The Budget Booster Shot for FMCG

Thu, 3 Mar Pre-Open

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The rural economy in India has been in doldrums for quite some time now. Deficient rainfall in the past two years has impacted farm income and consumption. And FMCG companies, that derive around a third of their sales from rural India, have been hit by the tepid demand. If one has to go by statistics, fast-moving consumer goods (FMCG) sales in rural areas grew 10-11% annually in the past two years, compared with 15-18% growth earlier.

However, the Union Budget 2016-17 has announced a number of sops to push rural economy out of slumber.

Rural India: A New Story in the Making...

The strong rural focus of the Union Budget is reflected in the fact that a sum of Rs 877.7 billion has been allocated to the rural sector with the aim of doubling the farmer's income within a span of five years. The spending on agriculture stood at Rs 359.9 billion with a focus on bringing more areas under irrigation.

Apart from improving credit and crop insurance to farmers, the government has proposed to introduce new schemes for animal welfare, rural electrification, interest subvention and a unified e-platform for farmers.

In order to boost the rural income, the budget allocated the highest-ever sum of Rs 385 billion for Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). This scheme ensures that labourers get jobs on demand for 100 days in a year.

Further, an allocation of Rs 190 billion was made for the Pradhan Mantri Gram Sadak Yojana (PMGSY). This scheme aims to provide good all-weather road connectivity to unconnected villages. This will add jobs as well as increase connectivity.

What's in the Box for FMCG Companies?

An uptick in the rural income can spur demand for consumer goods and improve the sales growth for FMCG companies particularly for firms such as Hindustan Unilever Ltd (HUL), Dabur and Videocon. These firms garner nearly half of their sales from rural India.

And this comes at a time when FMCG companies have been scouting to make acquisitions given their rising cash balances with an aim to maintain growth.

Having said that, investors can look out for investment opportunities in these companies going forward (subscription required).

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