It has been close to three months since the revised Goods and Services Tax (GST) rates came into effect, but India's fast-moving consumer goods (FMCG) industry is still waiting to experience the full force of the anticipated demand surge. While price cuts on a range of essential items were implemented, the sector has not witnessed the expected consumer spending shift, with benefits appearing more pronounced in higher-value categories like automobiles and consumer durables.
Consumers Prioritize Big-Ticket Buys Over Daily Essentials
Initial consumer response to the tax cuts revealed a clear preference. Shoppers were quicker to allocate their savings towards durable goods and cars, where the reduction from the highest tax slab offered more substantial absolute savings due to the products' higher price tags. This trend meant that instead of adding extra packs of biscuits, shampoos, or other daily-use items to their carts, household budgets were redirected.
Industry executives acknowledge some early signs of demand improvement, but they emphasize that the true extent of growth will only become evident over the next few quarters. Interestingly, within the FMCG space, a portion of the GST benefit, especially for smaller pack sizes, has been passed on to consumers not through direct price cuts but through increased grammage—giving more product for the same price.
Industry Leaders Divided on Demand Trajectory
There is no unanimous view among FMCG chiefs on how the tax reductions will ultimately translate into sustained consumer demand. However, a broader consensus exists that lower tax rates should, in theory, boost consumption by enhancing affordability. This could potentially allow consumers to premiumise their purchases or shift from unbranded to branded goods.
Sudhir Sitapati, MD & CEO of Godrej Consumer Products and chairman of the CII National Committee on FMCG, highlighted the sector's puzzling performance. "FMCG growth in the last 4-5 years has been puzzling for us. With Indian GDP at 7%-8%, one should see FMCG volume growth ahead of GDP growth, but it has been at 4%-5%," he told TOI. He noted that the long-term impact of GST remains uncertain and will be clearer in a few months, though short-term benefits are visible in categories where rate reductions were applied.
Echoing the sentiment of delayed benefits, Saugata Gupta, MD & CEO of Marico, pointed out that the immediate advantage was seized by sectors like durables and auto. "There the cut was substantial, something moving from 28% to 18%. And the significant outlay that was saved. For FMCG, the benefit will take time," Gupta stated at the CII FMCG summit in Mumbai.
Urban Demand Slump and Future Hopes
The sector's growth has been persistently hampered by weak urban demand. High inflation over the past year pressured city-dwelling consumers, particularly in the low to mid-income segments, to tighten their spending. This cohort is crucial for mass-market leaders like Hindustan Unilever (HUL) and Dabur.
Looking ahead, FMCG companies are pinning their hopes on a combination of factors to revitalize demand. The trifecta of GST cuts, recent income tax benefits announced in the budget, and currently low inflation levels is expected to provide the necessary stimulus to spruce up consumer sentiment and open wallets for everyday goods. The coming months will be critical in determining whether these measures can successfully unlock the volume growth the industry has been awaiting.
