While economists are feeling buoyant about India’s ability to overcome the challenges posed by the pandemic, the country’s biggest FMCG player is less than optimistic about the growth prospects, believing instead that sales volumes would decline in the rural areas with inflation causing additional stress on the economy.
A report in the Economic Times quotes Hindustan Unilever managing director Sanjiv Mehta to say that the company had never seen volumes dropping to such levels. While there was stress earlier when the rural economy slowed down, this time market volumes are in the negative for a long period and suggests a demand slump.
Are the tough times round the corner?
The official termed high commodity inflation as the prime reason for the declines in market volumes and hoped that the central government and the Reserve Bank of India (RBI) would do all that it can to manage interest rates without stifling growth.
The Reserve Bank of India had claimed that the economy witnessed a gradual, but uneven recovery during the quarter. “In the Indian economy, high-frequency indicators point to a gradual but unevenly strengthening recovery in the first quarter of 2022-23, in spite of headwinds from the geopolitical situation, elevated commodity prices, especially of crude oil, and volatile financial conditions, as global spillovers endeavor to unsettle domestic financial markets with bouts of turbulence,” the RBI said in its ‘Financial Stability Report, June 2022’.
Mehta also warned that the hike in interest rates would be inevitable given that the US Federal Reserve has already given enough indications of raising the cost of borrowing. From India’s point of view, the challenge is to rein in inflation without actually curtailing growth through a squeeze on money available for lending. If the government raises the rates sharply it can constrict growth and if the pace of raising interest rates is slow it could cause an outflow of capital which can then put pressure on the rupee.
The HUL official also cited data from market research firm Nielsen to indicate that his company’s market had expanded seven per cent in value terms but fell five per cent in volume during the first quarter of this fiscal year. The company posted a 19% growth in sales, driven largely by price hikes and not demand growth.
While the official GDP data for the first quarter is still some time away (it usually arrives towards the end of August), a report published in the ET said the median estimates of a poll conducted with economists had pegged the growth at 14.4% with the overall growth during the current fiscal year standing between 7.2 to 7.6%. On its part, RBI estimated FY23 growth at 7.2%.
The economists aren’t putting too much credence to the high growth numbers for Q1 as it comes over a very low base of the same quarter in 2021 when the second wave of the global pandemic had hit the economy. However, they’re near unanimous in the view that high frequency indicators of the first quarter do indicate a spike in overall economic activity.
So what can change things around?
Mehta believes the inflation challenges aren’t home grown but are tied to several factors such as the supply-chain disruptions caused by the pandemic, the fiscal stimulus given by the developed nations and the Russia-Ukraine crisis. He believes that if commodity prices start coming down, the growth volumes in FMCG could get back on an even keel.
He believes that things could turn for the better soon enough as green shoots of a revival were already visible. Government has taken steps such as reducing the excise on fuel along with similar cuts by state governments, additional subsidies on fertilizers and extension of the free grains scheme and retaining power subsidies.
