While consumption demand picked up and is seen getting stronger in the coming months in the backdrop of the rate cuts under GST 2.0, companies’ sales and revenue growth, especially for fast-moving consumer goods and price-sensitive consumer durables, are likely to see a dip in the July-September quarter due to the lukewarm offtake and transition-linked issues in the run-up to the September 22 rollout. FMCG major Hindustan Unilever has already flagged the risk of “near flat to low-single digit” consolidated business growth in Q2, which it sees spilling over till October as well.
Going ahead, however, companies and experts see this one-off, transitory impact waning, with consumption expected to pick up significantly with a rise in disposable incomes coming from the cumulative impact of the rate cuts under the Goods and Services Tax (GST) regime and income tax announced in the Budget.
Hindustan Unilever, which produces a range of common-use items such as soaps, shampoos, toothpaste to lifestyle nutrition items and has seen the GST rate being brought down to 5 per cent from 12 per cent or 18 per cent for about 40 per cent of its product portfolio, said there has been disruption at the end of distributors and retailers across channels to clear existing inventories with old prices.
“This has resulted in postponement of ordering in anticipation of receiving new stocks with updated prices and lower orders across the overall portfolio as consumers delayed their pantry buying. This has led to a short-term impact on sales for the Company in September. Given our existing pipeline inventory in the channels, we expect this impact to continue into October as well,” it said in a statement to stock exchanges on Friday. While the growth numbers for Q2 are expected to see a dent, HUL said this is a “one-off, transitory” impact, and the company anticipates recovery November onwards as prices stabilise, underpinned by rising disposable incomes and ongoing portfolio transformation actions.
Experts also said that the companies dealing in price-sensitive consumer durables such as refrigerators, air conditioners and other cooling products are also likely to see a hit to their margins with consumers delaying purchases in Q2 in anticipation of discounts after the September 22 rollout of the GST 2.0 rate cuts. The growth numbers for such companies will be under strain as they try to get rid of the excess inventory with the peak purchase season of summer months already having come to an end.
Voltas in an analyst conference call on September 19 had pointed out that demand remained severely impacted in the room AC category in Q2 of this financial year, given high inventory of 2-3 months, the extended monsoon season, and consumers deferring their purchases during the period from the announcement of GST cuts on August 15 to the rollout on September 22.
However, GST cut-led pent-up demand and the upcoming festive season should drive strong growth in Q3, it said. Nomura Global Markets Research in a recent report said despite about 8 per cent cut in AC prices on lower GST, elevated channel inventory may dampen primary sales channel build-up in Q3. “Also, the net benefit for consumers would be nominal by Q4 FY26; thus demand would remain contingent on the upcoming summer season,” it said. Among service providers, insurance companies are also likely to see a hit to their margins as they won’t be able to utilise their input tax credit after having been exempted under GST 2.0.
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Going ahead, a pickup in rural wages and urban demand due to higher disposable incomes are seen supporting consumption growth. Incremental benefits of around Rs 2-2.5 lakh crore are expected for customers driven by cuts in the income tax, GST and repo rate cut, HSBC said in a recent report. An improvement in volume growth is expected, in line with the trend seen at the time of the GST rollout in 2017, with the highest benefits from GST cuts seen for categories with a high low-unit-packs (LUP) share, discretionary and impulse items, a recent report by HSBC pointed out. “We expect impulse categories like biscuits, salty snacks, and chocolates to see an increase in immediate consumption as these items are consumed via packs rather than absolute quantity. While we see a one-time spurt in volumes in LUP for home and personal care categories like soaps, oral care etc., a significant step-up in consumption may not necessarily play out. Changes in the GST rate announced in Nov 2017 also point to a pick-up in volume growth ahead,” the report said.
The GST cuts are also expected to revive growth in the entry-level segment along with a push for consumption behaviour towards premium products. The rate cuts are seen specifically boosting the entry-level segment for automobiles that has been in a dire state with just 25,402 units sold in FY25 from what used to be nearly a million units a decade ago at 9,34,538 in FY16. The pent-up demand for cars was visible on the first day of GST 2.0 rollout, with Maruti Suzuki having received a record 80,000 enquiries and delivered 25,000 cars. Tata Motors also saw over 25,000 enquiries and made 10,000 deliveries.
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