How could the Union Budget create upwind for the FMCG sector?

Over the last year, the fast-moving consumer goods (FMCG) companies have underperformed when compared to the market as a whole. At the time of writing, in the last year, NIFTY FMCG returned 8.93% while NIFTY 50 returned a whopping 26.91%. However, the tide might just be turning for FMCG companies with rural consumption on the rise and government spending expected to boost this phenomenon.

Lok Sabha elections set the ball rolling

In the recently concluded Lok Sabha elections, surprisingly, the Bharatiya Janata Party (BJP) could not secure a majority on its own. So, the BJP was left with no choice but to form a coalition government. A major reason for this upset could be its performance in rural regions.

Although the party’s focus on infrastructure development has paid dividends in the urban areas with the BJP winning 40.1% of the votes in urban areas according to the Economic Times, it might be time to rethink this strategy. In the previous election, the party had won 201 rural constituencies but retained only 126 of these constituencies in this Lok Sabha election.So, in preparation for the next election, the BJP is expected to shift its focus to the rural economy.

Spotlight on rural employment expenditure

Since FY 2020-21, the Indian government has steadily reduced its expenditure on rural employment. The Union Budget estimate for rural employment stood at ₹86,000 crore for this financial year. However, in 2020-21, the government spent ₹1,11,169.53 crore on rural employment. This signifies a drop of 22.64%.

If the government does increase spending on rural employment, it would fortify rural income and in turn, rural consumption. Going by past trends, the chances of this happening are quite high. After the last two elections, there were substantial swings in rural employment expenditure.

When the BJP came to power in 2014, the expenditure on rural employment dropped dramatically from ₹32,992.83 crore to ₹513.31 crore. After the last Lok Sabha election in 2019, the rural employment expenditure rose by 15.96% from ₹61,815.09 crore to ₹71,679.3 crore.

Rural consumption on the rise!

The government spending boost could not come at a better time. Although the growth of rural consumption was languishing behind urban consumption for every quarter of the calendar year 2023, in the quarter that ended in March 2024, the growth in rural consumption finally eclipsed urban consumption growth. In this quarter, rural consumption grew at 7.6%. This is a huge improvement from the same quarter in 2023 when the growth in rural consumption was merely 0.3%.

The three main reasons for this recent rise in rural consumption are jobs created by Lok Sabha campaigning efforts, calming inflation, and a positive monsoon expectation as El Nino gives way to El Nina.

Identifying the right company

Hence, in our opinion, investors must find FMCG companies best placed to reap rewards from this situation. We think that an FMCG company that receives a major chunk of its revenue from rural areas and also has a high rural market share will do well. It will also be important to keep an eye on FMCG companies that have a portfolio of products well within reach of rural consumers.