Moneycontrol Pro Panorama | How sunny is the FMCG outlook?

The markets have assumed there will be higher spending on welfare schemes, to combat supposed disenchantment among rural voters and meet demands of allies.

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

India’s fast moving consumer goods sector (FMCG) was one of the clear winners in the 2024 surprise election verdict that saw the BJP return to power, but only with the help of allies as it failed to secure a majority on its own, unlike in the first two NDA terms.

Its showing was seen as a plus for the FMCG sector, however. The markets have assumed there will be higher spending on welfare schemes, to combat supposed disenchantment among rural voters and meet demands of allies.

In a month or so from now, when the full Budget is presented, it should become clear if indeed these considerations and coalition compulsions have changed the government’s fiscal policy stance. The spending so far has been tilted towards government capital expenditure, in a bid to create productive assets and keep inflationary fires under control. The government has also outlined its commitment to lower the fiscal deficit to GDP ratio as it seeks to exit the accommodative regime put in place during COVID years.
But consumer confidence does appear to have got dented. And not just in rural areas, which companies have already been pointing out but also in urban areas, as my colleague Manas Chakravarty pointed out. The RBI’s consumer confidence survey for May points out a sharp drop in sentiment on current economic conditions, with 40.2 percent reporting their employment situation has deteriorated—more than those who believe it has improved, and on inflation too far more people believe it will increase in the next one year than those who believe it will decline. An increase in inflationary expectations is one of the reasons why the RBI left interest rates unchanged. Read here for more on consumer sentiment.

The news on the global food inflation front, too, is not providing comfort. The FAO’s food price index has risen to a level last seen in November 2023 and broad-based inflation in dairy products and mixed trends in vegetable oils and cereals are reasons for worry. India’s retail inflation data too shows that it’s not time to go easy on the vigil against inflation.

While it may seem like an easy task to roll out social welfare measures that put more money in the hands of low income consumers, it can also stoke inflationary fires that can hurt these same consumers. Not to mention that investors can then say goodbye to hopes of interest rates coming down any time soon. The RBI governor has mentioned time and again how they need to see inflation coming down to its target levels and then stay there for a convincing duration, to give them the confidence to cut rates. Any sort of fiscal loosening will prolong the wait.

The run-up in shares has also meant that the price to earnings multiple of the FMCG sector has risen to 43.4 times trailing 12-month earnings, up from the 41 times prevailing pre-election results. That’s a significant step-up in such a short period based mainly on expectations of handouts from the government. If the eventual welfare outlays do not put substantial sums of money into the hands of low-income consumers, then disappointment may be lying in wait for investors.

Investing insights from our research team

Le Travenues Technology (Ixigo) IPO: Will it be a rewarding journey?

EIH: Why should you check into this luxury hotel stock?

Zensar – Is there more upside left in the stock?

SJS Enterprises: Strong Q4 FY24, outperformance to continue

What else are we reading?

Moneycontrol Pro Market Outlook | Markets rally strongly despite surprise election results, more upside likely

MC Inside Edge: HNIs on the backfoot in Suzlon, SAIL, wealth managers head for Dubai, I-Sec shareholders’ gripe

Tata Steel’s European operations to wave green flag

Biden in a tight spot over ceasefire proposal for Gaza

Can India plug into a uniform power tariff system?

India needs a fresh gameplan to secure mineral resources amid geoeconomic churn

Political heat gives central bankers pause for thought on interest rate cuts (republished from the FT)

India needs an indigenous model of employment where government is not creator of jobs

For an AI lesson, India must look back — 300 years

Personal Finance

Why you should keep an eye on liquidity, price deviation and tracking error while investing in ETFs

Technical Picks: ITC, Lead, JK Paper, Ajanta Pharma and Motilal OFS (These are published every trading day before markets open and can be read on the app). 

Ravi Ananthanarayanan
Moneycontrol Pro