The Chairman of Hindustan Unilever has been saying that the biggest challenge in the next few months could be how the rural demand pans out. The signals are not too encouraging if you go by the latest Nielsen survey on FMCG demand.
What the Nielsen survey says
The latest Nielsen report on FMCG sales, has pegged growth of FMCG products in the Mar-21 quarter at a healthy 9.4%. This is substantially higher than the 7.3% growth reported by FMCG sales in the Dec-20 quarter. That is a robust top line growth and is representative of a combination of strong festive demand as well as pent-up demand for food and other hygiene products. COVID-19 has driven a spike in demand for hygiene products like personal care products, home care and similar products that are seen as core to enhance hygiene.
The Nielsen survey has specifically said that the FMCG sales for Jun-21 quarter could get negatively impacted by the lag effect of COVID 2.0. As per Nielsen, in the last few weeks, there has been a rapid proliferation of COVID 2.0 cases in rural India. In the first phase, COVID was largely an urban phenomenon and rural India had been largely spared the blushes. That ensured rural demand remained robust and farm output also managed to create records. If Nielsen is correct, some of the basic assumptions of GDP growth could prove to be awfully off tangent for the fiscal year 2021-22.
Impact of weak rural sales
Demand for FMCG products may be the most noticeable aspect of rural demand. As most FMCG players would tell you, nearly 50-55% of the demand for food and other FMCG products comes from the semi-urban and rural areas of India. The latest inflation data indicates that low inflation in rural India could be an outcome of weak demand. Weak rural demand could impact a plethora of sectors like FMCG, banks as well as micro-lending services negatively. It can also hamper the demand for tractors, entry-level cars & two-wheelers, market for fertilizers and agrochemicals, etc. In short, weak rural demand could have a series of downstream lag effects for the Indian economy due to COVID 2.0.
Agriculture, GDP, and Exports
If the weak rural story is a reality, then it could have 3 serious implications. First and foremost, it is agriculture that drove GDP growth in last few quarters with 3.5% to 4% consistent growth. That would mean that GDP recovery estimate for FY22 could be seriously dented and India may end up with the growth that is much lower than the 10% that is now being anticipated. Rural demand could also play spoilsport. Even the much-touted export story may suffer. MSMEs account for 45% of Indian exports and they will find supply chains from rural areas strained. A weak rural story is the last thing that India needs right now!