Lok Sabha polls likely to bolster rural consumption demand amid languishing sales of consumer goods

Analysts noted that one aspect involves the government introducing populist measures, such as increased spending in rural markets.

The upcoming Lok Sabha election will deliver a much-needed boost to rural consumption demand which continues to languish with sales volumes of consumer goods so far not showing any signs of a significant recovery.

Traditionally, rural markets have been the biggest beneficiary of India's massive election machinery and analysts believe it will be no different this time around too. “Typically, elections result in increased spending, even if not directly from the government, as political parties may invest more, leading to potential cash transfers in rural areas and a subsequent boost in demand.”  Saurav Anand, economist at Standard Chartered Bank, told Moneycontrol.

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Analysts noted that there is also a likelihood of populist measures being announced as a part of government policy as election dates near, which too may lead to higher cash churn in rural markets. This is because such measures invariably lead to more money in people’s pockets. “Additionally, during election rallies, cash incentives are often distributed, encouraging attendance and further boosting incomes, particularly for those not actively engaged in other activities.” said Ajay Thakur, analyst at Anand Rathi Institutional Equities. “Candidates may also provide various giveaways such as mobile phones or cash, directly or indirectly, fostering rural consumption,” he added.

However, analysts said that a significant amount of funds is shifting towards financing elections. “With the impending central election, there is already a liquidity squeeze in the market, and additional funds are being redirected towards election funding.” said Vishal Gutka, analyst at Philips Capital.

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It is crucial to assess the nature of spending that occurs with higher disposable incomes. Individuals may choose between discretionary and essential products. Then there is the spending that comes from the political side.  “For instance, during election rallies, the distribution of items like biscuit packets may contribute to increased demand in the food products sector.” said Thakur. “This suggests potential growth in segments like biscuits and related products due to the electoral activities.”

Analysts noted that even election rollouts cannot sustain rural demand indefinitely. The slight signs of demand may come in Q1FY24. “Monsoon commentaries will start coming in post-election about how the season would be. That might drive positive sentiment for rural demand,” said Amit Purohit, analyst at Elara Capital. “This is particularly important considering the subpar monsoon observed in 2023.”

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The past two years, particularly 2022 and 2023, witnessed anaemic economic growth. However, there are now indications of a slow revival. Analysts say that the issue is clear—high inflation is squeezing the customers’ pockets, impacting their purchasing power. This is borne out by the fact that the hopes placed on festivals by fast-moving consumer goods (FMCG) companies have been belied.

“The primary reason appears to be the financial stress on customers due to soaring inflation and stagnant income, leading to reduced spending or downgrading of purchases,” said Gutka.

Talking about the importance of rural demand, Anand said it constitutes a substantial segment of GDP, apart from involving a substantial chunk of the country’s citizens. “With around 70 percent of India relying on agriculture and the rural framework, it's not just a minor fraction but a significant contributor in the overall GDP,” he added.