Despite some definite signs of improvement in economy in the near future, CARE Ratings does not expect much improvement in Indian fast moving consumer goods (FMCG) sector until Q3 FY21.
The Indian FMCG sector has been on a slow growth trajectory since the past four quarters since Q4 FY19.
The initial signs of a slowdown were noticed by larger players of the sector when they the witnessed softening of demand for such goods, especially from the rural segment.
Rural India, which usually projects about 30 percent higher growth rates than that of urban India, is currently displaying similar growth rates.
Multiple factors including the liquidity crisis that began in Q2 FY20 that created ripples in the economy and undoubtedly impacted the FMCG sector, which is dependent on the sufficient availability of cash in the economy.
The rating agency believes that certain categories of food products may witness a gradual demand pick up. However, the personal care category is expected to continue remaining under pressure for for the next six-seven months at least.
“Factors such as favourable monsoons, expectation of tax rate cuts –including GST and personal income tax, announcements in Union Budget of FY21 in favour of rural economy, among others, shall play a crucial role in uplifting consumer sentiments and bringing demand revival,” read CARE Ratings' report on the FMCG sector.
According to the rating agency, FMCG players can deal with the slump in rural consumption and revive demand by introducing smaller packaging so as to encourage users to try new products, and thereby improve volume growth, which is essential for companies in this sector that survive on wafer-thin margins.
CARE Ratings also suggested introducing sales promotion activities such as discounts, rebates and advertising to improve visibility and persuade consumer purchases.
All these measures are expected to help companies to generate fast cash and clear out inventory.
The rating agency pointed out that distribution still remains a major challenge due to insufficient infrastructure in rural India for roads, electricity, and power.
“Improving access and taping new markets, especially in rural areas, is pivotal for the sector to grow. FMCG players should also take increased advantage of e-commerce platforms that ensure last mile delivery of products,” the FMCG report read.
CARE Ratings also stated that the government also needs to step in to address the liquidity crunch faced by both wholesalers and retailers. The inability to source credit from the banking system does put pressure on funding their working capital requirements.
Erratic and delayed withdrawal monsoons in 2019 also affected farmers' income, and the government initiatives invoked provided limited relief to farmers for improving rural income, leading to sharp escalation in unemployment levels adding to the rural woes.
Due to these factors, the sector did not manage robust growth and has been on a decline since the last quarter of FY19, and recovery seems still a bit distant.