Budget 2025 Expectations: Consumer goods and retail

Anand Ramanathan, Partner and Consumer, Products and Retail Sector Leader

Current Environment

Urban demand deceleration and its implications

The urban FMCG sector, a major contributor to India’s consumption story, is experiencing a slowdown, particularly in mass-market segments. The last fiscal quarter saw a noticeable decline in sales volume growth in urban areas, with the mass-market segment dropping by over 10 percent in key metropolitan cities. Recent major Fast-Moving Consumer Goods (FMCG) company financial disclosures highlighted that the average consumption among lower-income urban consumers fell by 15 percent due to elevated food inflation, which remains above the RBI’s comfort level of 6.4 percent. Conversely, the premium category has shown resilience, with a 12 percent growth year-on-year, driven by higher-income groups. This divergence underscores the need for nuanced budget policies to revitalise urban demand without jeopardising premium segment growth.

Rural market resilience
Rural markets, comprising 35 percent of India’s FMCG sales, are rebounding with a 6 percent year-on-year growth in volume sales. The increase in rural consumption is also reflected in a 3 percent rise in tractor sales and a 10 percent uptick in three-wheeler sales, indicating a broader rural economic revival. Factors such as favourable monsoon patterns and increased government spending on rural employment schemes, which reached INR1.80 lakh crore under MGNREGA in 2024–25 have contributed to this growth. Continued investments in rural infrastructure, digital penetration and affordable product offerings can amplify these gains. Policymakers must allocate significant budget resources to sustain this momentum.

Challenges posed by quick commerce
The rise of quick commerce platforms at a 25 percent CAGR is altering traditional retail dynamics. Reports indicate that Q-commerce platforms such as Zepto and Blinkit captured 8 percent of the urban grocery market share in 2023, up from 3 percent in 2021. Tier 2 cities now contribute 30 percent of these platforms’ overall sales, signalling their broader reach. However, this expansion has negatively impacted Kirana stores, with the Confederation of All India Traders (CAIT) reporting a 12 percent decline in small retail revenues in urban areas. Initiatives such as Open Network for Digital Commerce (ONDC), supported by the government, are steps towards creating a balanced retail ecosystem. Budget allocations should address small business support mechanisms and foster technological progress in commerce.

Macro-economic considerations for the Budget formulation
India’s GDP growth is expected to moderate to 6.3 percent in FY25, per World Bank estimates, reflecting the combined impact of fiscal consolidation and tighter global credit conditions. Core inflation remains at a manageable 4.8 percent, but food inflation poses challenges at 5.1 percent due to global supply chain disruptions. The country’s current account deficit is projected at 1.9 percent of GDP, supported by a 13 percent rise in services exports, mainly IT services, which contribute US$325 billion annually. This economic backdrop underscores the need for prudent fiscal policies that prioritise consumption revival, infrastructure development and innovation-driven growth.
 

Expectations

Top three asks

Ask #1: Introduce higher income tax exemptions to boost disposable income

•  Specific measure: Relax the basic income tax exemption limit under the old regime from INR2.5 lakh to INR3.5 lakh and raise the standard deduction under the new tax regime from INR50,000 to INR75,000.
  
  
• Expected outcome: A 5–7 percent increase in disposable income for middle-income households could lead to a 6 percent rise in consumer spending on FMCG and other essential goods. This is expected to contribute to a 0.7 percent growth in GDP directly.
• Rationale: With consumption accounting for over 60 percent of India's GDP, boosting disposable income is critical to reviving demand. The urban middle class, a significant portion of the consumer goods market, has shown a cautious spending pattern due to stagnant income growth and high inflation. Tax relief will alleviate financial pressure and stimulate spending.

Ask #2: Reduce GST rates on mass-consumption FMCG products

• Specific measure: Lower GST rates on mass-consumption FMCG products, such as personal care and packaged foods, from 18 percent to 12 percent.
• Expected outcome: A projected 8 percent increase in volume sales of mass-market FMCG products, leading to higher tax collections from increased consumption and a 0.5 percent boost in GDP.
• Rationale: Price sensitivity among lower-income groups has led to a decline in mass-segment consumption. By reducing GST, the government can offset this decline, support small-scale FMCG manufacturers and enhance affordability for essential goods, aligning with its inclusive growth agenda.

Ask #3: Provide targeted tax incentives for rural market development and innovation

• Specific measure:
  - Allocate INR10,000 crore FMCG Rural Growth Fund to strengthen rural distribution networks and offer tax rebates for companies investing in affordable rural product lines.
  - Introduce a 150 percent weighted tax deduction on R&D expenses for FMCG companies innovating in sustainable packaging and health-focused products.
• Expected outcome: A 10 percent growth in rural FMCG sales, contributing an additional INR50,000 crore in annual revenue for the industry. Enhanced R&D incentives would promote innovation, creating premium and sustainable product categories with higher profit margins.
• Rationale: Rural India accounts for over 35 percent of FMCG consumption and is poised for significant growth if supported by better distribution infrastructure and affordable products. Additionally, providing incentives for R&D aligns with global trends focusing on sustainable and health-oriented goods, positioning India as a leader in innovative FMCG solutions.
   

Policy recommendations

Recommendation #1: Regulating quick commerce practices for equitable retail growth

• Details: Implement regulatory measures to curb predatory pricing and ensure transparency in fund usage by quick commerce platforms. This includes introducing compliance with FDI norms, fair trade practices and supply chain transparency. Regulatory bodies such as the Competition Commission of India (CCI) and the Ministry of Commerce should take measures to ensure adherence to the Competition Act, 2002, and the Foreign Exchange Management Act (FEMA). Develop an ethical code of conduct that protects small retailers, distributors and Kirana stores from market distortions caused by deep discounting and other anti-competitive practices.

• Expected impact: Regulating quick commerce practices will create a level playing field, safeguarding the livelihoods of over 30 million Kirana stores and 8 crore small retailers and distributors, which are vital to India’s retail ecosystem. The policy will promote sustainable competition, ensuring quick commerce platforms operate ethically and transparently. With improved oversight, consumer trust in e-commerce will strengthen, while protecting traditional retail sectors will contribute to a more equitable economic growth trajectory. Additionally, fostering fair trade practices will reduce market concentration risks and enhance the resilience of the retail economy against external shocks.

Recommendation #2: Expanding the PLI Scheme for the consumer goods industry

• Details: Expand the scope of the Production Linked Incentive (PLI) scheme to include high-demand sub-sectors within the consumer goods industry, such as home appliances, personal care products and small consumer electronics. Allocate additional incentives to manufacturers prioritising domestic value addition and labour-intensive operations. The expanded policy should include simplified application processes, measurable performance-linked benchmarks and targeted benefits for MSMEs to enhance participation across all tiers of the manufacturing ecosystem. This expansion should also focus on facilitating backward integration and encouraging investments in export-oriented manufacturing.

• Expected impact: An expanded PLI scheme will bolster India’s domestic manufacturing capacity, reducing import dependency and addressing demand-supply gaps for consumer goods. This policy is projected to attract substantial investments in the sector, drive industrial output and support the creation of over 1 million jobs within five years, particularly benefiting the semi-skilled and unskilled workforce. Strengthening backward linkages and fostering innovation will enable MSMEs to scale operations and contribute to the manufacturing