New Delhi: High inflation levels have considerably eroded demand for both durable and fast-moving consumer goods (FMCG) despite the Indian economy having normalised from the shocks of the Covid-19 pandemic and the Russia-Ukraine war, says a new report citing consumption data.
Released Monday and accessed by ThePrint, the report by Bank of Baroda’s economic research department (ERD) on consumption levels in the economy as of August 2023 also said the ongoing festival season would be “crucial in determining the future direction of industry” in the country.
The analysis looked at the production of both durable goods — fridges, TVs, washing machines, phones, cookers, etc. — as well as FMCG products including shampoo, detergent, hair dye, tea, soft drinks, and instant foods, among others.
“The supply side disruptions which started during the lockdown and ended by 2021 are a thing of the past,” it said while adding that the “shock of the Ukraine war was short-lasting and it does look like that the system has adjusted to this disruption quite well”.
In the consumer durables sectors, the report found that production levels in 2022 were “much higher” than even pre-pandemic levels, which it said meant that production is no longer being boosted as a reaction to lockdown-induced slowdowns.
The analysis found that production contracted in six out of the nine consumer durables sectors Bank of Baroda’s ERD looked at.
“The explanation then is that the pent-up demand seen in 2022 has gotten diluted considerably here in 2023 which is what is being witnessed,” the report said, adding that the “fall in output of mobiles/telephones does come as a surprise as this means that demand may be getting saturated”.
It also said that “based on what has been reiterated in the media by companies, high inflation has come in the way of demand” and that when inflation is high, households tend to cut back on their discretionary spending — a broader trend that is visible in the latest data.
In the FMCG sector, the report noted that inflation was more varied, coming in above 5 percent for items such as detergents, toothpaste, soaps, coffee, and instant foods, and below 3 percent for hair oil, cigarettes, wines, oils, spirits, tea, and shampoos.
“Again, the generalised inflation factor has been at work where real income has come down thus leading to lower purchasing power,” the report said.
Notably, the report found that with the exception of wines — the production of which grew 24 percent in April-August 2023 on the back of a 27 percent growth last year — growth in other FMCG sectors was largely because it was coming on the back of contraction last year.
It further said that anecdotal evidence showed that this year companies reported that consumers were increasingly preferring lower-priced products or smaller packets with lower weights.
“Companies have so far reported on output performance up to September where a cautious picture has been painted,” it said, adding that the “next couple of months will determine whether consumption has actually picked up as producers increase their output”.
Rural demand, it added, will be key here, with the possibility of some pressure arising out of lower output in some crops.
“Urban demand has been good for premium products so far which will persist through the season for both goods and services,” said the report.
(Edited by Amrtansh Arora)
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