The FMCG lag

BEATING THE STREET

It has long been a subject of mirth that the new fiscal starts on April1. It is just as well that the quarterly estimates for October"�December 2003 were declared earlier. The CSO estimates of 10.4 per cent would otherwise have caused disbelief.

Despite a consensus that business is booming, double-digit growth was unexpected. But the corresponding Q3 of fiscal 2002-03 wasn't very upbeat, the economic cycle had just started moving up. So it's growth on a relatively low base.

The major contributor to growth in Q3, 2003-04 was agriculture, forestry and fishing. If you recall, last year saw a decent monsoon after successive droughts. So the agri-boom of 16.9 per cent growth reflects the statistical effect of an excellent performance compared point-to-point to a very low base.

Agriculture doesn't contribute that much to Indian GDP. By most reckonings, it would contribute between a quarter and a third of GDP. But over 50 per cent of the population is rural, and dependent on agriculture in some fashion. So, growth in that sector does have a disproportionate feelgood effect.

There are a few caveats regarding agricultural growth itself and the ways in which it translates into generic feelgood. Production volumes and unit values often show sharp inverse-correlation. That is, a glut of rice, wheat, sugar, milk, or any other agri-commodity, can lead to massive drops in prices.

Demand in such goods is pretty near constant and hence, prices fluctuate a lot with changes in supply. People don't eat vast quantities when food is cheap. Nor do they tighten their belts several notches when food is expensive. Hence prices are supply-dependent.

For example, a 5 per cent shortfall in the onion crop led to triplings and quadruplings of price in Delhi a few years ago.

Intuitively, one would rather have plenty than shortfalls. But a bumper harvest doesn't necessarily translate into more money in the farmers' pockets though it would show up as growth. Surpluses can be a ticklish problem for governments committed to basic food procurement prices.

The European Union regularly buys and destroys food to subsidise the farm sector. India stashes surplus foodgrains to rot away in godowns. In years of plenty, the food subsidy rises.

Let's assume that the agricultural growth was translated into more money. Why didn't it lead to commensurate expansions in sales volumes for FMCGs?

FMCG sales were nearly flat in Q3, 2003-04. Old market hands reflexively buy Hindustan Lever, Nirma and Colgate shares the instant a good monsoon is confirmed since that drives rural growth.

The more cautious investors wait for two successive good monsoons. But 16.9 per cent growth surely delivered the equivalent of two "average" good monsoons and ought to have led to strong FMCG performance.

Access to and from rural markets also got easier in the period concerned. Road networks improved, enabling easier deliveries of soap and toothpaste to rural markets as well as converse deliveries of agriproducts to urban markets. Telecommunications also improved, enabling farmers to discover the best prices.

If it wasn't an access problem and good harvests did indeed translate into more money, there must be a major lag factor at work here in terms of FMCG sales. Can we reasonably assume that January-March 2004 will see a big bounce in FMCG volumes?