Is There a Light on the Horizon for India’s FMCG Sector

Is There a Light on the Horizon for India’s FMCG Sector

Despite the widespread effects of the Great Recession, India’s economy was resilient during the first half of the five-year meltdown, thanks to strong fundamentals and a healthy consumption appetite. In fact, the Indian economy boasted a 9 percent boost in GDP during its 2007-2011 fiscal years. The last two years, however, have been a different story.

In fact, India has been staring down the barrel of a severe economic crunch, as key macroeconomic indicators have slipped perilously. GDP growth has slowed to its lowest pace in the past 10 years, touching 5 percent in 2012-13. It then slipped to 4.8 percent in Q1 2013. Foreign direct investments from companies into the Indian economy have dried up, and India’s Index of Industrial Production bottomed at 1.1 percent in 2012-13—an indication that businessmen aren’t as confident as they used to be. India’s Current Account Deficit (CAD), which is a ratio of imports to exports, has also ballooned over the last three quarters, making it one of the country’s top economic challenges.

Of all of India’s economic indicators, stability of the country’s currency has been the biggest newsmaker. The Indian rupee has depreciated by 25-30 percent in the last two years. When the value of the rupee breached the 68 mark against the U.S. dollar in the first week of September 2013, it was an unprecedented event and further added to the prevailing negative economic sentiment.

India’s shrinking GDP also had an effect on the country’s robust consumer and business confidence, which is typically robust during the summer months. Until 2012, India had the highest consumer confidence among the countries included in Nielsen’s quarterly Consumer Confidence Index. In the last three quarters, however, falling consumer sentiment has negatively affected India’s index level and its overall ranking with the other countries in the index. In Q3 2013, confidence in India plunged six points, pushing India to the third spot, behind Indonesia and Philippines. Compare this with Q4 2012, when India ruled the roost for 32 consecutive quarters.

The Going Gets Tough

While India’s fast-moving consumer goods (FMCG) industry has been generally immune to the macroeconomic stresses over the past few years, it has started to show signs of giving in. Largely unaffected until October-November 2012, the industry’s growth trajectory has dwindled since December 2012. Nielsen retail measurement data suggests that India’s FMCG sector in the first three quarters of 2013 did experience stress, as the FMCG value growth (vs. the same quarter of the previous year) dipped to a single-digit in the third quarter.

Significantly, India’s volume-based growth, which hovered around 10 percent throughout 2012, fell in the first three quarters of 2013. So whatever nominal growth that India’s FMCG industry experiences in 2013 will largely be due to unit value change—a combination of price hike, reduction in unit pack size and consumer shifts to more premium brands.

Ray of Hope

Despite the slowdown in India’s FMCG industry in 2013, there are a number of positive factors that marketers and manufacturers can look forward to. The new Governor of Reserve Bank of India initiated some measures recently that have had a comforting effect on the rupee and equity markets. Looking ahead, a good monsoon this year should yield a healthy harvest in Q4, which will have a positive impact on food supply. This, coupled with strong consumer consumption spending growth, will likely bring the FMCG industry back on track. Easing inflation should also boost consumer sentiment and raise consumption appetites.

Currently, risks do not seem very pronounced, given that government has been reasonably proactive in policy-making recently, with the results showing up in the form of credit and core sector growth.

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