Connect with us

Daily News

Will Consumers Cut Back Their Spending On FMCG Goods To Pay Higher Telecom Bills?

One man’s meat is another’s poison. Will this play out between Indian telecom companies and consumer firms, as the former is set to generate more revenues owing to the tariff hikes implemented last week? As a result of the tariff hikes, annual revenue of the telecom industry is expected to rise by about 50,000 crore. A moot question is what kind of dent this will make on the FMCG industry.

At least some industry executives and analysts think there will be an impact. “Higher telecom tariffs will hurt consumption demand to some extent for the next one-two quarters. Over the long run, consumers are likely to adjust to this change,” says Vivek Gambhir, managing director and chief executive officer of Godrej Consumer Products Ltd.

Kunal Vora, senior analyst (consumer and telecom) at BNP Paribas India, points out that government spending as well as sharp cuts in telecom spending might have boosted the FMCG industry’s revenue growth since FY16. A reversal in the trend will naturally hurt. “Spending on telecom services that declined by about $10 billion over FY16-19, is set to increase by $7-9 billion (including taxes) in FY21 as the companies have raised tariffs by about 35%,” he says. “This is a significant increase and larger than the total $5 billion the government has spent on its flagship, direct benefit transfer scheme PM-Kisan, over FY19 and FY20.”

Gambhir says, “Given that the telecom hikes come at a time when demand is already depressed, it’s safe to say incremental pressure on rural demand will increase.”

The price-conscious Indian consumer will be forced to choose what he spends his money on, as his wallet share changes. In this process, he may cut spending in other areas. According to Gambhir, consumer discretionary spend will be hit more relative to consumer staples. And one view is that one of the fallouts of the increase in telecom tariffs could be a drop in aggregate household savings.

What’s more, rural demand does not look ready to improve in a hurry. Rural income growth is one of the factors that drives consumption growth, said analysts from JM Financial Institutional Securities Ltd in a report on 4 December. “The sluggish trend in non-farm income growth (impacted by lower liquidity, weak exports, low rural wage growth) would constrain any material pick-up in rural consumption,” they said.

“Incremental pressure on consumption can also mean excess consumption of data is the first casualty,” says Ritesh Jain, a global macro investor. Telecom analysts at Jefferies India Pvt. Ltd have pointed out the possibility of down-trading to lower priced plans with less data allowance as a result of the tariff hikes.

There is also a likelihood that usage of multiple phone connections, or SIM cards, would reduce. Additionally, as Jio’s offers are priced at a discount to peers, the latter may also offer discounts to some customers on a selective basis. Thus, the growth for the telecom industry may end up being lower than anticipated.

The big worry is that the tariff hikes have come at a time when September quarter economic growth has dropped to a six-year low of 4.5%. Worse, things don’t seem to be improving, with consumer confidence at a nine-year low, according to a survey by the central bank. Against this backdrop, with some costs rising, something has to give. – Livemint

Click to comment

You must be logged in to post a comment Login

Leave a Reply

Stay Updated on Enterprise Network and Carriers Industry.
Receive our Daily Newsletter.
Loading