From cars, to apparels to noodles, signs of weakness in urban demand are everywhere, pointing at a demand slowdown in urban areas.
Many hope the slowdown, especially in auto and fast-moving consumer goods (FMCG) sales, in urban areas may turn out to be transient with the advent of the peak festive season which is expected to lift sales. Aggregate demand in India is poised to shrug off the temporary slowdown in momentum in the second quarter of 2024-25 as festival demand picks up pace and consumer confidence improves, the Reserve Bank of India (RBI) has said in its monthly bulletin for October.
Bellwethers emit stress signals
Hindustan Unilever (HUL), the company whose performance is considered a proxy for broader consumer sentiment in India, posted a disappointing performance in the quarter to September, which was characterised by a modest 2% growth in revenues, 3% rise in volumes and 4% drop in net profit. Excluding one-off impact of an indirect tax item in base year, net sales rose 3%, net profit growth was flat and so was operating margin. High raw material costs limited the margin gains even as the company spent less on advertising during the quarter.Another FMCG major, Nestle India, the maker of Maggi noodles, KitKat chocolates and Nescafe coffee, reported a marginal 0.94% year-on-year decline in net profit for the July-September quarter, down to Rs 899.49 crore, hurt by softer demand and high commodity prices. The India unit of the Swiss foods company had reported net profit of Rs 908.08 crore in the year-ago quarter.
Reliance Retail said weak demand in the fashion and lifestyle business and calibrated approach to improve margins in its wholesale business hurt revenues which fell 3.5% during the second quarter ended September. This is the first instance of a revenue decline for India’s biggest retailer except during the pandemic when covid-led restrictions forced them to shut stores temporarily.
The overall retail sector posted a 5 per cent muted growth year-on-year in September, with sales expected to pick up momentum as major festivals like Diwali approach. North India saw a sales growth of 7 per cent , followed by West and South India, which showed an increase of 5 per cent each, while East India showed a growth of only 4 per cent , according to the Retailers Association of India (RAI).
What’s dragging consumer sector?
Consumer goods companies including Parle, Dabur and Tata Consumer have said rural demand for daily essentials and food is recovering but there is still stress in cities due to food inflation, dragging the overall growth down in the September quarter. Muted consumer demand coupled with high commodity prices are dragging the FMCG sector even as rural demand is recovering.
HUL said raw material cost grew 5% on year and constituted 49.6% of the revenues, driven by inflation in tea and crude palm oil prices. Nestle India’s chairman Suresh Narayanan has pointed at the surge in prices of fruits, vegetables and edible oils as “cause for concern because this clearly will lead to an increase of prices if they become unmanageable for organisations”. Mega cities are particularly affected with weak performance in segments such as milk and nutrition, chocolate, and confectionery, he said.
“Palm input costs have been rising since March and have risen in the high teens as of date. Management has decided not to pass on the entire cost hike to consumers in one step and decided to continue investments on the long-term growth initiatives like rural van programme, new category development etc,” Godrej Industries Group’s FMCG arm GCPL had said.
Prices of vegetables such as tomatoes and onions shot up to 35.9% in September over the previous month, impacted by heavy rains and supply-disruptions. The recent hike in import duties on crude and refined edible oils by 20 percentage points last month pushed India’s retail inflation to a nine-month high of 5.5% in September, against 3.65% in August.
Marico said among key inputs, copra prices rose ahead of internal forecasts and the recent import duty hike led to vegetable oil prices moving higher towards the end of the quarter.
Tata Tea will implement price hikes across its brand portfolio over the next few months, as it aims to expand its profit margins, which have been hit due to a jump in input prices, a top official said on Wednesday.
Wholesale inflation pinching companies
India’s wholesale inflation accelerated to 1.84 per cent in September on an annual basis, as against 1.31 per cent in August amid surge in food prices, as per government data. The WPI for September 2023 was pegged at 0.26 per cent.
Food prices, a key indicator, went up to 9.47 per cent in September from 3.26 per cent in August, showed government data. Vegetable prices rose 48.7 per cent, compared to a drop of 10 per cent in August. Cereal prices rose 8.1 per cent over last year from an 8.4 per cent increase a month ago. Additionally, the annual rate of inflation for Primary Articles of WPI accelerated to 6.59 per cent as against 2.42 per cent in August.
Slowdown worries for some MPC members
New external members of the monetary policy committee (MPC) share RBI members’ neutral-to-dovish outlook. But while RBI members’ dovishness arises from optimism that things will improve, external members are more worried about a slowdown, TOI has reported.
Nagesh Kumar, one of the three new external members, called for the loosening of monetary policy, emphasising on slowing economic growth and demand deficits in the domestic and external markets, minutes of the MPC meeting released on Wednesday showed. External member Saugata Bhattacharya advocated a neutral stance and was concerned about loss of growth momentum, uncertain aggregate demand, and external risks, including geopolitical factors and rising commodity prices. However, the third new member, Ram Singh, was optimistically dovish and acknowledged resilient domestic growth driven by consumption and investment.
Kumar was the only member to have voted for a 25 basis point rate cut in the October 9 MPC meet, while others voted for a pause.
During the latest rate-setting panel meeting, in which the MPC retained repo rate, it left its inflation forecast for this fiscal year (FY25) unchanged at 4.5 per cent, even amid caution on food price trajectory that may hurt core inflation along with geopolitical tensions which pose a threat to any comfort on crude prices. The central bank now sees inflation for Q2, Q3 and Q4 of this fiscal year at 4.1%, 4.8%, and 4.2%, respectively. In the August policy, the monetary authority had pegged the inflation readings at 4.4%, 4.7% and 4.3%, respectively. Inflation stood at 4.9% in the first quarter.
Considering the balanced inflation and growth trends, RBI governor Shaktikanta Das announced the MPC’s shift from “withdrawal of accommodation” to “neutral.” This change allows the MPC greater flexibility while maintaining focus on aligning inflation with the target without compromising growth.
(With inputs from TOI)