Opinion Reduced spending by middle-income households is a concern

Nestle India chairman Suresh Narayanan has expressed concern over middle-income households, especially in urban areas, not buying enough packaged foods, beverages and other fast-moving consumer goods. The “middle segment”, which is the main market for FMCG players, “seems to be shrinking”. Narayanan, whose company reported a 1.2 per cent year-on-year domestic sales revenue growth for July-September 2024, isn’t alone here. Hindustan Unilever and Tata Consumer Products, too, have flagged “moderating” and “softness” in urban demand. The former registered a 1.9 per cent annual sales and a 3 per cent underlying volume growth during the last quarter. The latter has seen its tea volumes declining by 4 per cent and that of foods, including salt, increase by just one per cent. If one adds to this Reliance Retail, which posted a 3.5 per cent drop in revenues from operations on the back of “weak fashion and lifestyle demand”, a clear pattern emerges.

One, the slowdown in consumer spending is no longer a mere rural phenomenon. Rural demand, if at all, is recovering gradually. It’s partly borne out by motorcycle sales going up 13.4 per cent in April-September 2024 over April-September 2023. A revival in agricultural production from a good monsoon — plus assorted cash transfers and other welfare schemes, both at the Central and state government levels (Maharashtra’s Ladki Bahin Yojana being the latest) — should further aid this recovery, albeit from a prolonged period of stress. On the other hand, the pressure points are now apparently coming more from the metros and urban centres. This weakening of urban consumer demand was somewhat hidden by the growing “premiumisation” and “polarisation”, with the lower and middle-income households curtailing their expenditures and the well-off/wealthy continuing to spend. But passenger vehicle sales in April-September recording a marginal 0.5 per cent growth over the same period of 2023 suggests that the pent-up demand accumulated from the pandemic has been more or less satiated.

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It links up with the second takeaway. The biggest drags on consumer spending, whether urban or rural, are food inflation and muted growth in real incomes. Both are limiting the capacity of households to diversify their expenditures and of firms to grow the market by attracting new, rather than the same set of, buyers. Food inflation should hopefully soften with the arrivals of the kharif crop picking up post Diwali and the prospects for the upcoming rabi planting season also looking good. The government can help by keeping the door on imports open and not resort to politically-motivated duty or minimum support price hikes. It’s high time for the Reserve Bank of India to also consider cutting interest rates, taking a more proactive view that accommodates growth (read jobs and incomes) concerns as much as inflation targets.