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GST Cuts: Consumer Hopes Dented, Not Defeated
14 Feb
Summary
- GST rate cuts boosted sales for some electronics and cars, not broad consumption.
- Small absolute savings from GST cuts didn't change middle-class consumer behavior.
- FMCG companies faced margin pressures despite GST rate rationalization.
India's implementation of GST 2.0, featuring rate cuts on over 375 items effective from September, aimed to invigorate consumption. The expectation was a shift towards premium and branded goods as prices dropped. However, the immediate impact has presented challenges for consumer giants, with revenue growth for FMCG companies ranging narrowly between 2% and 27% in the December quarter.
Anil Kumar, CEO of Redseer Strategy Consultants, noted that consumption, particularly among the middle class, has not meaningfully improved, as the absolute savings from GST reductions were too small to influence behavior. Sunil D'Souza, MD and CEO of Tata Consumer Products, acknowledged short-term disruption but emphasized that demand for staples and FMCG won't change overnight solely due to tax rate adjustments.
This tax reform has also impacted company margins. Colgate Palmolive, for instance, saw its Ebitda margin decrease to 30% from 31.1% year-on-year after nearly 90% of its products were affected by GST cuts. Despite these short-term difficulties, there is a prevailing optimism for future quarters.
FMCG executives anticipate long-term benefits, with Marico's MD and CEO Saugata Gupta expecting easing prices and GST-led affordability to gradually support demand recovery. He views the tax reform as a long-term positive and transformative for brand growth, especially in personal care and packaged foods which saw significant GST reductions.
Britannia Ltd. CEO Rakshit Hargave reported stable demand post-GST transition, with revenue growth attributed equally to volume and value realization. However, dual pricing on packs has created market confusion. Dabur CEO Mohit Malhotra observed a gradual recovery in demand trends, aided by GST rate cuts, though October faced transient headwinds.
Rural markets continued to outpace urban growth for companies like HUL and Dabur, though the gap has narrowed. Companies are also investing heavily in quick commerce in urban areas, with sales doubling for many. The implementation of new labor codes has also impacted company bottom lines through increased wage and payout mandates.
