05 Feb 2018 20:13 IST

FMCG sector to receive a boost with rural allocation

Budget measures set to result in long-term increase in rural consumption

Almost all major fast-moving consumer goods (FMCG) companies in India are expecting tremendous growth, with several of them — including HUL, Colgate, Dabur and Godrej — posting double-digit volume growth during the December quarter. With the Budget’s main focus on the rural population, the FMCG sector could see a further increase in consumption numbers. This article explores how this may happen.

First, let’s look at how farmers are going to benefit from the Budget.

Increased development expenditure on rural India translates to an increase in the income of people of these areas. This means the disposable income also increases and more money can be spent on daily commodities such as food, beverages, cosmetics and more.

Close to 40 per cent of all branded items are sold in rural India, which therefore forms a big chunk of the FMCG market. The growth trends in the rural areas were almost double the rate in urban markets but that tapered in the last two years as a result of demonetisation, GST and low monsoon rains. Now growth has revived and this Budget has further boosted that.

Space for wants

The rural population has received a boost through the mega health insurance scheme. Targeted at the poor, it promises a ₹5 lakh insurance cover for a family at a nominal premium of ₹1,200 per year. This has addressed the concerns of families regarding the huge expenses on health that consume most of their savings. Now, that amount can be used to buy everyday items.

The increase in standard deduction against travel and medical expenses will add to the disposable income available to a person. This will hopefully result in the further penetration of products and increase in consumption levels.

Some other initiatives introduced in the Budget that will benefit the under-privileged section of society are: earmarking over ₹14 lakh crore for creation of livelihoods in the rural areas, and giving eight crore LPG connections and free electricity connections to over four crore households. The reduction in corporate tax to 25 per cent for businesses with a turnover of up to ₹250 crore will benefit micro, small and medium enterprises (MSMEs).

Now, let’s look at what the FMCG sector should do to reap the full gains from the Budget.

For the long term

Smaller unit packs will help products gain entry into non-user households; companies should focus on developing and launching these in the market soon. They should also strengthen distribution to smaller outlets in rural areas. Given that demand in these areas is going to increase, having physical access to products is an important parameter.

Outfits like women’s self-help groups will gain more significance in the current context. Companies could benefit from appointing new channel partners and offering more incentives to existing ones in order to access even remote rural consumers.

Companies should also undertake more promotional programmes — rural cinema festival, folklore, storytelling and so on — to woo rural consumers.

However, according to Kumar Rajagopalan, CEO, Retailers Association of India, one should not expect any short-term increase in consumption as these schemes are meant for long-term development and it will take time for the benefits to accrue.