Most consumption stocks have slipped over the past year because of sluggish demand; pushing earnings growth down to single digits. Post pandemic, the government has prioritised public spending and fiscal prudence and refrained from giving direct boost to consumption through tax breaks and other measures.
The Central government is faced with the difficult task of balancing capital expenditure, while also spurring consumption in order to push the country’s lagging growth engine back into overdrive.
Could this time be different? Market experts believe that may not be a priority although measures to create jobs and augment income will eventually spur consumption.
Over the past few years, rural demand lagged as consumers from tier-3 towns and villages pinched their pockets as pandemic-era woes and dry monsoons weighed. But the tides turned, and the 2024 monsoon brought greenshots to the rural sector. Demand for two-wheelers, fertilisers and tractors shot up, while other high-frequency indicators also indicated a trend reversal in the rural sector.
However, instead of consumption returning to full-form, urban demand began to lag during the second half of the last year, as mass-end consumers from metro cities tightened their expenditure.
Tightening liquidity and drying up credit in the unsecured space, coupled with a slowdown in government capital expenditure, along with high inflation caused a demand slowdown in metro and tier-1 cities.
During the September quarter earnings call, FMCG player Britannia Industries shared an important update: while urban demand accounts for 30 percent of overall demand, it contributes 2.4 times that to a slowdown.
Therefore, for consumption stocks to see a revival, urban demand will have to see a sustained recovery. Based on the high vegetable prices and high inflation figures, coupled with slowing economic growth, experts believe that the Union Budget will need to have concrete measures to perk up consumption.
Tax breaks to spur consumption?
Several brokerages and market experts are pencilling some changes to income tax for the salaried population, which will boost the disposable cash in hand, leading to an uptick in consumption across the board. These could be by way of higher basic exemption limit or a higher standard deduction. However, this is purely speculation at this point. If any of these measures are implemented, it could lead to a positive, second-order effect on consumer goods.
“Given the government's commitment to inclusive growth, the budget is expected to prioritize agriculture, MSMEs, household consumption, and job creation. In all likelihood, there will be measures to boost household spending as it accounts for over half of India's GDP,” said Dhiraj Relli, MD & CEO, HDFC Securities.
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He added that, “Initiatives to boost private consumption expenditure, which remains below pre-pandemic levels, could catalyse consumer spending across both urban and rural sectors. Additionally, direct tax incentives could reinvigorate demand for discretionary consumer goods, a segment that has experienced sluggish growth in recent months.”
Consumption through job creation?
The other important piece expected in this Union Budget is the broad focus on job creation. “This could mean more impetus on infrastructure, other public welfare schemes, and fiscal expansion using off-balance-sheet structures. Job creation through government activities is a necessity as private capex continues to be sluggish,” said Neeraj Chadawar, Head of Research, Axis Securities in a report. This, in turn, could enable income growth, and spur consumption probably with a lag.
Largely, despite the clamour to boost consumption directly, the view on the Street is this may not come through immediately. Domestic brokerage Motilal Oswal said, “There is a lot of expectation from the government to boost consumption. This, we believe, is unwarranted.” According to the broking house, the government needs to focus on improving household income growth rather than consumption.
“Apart from simplifying and lowering indirect taxes, any support to the construction sector (the second-highest employer industry in India) would be highly effective. Further, while the formalisation of the economy is beneficial, it is not advisable to completely overlook the huge informal sector,” said the brokerage.
Impact on stocks
UBS India strategist, Anubhav Agarwal, thinks the impact of the budget on the markets would be muted, as capex and consumption boosts could be limited if the fiscal deficit is to be contained at less than 4.5 percent of GDP in FY26.
However, if there are any unexpected tax breaks to the middle-class, consumption stocks are likely to soar, more so because stocks have been fairly sluggish and have underperformed the frontline indices over the past one to five years. Any further welfare schemes announced that could boost the economically weaker section will also spur FMCG, durables, and other consumer names.
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