May 10, 2004
Abstract: Two explanations are offered for the slow growth of branded FMCG (Fast-Moving Consumer Goods) sector in India:
- There is increasing price competition from the informal sector which is able to sell cheaper by avoiding indirect taxes paid by the formal sector. FMCGs could regain market share with lower prices but revenue would only increase if price elasticity of demand is less than -1; and
- Consumers are buying a broader range of goods and services, such as housing, consumer durables, higher education, etc through debt financing, which leaves less for discretionary spending. More expensive health care is also eating into the budget. FMCGs are bearing the brunt of the shift in demand. Industrial production data supports the hypothesis that FMCGs growth is significantly negatively correlated to growth in durable spending. Additionally, a decline, albeit mild, in consumption as a share of GDP might also be hurting FMCG sales.
Keywords: FMCG; price elasticity of demand; retail financing boom; consumption basket; aggregate private consumption; IIP; household wallet; discretionary spending
