While FMCG companies have been underperforming for a year now owing to a slump in rural demand, rural is finally exhibiting early signs of revival.
While FMCG companies have been underperforming for a year now owing to a slump in rural demand, rural is finally exhibiting early signs of revival. There are four factors indicating why the worst is now likely over from a rural perspective for fast-moving consumer goods companies, Motilal Oswal said in a report this week. This includes higher inflation which could translate to higher wages for farmers, a lowering of farm input cost for farmers, an increase in rural spending by the central government and expected high yield in the rabi season, the report said.
Inflation: Rise in farm income
One of the key reasons why rural demand slumped was because of lesser income in the hands of the farmers. “While nominal wage growth was the same in 1HFY20 as a year ago, higher inflation has driven lower real wages. Besides, higher inflation is actually good for the farming community, as it is a reflection of the higher prices fetched for their output,” the report said. In the first eight months of FY20, wholesale food prices also jumped at six-year highest pace.
Decreasing farm input costs
A further lever to farm incomes will be provided by the slight reduction observed in farm input prices. “While farm output prices (at the wholesale level) have increased sharply at 7.3% in Apr-Nov 2019, farm input prices have declined slightly during the same period, implying better profitability for the farm sector in FY20 after 2 years of margin decline (FY18-19),” according to the report.
Govt hikes rural spending
In the first seven months of FY20, the rural spending by the central government spiked by 21% on-year, marking the fastest growth in 11 years. This was also about 13% of the total spending, which is the highest amount allotted to the rural sector in the last 8 years.
Rabi season looks promising
The upcoming rabi season also looks promising for the farmers considering unusually high water reservoir levels. The sowing activity has also picked up which could translate into better farm yields. “Sufficient initial signs have sprang up that point toward the rural sector bottoming out,” the report said.
Meanwhile, the FMCG sector reported a single-digit growth across general trade, modern trade and e-Commerce for Q4 2019, Nielsen said in its eighth edition of the Quarterly FMCG Snapshot. “We are starting to see early signs of stability with the slowdown being arrested. The macroeconomic policies coupled with inflation/GDP trajectory, manufacturer actions and consumer sentiment is expected to lead to money in the hands of consumers, thereby fueling consumption,” Nitya Bhalla, Lead, Data Science, Nielsen South Asia said recently.