Consumption push: Shop till you drop?
Source: Live Mint
There is a spring in the step of Indian consumer-related companies after the budget 2025’s proposal to make income up to ₹12 lakh tax-free under the new tax regime. With more disposable income in the hands of millions of taxpayers, the expectation is that consumers would be encouraged to spend more on items like staples, electronics, clothes, footwear, restaurants and travel.
In the process, the government forgoes revenue of around ₹1 trillion in direct taxes. Sure, the move is a game-changer and is expected to offer the much-needed stimulus to demand, helping consumer companies that are finding it tough to boost sales amid moderating urban demand and a slow rural recovery.
But a rising tide may not lift all boats. According to ICICI Securities Ltd’s analysts, discretionary companies will benefit more than staples. “Within discretionary, we reckon restaurants and consumer durables will likely gain. Within staples, companies with higher urban exposure and higher premium salience stand to benefit,” said the analysts in a report on 1 February. Further, products targeted at mass consumption are unlikely to gain significantly on volumes. Consumers are likely to order more on food delivery apps, which means investors see Zomato Ltd and Swiggy Ltd benefitting, evident from the 4-7% gain in their share prices on Saturday.
Read more: Budget aims to deepen electronic goods value chain; capex target disappoints industry
Trent Ltd’s shares were the biggest gainers in the Nifty 50 index on Saturday, rising 7%. InterGlobe Aviation Ltd and The Indian Hotels Co. Ltd gained 4-5%. The Nifty FMCG index and the Nifty Consumer Durables index gained about 3% each on a day when the broader Nifty 50 index fell 0.1%. It is likely that the benchmark Nifty 50 index would have taken a sharper beating if it wasn’t for the consumption boost as the year-on-year capex growth is moderate at 10% even on a low base of FY25.
Shares of India’s largest FMCG company Hindustan Unilever Ltd (HUL) were up about 1.5%. The company’s volumes were flattish year-on-year in the recently released December quarter (Q3FY25) results, disappointing even the already low expectations. Other FMCG stocks such as Godrej Consumer Products Ltd (GCPL) and Tata Consumer Products Ltd rose at a faster pace of 5-6%. ITC Ltd’s shares were up 3% with the government leaving tobacco taxes unchanged.
Key FMCG stocks HUL, Marico Ltd and GCPL are trading at FY26 price-to-earnings multiples of 49-51x, showed Bloomberg data. Sentimental uptick aside, to justify these high multiples, a significant demand pick-up is crucial for earnings estimates to be upgraded. Moreover, as ICICI Securities’ analysts point out: Consumers may not spend all of the tax savings. “This is likely to benefit asset management companies,” they added.
Agriculture & rural economy support
Meanwhile, the finance ministry also announced a series of measures to bolster the Indian agriculture sector, which can improve rural incomes and thus, demand. The subsidized Kisan Credit Card loan limit has been increased to ₹5 lakh from ₹3 lakh. Also, the Dhan Dhanya Krishi Yojana has been launched with an aim to improve agricultural productivity in 100 districts with low output, and is expected to benefit 17 million farmers in India.
A revival in consumption is crucial for India’s economic growth. The Economic Survey tabled in the parliament on Friday estimates India’s gross domestic product (GDP) to grow at 6.4% in FY25—the slowest in four years. One culprit for this is the sticky retail inflation that has stayed above the RBI’s medium-term comfort zone of 4% for a large part of 2024. The survey expects food inflation to soften in Q4, aided by the seasonal easing of vegetable prices and arrival of kharif harvest.
Read more: Budget 2025 | 100% FDI in insurance a positive for the sector but not for its stocks
In this backdrop, putting more money in the hands of consumers by way of tax cuts is a step in the right direction. “Government intent is clear with their priorities tilted towards consumption, going by the big relief on tax rebates changes. Household balance sheets should get a breather due to this relief,” said Vijayaraghavan Swaminathan, executive director, equity research, Avendus Spark Institutional Equities. But is that enough? “We need factors like more job creation, better inflation adjusted salary growth for the consumption cycle to see a big recovery,” added Swaminathan.
The Street’s focus now shifts to the Reserve Bank of India’s monetary policy meeting on 7 February. An interest rate cut by RBI would be an incremental positive for giving further consumption fillip.
