Rural Demand Recovery Driving FMCG Sector’s Revival

As the consumer goods industry grapples with poor demand in rural areas due to the slowdown reported in consumption since 2021, driven by the steep rise in inflation, the industry has now taken a sigh of relief. With most of the indicators impacting rural demand showing signs of positive growth, the fast-moving consumer goods (FMCG) sector is set to be realigned with the mainstream trajectory of growth.

Rural growth, which lagged behind urban growth in terms of consumption, has now begun to outpace its urban counterpart. The Reserve Bank of India’s (RBI) monthly bulletin of August 2024 stated that the receding of inflation pressures has pushed rural spending, driving a catchup with urban consumption volumes.

The rural market, which accounts for 52 per cent of the FMCG sector’s volume, has started to pick up as favourable global factors and domestic revival are at play, as per a report from Centrum Institutional Research, which has forecasted that the FMCG sector is likely to witness boost in the coming months. A report from Crisil has highlighted that the FMCG sector will see revenue growth grow 7 to 9 per cent this fiscal, riding on higher volume growth.

What Drives Rural Demand?

Understanding rural demand becomes crucial while trying to figure out its impact on the FMCG sector as the majority of the country still lives in rural areas. The rise in disposable incomes directly affects consumption. The Rural demand is driven by factors such as the monsoon, harvest and minimum support prices offered by the government to farmers. The non-farm income also plays its role. These factors have shown positive signs.

Rainfall plays the most important role in deciding whether consumption will witness a boost or remain on the downside. The country has received surplus rains this year as the rainfall averaged over the country as a whole during September 2024 is most likely to be above normal (at 109 per cent of the Long Period Average), as per the Indian Meteorological Department (IMD).

The Centrum Institutional Research report has stated an increase in minimum support prices (MSPs), particularly for pulses is expected to further aid the sector. The RBI stated that the revival in rural consumption is visible as the growing income has started driving the volume growth in the FMCG sector.

“Factors including the pattern of monsoon, level of harvest, and support from government schemes, especially for farmer incomes, impact rural consumption and demand patterns. With the strong economic growth trajectory of the country along with a benign trend of inflation, we expect that the rural demand will increase steadily,” stated SP Sharma, Chief Economist and DSG, PHD Chamber of Commerce and Industry.

Rural Consumption Driving FMCG Growth

While it has become clear that the FMCG sector has been looking at an upward growth trajectory in the coming months, the relationship between the growth in rural demand and the FMCG sector’s growth becomes much more interlinked.

“The rural demand for FMCG plays a significant role in the growth of the FMCG sector in India. The majority of India’s population resides in rural areas and captures a large proportion of the demand for FMCG. Moreover, with the strong revival of rural demand, we expect the FMCG companies to grow more robust in the coming times,” added Sharma.

The tier-two and three cities have added to the growth as the residents in these cities have adopted modern, aspirational lifestyles similar to tier-one. The trend is expected to be sustainable in the long term, supported by increasing purchasing power.

“Rising disposable incomes, urbanisation, digital access and the growth of ecommerce and quick commerce are driving consumption in Tier-two and Tier-three cities. Improved logistics and connectivity have turned these areas into major consumer hubs, where people are more open to spending on a diverse range of goods,” said Rahul Aggarwal, Founder, Coffeeza.

The Festive Season Push

The country is gearing up for a mega festive season as evidenced by the recent trends in shopping behaviour, especially in the rural and tier-two cities. Keeping in mind the rise in disposable income backed by the surplus rains, the consumption in these regions is set to register an uptick which will drive the much-needed boost in the FMCG sector.

“The demand witnessed in August 2024 with monsoon's positive impact on agriculture may boost rural consumption and the start of the festive season which typically drives up demand for FMCG products for preferred brands like HUL, ITC, Dabur, Marico, GCPL, Britannia United Spirits, Radico, Bikaji,” said Mahesh M. Ojha, AVP, Research and Business Development at Hensex Securities.

As the recovery in rural demand has shown the way for the FMCG sector in the country, the positive factor remains the sustainability aspect of it. With the base effect likely to prove beneficial, it augurs well for the Indian economy.

Kishan Singh

BW Reporters The author is a trainee content writer with BW Businessworld