FMCG majors have seen parts of Madhya Pradesh and Chhattisgarh hit by slowdown, along with the states of Punjab, Haryana and some hill states. (Representational image)The southern states of India are defying the slowdown, even as consumption of fast-moving consumer goods (FMCG) have plummeted in the north, west and eastern parts of the country. Rising unemployment and fall in farm incomes have severely impacted consumption in the northern states, while increase in investments by municipalities and corporates over the past five years and lower unemployment rates have led to more disposable income in the hands of people in the south, which is sustaining sales of consumer products.
FMCG majors have seen parts of Madhya Pradesh and Chhattisgarh hit by slowdown, along with the states of Punjab, Haryana and some hill states. As per HUL, different parts of the country are behaving differently.
There are some pockets where demand is slower, while it is holding up well in southern markets and in parts of Uttar Pradesh, the management told analysts recently. In comparison, slowdown seems to have been arrested in greater part of Maharashtra, excluding Mumbai and Pune.
As per Nielsen’s India FMCG Growth Snapshot for the quarter ended September 2019, the north India market has seen maximum impact of consumption slowdown, where volume growth remained almost flat at 1% versus strongest growth of 17% recorded in the corresponding quarter a year ago. A higher dependency on rural strata with 37% contribution makes it a relatively more price-sensitive market as compared to other zones, says the market research firm. Also, the larger impact of slowdown has been on small traders which are concentrated in the north zone and have maximum business in that area. The south urban market, which contributes close to three-fourth of the south sales, has seen a positive impact of better price pack mix architecture, helping volumes grow.
Sunil Khiani, RMS Lead, Nielsen, South Asia, told FE that the divergence in consumption trends between north and south zones can be largely attributed to the macro-economic indicators in the two zones. North India’s rural economy is largely driven by agriculture. However, fall in farm incomes coupled with slowdown in auto and ancillary units, which are also concentrated in the north, have impacted rural consumers, resulting in shrinkage of their disposable incomes.
In comparison, high per capita investments clubbed with low unemployment are favouring sustained growth in the south of India. According to Nielsen’s findings, unemployment rate in north has surged by 14%, primarily driven by sectors like the automobile, ancillary and farm and non-farm lower income levels in rural areas. In contrast, south zone unemployment rate is the lowest across zones.
FMCG majors, too, have flagged off concerns over the demand remaining a challenge. For instance, at HUL, rural demand is at a mere half of urban growth, which in good times goes to 1.5 times, and has touched even twice at times. Sanjiv Mehta, chairman, HUL, said, “Rural consumption has been weak for the last few quarters due to macroeconomic factors. Urban consumption has also softened. However, the pace of deceleration is comparatively starker in rural markets.”
Rural India contributes 36% to overall FMCG spends in India and has historically been growing around 3-5 percentage points faster than urban. To be sure, during the slowdown prompted by the global financial crisis back in 2008, it was the rural demand that led the consumption growth in India. Rise in rural disposable incomes increased affordability and rise of modern trade resulted in higher demand. Also, government-led investments in rural India propelled this growth at that time. However, in recent periods, rural growth is slowing down at a much faster rate compared to urban.
Rural growth, which grew on a par with urban growth in the June quarter, is losing steam, and is now at 0.9x of urban, according to analysts at Edelweiss Securities. The key reasons include liquidity crisis hurting wholesalers and retailers, weak overall macroeconomic scenario and slower ramp-up of the PM-Kisan scheme.
However, there is some hope of demand revival starting January 2020. “We expect demand to pick up from Q4FY20 once payouts under the direct transfer scheme start reaching a wider base, and rural India — nourised by a normal monsoon — regains its activity and liquidity improves,” says Mehta of HUL, adding that more income in the hands of people through a conscious attempt by the government to transfer money to rural people or by way of increasing the minimum support prices (MSP), could result in the wage rate going up in rural India, which could give a fillip to demand.
“With festive season coming in the fourth quarter (of calendar 2019), and various initiatives taken by the government we expect growth momentum to pick up pace in the coming quarter,” Khiani said.
source https://cvrnewsdirect.com/southern-states-defying-economic-slowdown-heres-why/
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