right product, they are not hesitating to do so,” says Sridhar Gundaiah, founder and CEO of rural grocery distribution company, Storeking.
Consumers are also opting for tried and tested brands. “One of the key emerging trends that has come out of the Covid crisis is consumers’ demand to seek value-oriented high-quality products. Consumers are moving towards companies and brands that they believe stand for quality,” says a senior spokesperson of ITC. “They don’t want to experiment with unfamiliar brands,” confirms Sushil Sharma, a kirana store owner in Sanchi, near Bhopal.
Not only are they buying wellknown brands, but also products such as dry fruits, which have always been associated with the urban rich. “Dry-fruits as a category shot up 5,000 times,” confirms Storeking’s Gundaiah. Other health-related food products such as millets have seen rising demand in rural India.
The ITC spokesperson also agrees that there is a surge in demand for health-related products across the country. “We have created several products around the health benefits of immunity like B Natural fruit juices, launched organic range of Ashirvaad atta and dal (free of chemicals) and baked snacks. We have launched millets range under Aashirvaad Nature’s Super Food and cold pressed mustard oil under Sunrise.”
Gundaiah attributes the change in consumption preferences to increasing exposure of rural consumers to content through smartphones. “Consumption of information has become much easier in rural India. They are well informed now about what is healthy and what isn’t, and that is reflected in their grocery basket. We have seen sugar consumption come down dramatically, while consumption of biscuits has also reduced. Consumption has entered a new era in rural India,” he adds.
According to Angshu Mallick, MD and CEO, Adani Wilmar, 50% of the FMCG major’s sales have started coming from towns with a population of less than 1 lakh, and the percentage is rapidly increasing. “Small town consumers are asking for packaged products, and whichever company comes up with a value-for-money proposition, they are lapping it up.”
Managing Inflation
The biggest challenge for manufacturers is managing price hikes and margin pressure. Be it FMCG, auto or consumer durables, companies have passed on price increases between 7% and 25% to consumers. The price of edible oil has gone up from ₹110 a litre to ₹180. This has forced consumers to down-trade.
“They are only buying essentials and brands are recalibrating their product and marketing mix. They are coming up with more mass-market SKUs [stock-keeping units], playing around with quantity and price,” explains Prem Kumar, Founder and CEO of retail tech company, Snapbizz.
The biggest challenge is managing costs, says Mayank Shah, senior category head, Parle Products. “Our greatest dilemma was whether to pass on all the cost to the consumer or not. Costs have risen over 20% since last year,” he adds. The biscuit major has hiked prices by 6-7% across the board.
Godrej Consumer Products, on the other hand, is in the process of absorbing a 8-10% increase in prices. “We are choosy about the penetration driver packs since they are price sensitive, so we are ensuring that we don’t play around much with that,” explains Kataria of GCPL. Most of its price hike is in discretionary categories such as hair colour.
“If my ₹30 pack becomes ₹33, I don’t expect people to stop colouring their hair. The desire to live a normal life that they have missed will overweigh the price impact in those categories,” he adds.
Though price hikes in edible oil have been inevitable, Mallick of Adani Wilmar says a diversified portfolio has helped the company manage prices efficiently. “I have a soybean crushing unit and processing unit within the same facility. We have common warehouses which I use sometimes for soyabean, sometimes for wheat or channa. Our salesmen and distributors are common too. All this helps conserve cost.” He, however, doesn’t expect prices of edible oil to return to earlier levels. “Edible oil costs are beginning to come down with government cutting duties by 17.5%. However, one can’t ignore the fact that edible oil prices were stagnant for a long time. Prices of all commodities had gone up, but edible oil was not going up, and now it has got corrected. We will never see the old level of ₹70-80 per kilo again.
Nandi of Godrej & Boyce says while commodity costs for consumer durables have shot up over 25%, the industry has been able to increase prices only by 16-20%. “As an industry, we do not have hefty margins to absorb rising costs, so when there is an option to increase prices, they will go up.
Like the auto sector, the consumer durable industry is also facing component supply constraints, and Nandi says given the supply side challenges, the inflationary trend will persist for some time.
Price of commodities, such as copper, steel, aluminium and plastic increased by 20-25% in the last one and half year, says Parag Bhatnagar, executive vice president and SBU head, Havells India. “The challenge related to inflationary trends in commodities might affect consumer sentiment in the rural markets in the short-term, impacting overall demand. An increase in commodity cost remains unabated, creating margin headwinds.”
The industry at large expects a slight correction, but inflationary trends are likely to stay. So, will consumption remain muted?
“I don’t see growth issues in both rural and urban because all that impacted growth between April and July, be it supply chain issues or labour shortage, is gradually getting fixed. Also, the uptake on credit transactions is a positive. Credit transactions tell you the psyche of a consumer’s intention to spend. During the festival season, there was also an uptake in credit card transactions. It tells you that consumers are looking to spend,” says Sanjesh Thakur, partner (risk advisory), Deloitte India.
“We will probably see post-Covid normal behaviour only by April 2022,” says GCPL’s Kataria.
No one wants to do crystal ball grazing on whether consumption would pick up anytime soon. It all depends on how well India is able to contain Covid infections. The good news, however, is that as more people get vaccinated, consumer sentiment will improve.