The Indian Fast-Moving Consumer Goods (FMCG) sector is on track for a gradual recovery, although the recent Goods and Services Tax (GST) rationalization may result in modest volume growth in the short term, according to industry experts.

Consumer Behavior and Trade Dynamics

Abneesh Roy from Nuvama Institutional Equities highlighted that consumers have been adopting a wait-and-watch approach, anticipating lower prices following the GST announcements. Simultaneously, traders have been cautious about stocking products with higher Maximum Retail Prices (MRP), creating a temporary lull in the market.

Impulse Categories to Lead Recovery

The silver lining in this scenario is the expected boost for impulse categories such as biscuits and snacks. These products are likely to benefit first from the lower unit taxes, with companies planning to increase product quantities to stimulate volume growth starting November.

Limited Impact on Essential Categories

While impulse purchases are expected to see an uptick, essential categories like toothpaste may experience limited long-term benefits. Experts suggest that consumption in these categories is unlikely to rise significantly despite the tax changes.

GST Clarity Awaited

The industry is currently awaiting clarity on the inverted duty structure, where services and raw materials are subject to 18% GST, while finished products are taxed at 5%. This discrepancy has created some uncertainty in the sector.

Sectors Poised for Growth

Several product categories are expected to benefit from the GST rationalization:

• Paints
• Alcoholic beverages
• Bhujia
• Biscuits
• Noodles
• Pasta
• Chocolates
• Confectionery

Return of Popular Price Points

A significant development for consumers is the expected return of popular price points:

The GST cuts are anticipated to extend the lifecycle of these price points by five to seven years, making products more accessible to a wider consumer base.

Premiumization and Market Growth

As disposable incomes rise, the FMCG sector is likely to see a trend towards premiumization. Interestingly, smaller towns and rural areas are projected to outpace urban markets in terms of growth, indicating a shift in consumption patterns across India.

Conclusion

The FMCG sector's recovery, while gradual, appears to be on a positive trajectory. With impulse categories leading the charge and strategic adjustments in pricing and product quantities, companies in this space are adapting to the new tax regime while catering to evolving consumer preferences.

JPMorgan's Executive Director, Latika Chopra, has projected a positive outlook for India's Fast-Moving Consumer Goods (FMCG) sector, citing recent Goods and Services Tax (GST) rate reductions as a key driver for increased consumption.

Impact on Discretionary Categories

The GST rate cuts are expected to have a significant impact on discretionary spending categories:

• Footwear
• Apparel
• Consumer durables

Notably, the rate reductions are more pronounced for durable goods, air conditioners, and large televisions, which could potentially accelerate recovery during the upcoming festive season.

FMCG Staples: A Gradual Impact

For FMCG staples, the effect of the GST rate cuts is anticipated to be more gradual. The December quarter is projected to serve as the first real test for observing volume response in this category.

Projected Growth in FMCG Volumes

Chopra forecasts an improvement in FMCG volume growth:

• Current: Low-to-mid single digits
• Projected (H2 FY26): Mid-to-high single digits

Key Growth Drivers

Four primary factors are identified as driving this growth:

1. Grammage increases at fixed price points
2. Price-demand elasticity
3. Market share gains for branded players
4. Premiumization

Urban vs Rural Consumption

The recovery landscape shows a divergence between urban and rural markets:

• Rural: Recovery has begun
• Urban: Consumption remains patchy due to wage and employment concerns

Company Strategies and Margin Outlook

FMCG companies are currently prioritizing revenue growth over margins. However, a modest improvement in margins is expected in the second half of FY26.

JPMorgan's Market Perspective

Despite rich valuations compared to Asian peers, JPMorgan believes that the earnings downgrade cycle for the FMCG sector is coming to an end. This suggests a potentially stabilizing outlook for the sector's financial performance.

Conclusion

The GST rate cuts represent a significant policy move that could reshape consumption patterns in India, particularly benefiting the FMCG sector and discretionary spending categories. As these changes take effect, both consumers and industry players will be keenly watching the impact on prices, demand, and overall market dynamics in the coming quarters.