Moneycontrol Pro Panorama | A cure for consumption

A pragmatic case for supporting consumption using fiscal measures.

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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.

In about a fortnight from now, the full Budget will be presented by the new NDA government. A healthy economy and an RBI dividend windfall have given wing to financial market chatter that a boost to consumption is a given. One hot factor included a month ago has been put on simmer, namely tailwinds from an above normal South West monsoon.

A patchy monsoon in June means reservoir levels are not at desired levels, but the area under Kharif cultivation has improved and there are hopes that July rain levels will make up for it. Do read this week’s edition of Monsoon Watch to know which way the rain clouds are blowing. Mumbaikars caught in Monday’s heavy downpour already know it.

Today’s edition features IndusInd Bank’s Chief Economist Gaurav Kapur making a pragmatic case for supporting consumption using fiscal measures, as it in turn will help the engine of capital investment keep running smoothly. He sticks his neck out and estimates that there is fiscal space enough for the government of 0.3-0.5 percent of GDP and small it may seem in percentage terms, but given the GDP base that’s a huge number. How to spend this or even 0.1 percent of GDP without stoking inflation is the challenge. Do read to know more about his prescription to ensure the medicine does not do more damage than the illness.

Since the first week of the quarter is behind, we have a few trading updates from FMCG companies that give us an idea of the state of consumption, especially rural consumption that has been identified as a problem area. However, note that predictions of a normal monsoon, stabilising of core inflation and falling FMCG product prices have seen rural consumption improve. My colleague Anubhav Sahu parsed FMCG company updates and said they point to only a gradual improvement reported by FMCG companies. But there are bright spots as well.

While rural consumption has been one part of the problem, urban markets had been holding fort. However, a recent Kantar note points to a disturbing trend. It shows rural FMCG volume growth picking up steadily while urban figures have been slipping, a trend seen in 2023. However, Q1 of 2024 (March quarter) saw that urban growth slipped below rural growth.

Of course, this is nothing new and a few years ago, rural markets were growing ahead of urban markets. But it’s different when the growth rates are rising, but one is growing faster than the other. Here it’s a case of urban growth slipping. The early FMCG updates don’t point to the situation having changed in the June quarter. We have highlighted earlier how urban growth may be coming under pressure, not in the affluent pockets that are supporting the premiumisation wave but in the mid and lower income groups. The trend appears to be setting in.

The big question that the market is seeking answers to is whether the government will take budgetary measures — small or big — to help consumption growth recover or let it heal by itself. We will know very soon.

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Ravi Ananthanarayanan
Moneycontrol Pro