It is likely that the interim budget for FY25 the finance minister will present on February 1 will leave big announcements for the full budget that will follow after the Lok Sabha elections. The government is likely to stay on the fiscal course-correction glide path in the interim budget, shunning populist spending or incentives ahead of the summer general election, ET has reported based on information from people aware of the matter.
However, the government might have to heed to the message emanating from the retail industry: the slowing consumption.
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The message from retailers
India’s top retailers have significantly slowed down their store expansion this fiscal year, after opening a record number of outlets last year, ET has reported based on their latest investor disclosures. The top five retail chains – Reliance Retail, Titan Company, Avenue Supermarts that owns DMart, V-Mart Retail and Shoppers Stop – together opened 44% fewer stores in the first three quarters through December compared with a year earlier.The chief reason, as per top industry executives, sharper focus on profitability when consumption did not pick up the way it was expected. “The rural and mass segment has improved year-on-year, but we are yet to return to the original consumption levels,” V-Mart managing director Lalit Agarwal told ET.Retailing in India is one of the pillars of India’s economy and accounts for about 10 percent of its GDP. The Indian retail market is estimated to be worth $1 trillion and is expected to reach $2 trillion by 2032. India is one of the fastest growing retail markets in the world.
The tell-tale signs
Though the well-off continue their shopping spree, there is stress in the mass consumption segment. It had become manifest in the festival and wedding seasons. Persistent inflation subdued wedding celebrations in India’s rural and semi-urban markets, particularly the large Hindi heartland, with demand faltering for customary wedding items such as gold jewellery and household appliances. Inflationary pressures have been disrupting household budgets, leading to a noticeable strain on the purchasing power of people with low- to mid-level incomes.
Overall consumption in small towns and rural areas has been affected for the past six to eight quarters, ET had reported last month, though the well-off in these markets are continuing to make purchases, that too of premium products.
Retail sales in October and November 2023 showed a growth of mere 7% as compared to the sales levels during the same period in 2022 despite the festive season, according to a survey by Retailers Association of India.
Sales are also not drawing in as many customers as expected. Demand for lifestyle products and apparel has remained weak despite retailers offering discounts of as much as 65% during their ongoing end of season sales (EOSS). Most brands also advanced their EOSS by two weeks to early December compared to January, hoping to mop up sales before ecommerce platforms begin their Republic Day sales. The fashion retail segment has been struggling with a demand slowdown since January 2023 due to inflationary headwinds. Overall retail growth slowed to 6% in both March and April, increasing marginally to 9% in August and September before slowing to a 7% increase in October and November, according to the Retailers Association of India.
The FMCG sector, which has 34% of its market in rural areas, which is a good indicator of rural economic health, has been facing challenges in rural areas due to sluggish demand. The deficiency in rainfall in key agricultural states has disrupted the revival of rural demand seen in the first two quarters of the financial year. President of All India Consumer Products Distributors Federation, Dhairyashil Patil, has told TOI that FMCG sales in rural areas are 20-30% lower than usual. “High rural unemployment, along with demand for the NREGS jobs, reflects rural stress. El Nino derailed the initial green shoots seen at the start of FY24. Increased aggression of smaller players and alternative avenues of spending such as higher spends on education, medical, telecom charges, are leading to softer growth in the FMCG sector,” Abneesh Roy, executive director at Nuvama Institutional Equities, has said.
How can the budget fix the problem?
Retailers Association of India has recommended to the Central government that the budget should focus on generating demand and spurring consumption by offering benefits or concessions in the form of lower taxes. The association said that it will boost the overall consumer sentiment and benefit the retail sector. Tax benefits and relief to individual taxpayers will increase the monthly disposable income and support consumption.
Aasif Malbari, CFO, Godrej Consumer, has told ET Now that the budget must try to boost consumption. “In terms of the overall expectation from the Budget, there has been a lot of boost to the investment side of the economy through various schemes, Make in India, through the PLI schemes, etc. It is important that the Budget focuses on the consumption side also and gives a boost to it, to make it more resilient and an inclusive growth story over the next couple of years. Specifically on the rural end, it is important that the Budget looks at rural job creation so that the consumption economy gets a much required fillip,” he said.
While the government might cut taxes or launch schemes that put cash in the hand of consumers at the lower end, it can also raise funding for the existing such schemes. Depending on the government’s fiscal space, a cut in the excise duty on petrol and diesel will certainly provide a fillip to consumption in the economy and will also help control inflation.
Rajani Sinha, Chief Economist, CareEdge, explains why a fuel cut is an effective tool to boost consumption: “The demand for petrol/ diesel is quite inelastic, hence any reduction in fuel tax will increase the disposable income in the hands of people, which in turn will help boost consumption of other items. Fuel tax is supposed to be regressive in nature as it broadly impacts all income categories. In India, while a large section of the households may not own private vehicles, they are reliant on public transport and hence they do get indirectly impacted by high fuel prices.”
Besides the government’s fiscal and electoral considerations, the stark ground reality of depressed consumption might find a place in the interim budget math. Experts have said the government might not leave the problem to the full budget.