The Indian retail sector has become one of the most dynamic and rapidly evolving industries, driven by the influx of new players and innovative business models. According to IBEF, as of November 2024, the retail industry contributes over 10% to the country’s Gross Domestic Product (GDP) and provides employment to nearly 8% of the workforce. This sector is poised for significant growth, with projections estimating a 9% growth rate from 2019 to 2030.
From a market size of US$ 779 billion in 2019, India’s retail industry is expected to reach US$ 1,407 billion by 2026 and more than US$ 1.8 trillion by 2030. As the Union Budget for 2025 approaches, the industry looks forward to strategic policy measures that could further fuel its expansion and address key challenges.
As per Deloitte’s Budget Expectations 2025 analysis report, the current landscape of the Indian retail sector is shaped by both challenges and opportunities, with varying dynamics across urban and rural markets.
The urban FMCG sector, a significant contributor to India’s consumption growth, is experiencing a deceleration. The mass-market segment in urban areas has seen a noticeable decline in sales volume growth, particularly in key metropolitan cities, with a drop of over 10% in the last fiscal quarter.
This slowdown is attributed to elevated food inflation, which remains above the Reserve Bank of India’s comfort level, leading to a 15% reduction in average consumption among lower-income urban consumers. However, the premium category has shown resilience, with a 12% year-on-year growth, primarily driven by higher-income groups. This divergence highlights the need for targeted policies in the Union Budget 2025 to revive urban demand while supporting premium segment growth.
In contrast, rural markets are demonstrating resilience, with a 6% year-on-year growth in FMCG volume sales, constituting 35% of India’s FMCG market. This growth is reflective of a broader rural economic revival, fueled by favourable monsoon patterns, increased government spending on rural employment schemes like MGNREGA, and a rise in sales of tractors and three-wheelers.
Meanwhile, the rise of quick commerce platforms, such as Zepto and Blinkit, is altering the retail landscape, with these platforms capturing a growing share of the urban grocery market. Despite their expansion, the rapid growth of quick commerce is negatively impacting small retail businesses, such as Kirana stores, with reports of a 12% revenue decline in urban areas.
As per Deloitte’s Budget Expectations 2025 analysis report, there are several key measures expected to be introduced in the upcoming Union Budget to stimulate growth in India’s retail sector.
A key expectation is the introduction of higher income tax exemptions to boost disposable income for middle-income households. It involves relaxing the basic income tax exemption limit under the old regime from ₹2.5 lakh to ₹3.5 lakh, and increasing the standard deduction under the new tax regime from ₹50,000 to ₹75,000.
This change is expected to lead to a 5-7% increase in disposable income for middle-income households, which could drive a 6% rise in consumer spending on FMCG and other essential goods. This is likely to contribute to a 0.7% growth in India’s GDP directly.
With consumption accounting for over 60% of India’s GDP, boosting disposable income is essential to reviving demand in the retail sector. The urban middle class, which forms a significant portion of the consumer goods market, has been cautious in its spending due to stagnant income growth and high inflation. Tax relief would alleviate this financial strain and encourage spending, especially in essential retail sectors.
Another expectation is a reduction in the Goods and Services Tax (GST) rates on mass-consumption FMCG products, such as personal care items and packaged foods, from 18% to 12%.
A reduction in GST is expected to lead to an 8% increase in volume sales of mass-market FMCG products. This could result in higher tax collections from increased consumption and a 0.5% boost to the country’s GDP.
The rural market, which accounts for over 35% of India’s FMCG consumption, holds significant growth potential. Therefore, a key expectation is the introduction of targeted tax incentives to support rural market development and innovation.
Allocating ₹10,000 crore to the FMCG Rural Growth Fund to strengthen rural distribution networks and provide tax rebates for companies investing in affordable rural product lines. Introducing a 150% weighted tax deduction on R&D expenses for FMCG companies that innovate in sustainable packaging and health-focused products.
These measures are expected to drive a 10% growth in rural FMCG sales, contributing an additional ₹50,000 crore in annual revenue for the industry. The enhanced R&D incentives would encourage innovation in the FMCG sector, leading to the creation of premium, sustainable, and health-oriented product categories with higher profit margins.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.
Published on: Jan 9, 2025, 2:51 PM IST
Nikitha Devi
Nikitha is a content creator with 6+ years of experience in the financial domain. Specialising in personal finance, investments, and market insights, Nikitha simplifies complex financial topics, making them accessible to readers.
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