Union Budget 2025: Who Moves First- Brands or Consumers?

The 2025 Budget has placed a bold bet on the middle class, increasing disposable income through tax relief. With the assumption that more money in the hands of consumers would revive demand across! But the important question remains to be answered; will the consumers actually spend? Or will businesses will have to generate the demand by moving first?

The Tax Relief-Consumption Link: A Decision Under Uncertainty

Theoretical and binary wisdom suggests that more disposable income means more spending, but economic behaviour is not so predictable and this will be oversimplification.

In my understanding, there are three probable factors that complicate this assumption:

1. Savings vs. Spending Dilemma

Post-pandemic, Indian households have remained cautious. Despite falling savings rates (32% in 2018 to 30% in 2023-Statista), many may still prioritise debt repayment (education loans, mortgages) or building emergency reserves over in-discretionary spending.

2. Fragmentation in Demand Improvement

Middle-class spending will most likely favour essentials (FMCG, healthcare) and experiences (travel, dining) as we have seen with the increase in travel and hotel rates post pandemic. These will be favoured over big-ticket items (auto, real estate), where high loan EMIs could still remain a deterrent.

3. “The Factor” of Consumer Confidence

Dec 2024 RBI report shows marginal drop in consumer confidence in short-term, which effectively means even with more disposable income in hand, factors like job security and global uncertainty could still limit spending the middle class.

This brings to the moot decision question, Who will moves first: Brands or Consumers?

One of the strong indicators of demand recovery is how brands adjust their advertising & promotions (A&P) budgets.
In simple terms, brands seem to have 2 options,

To Play

Increase A&P spend now, assuming demand will grow or attempt to generate demand through advertising nudges. But then the risk is that the consumers still holding back spending, and ROI on marketing looks worrying with no uptick in sales figures.

To Wait

Brands can choose to delay increasing their A&P investment until demand signals show strengthening of spending by the middle class. But then they risk losing to competition, if they moves first, thus the brands could lose early share of mind.

This brings us to find a reasonable decision model that can help brands with this choice paradox, with my limited research, my suggestion directs us to a model, called Bayesian Updating.

What is Bayesian Updating

Bayesian Updating is a framework for updating our assumptions in light of new evidence. Instead of making one-time decisions, it allows decision-makers to continuously refine their probability estimates as new information becomes available.

Without getting into the Maths of it,
“It is to think in terms of updating our belief about a hypothesis A in the light of new evidence B.”

Let’s say a brand is deciding whether to increase advertising and promotions (A&P) based on the assumption that demand will rise due to the 2025 Budget.

Step 1: Start with a Prior Belief

The company initially estimates a 60% chance that consumer demand will increase based on tax relief.

Step 2: Observe New Evidence

The first post-budget retail sales report shows no significant increase in consumer spending.

Step 3: Update the Belief (Bayesian Model)

Instead of blindly sticking to the initial 60% confidence, the company adjusts its belief downward in light of the weak sales data. Now, it might believe there’s only a 40% chance that demand will rise, leading it to reduce or delay A&P spending.

Bayesian Updating in A&P Use case

Brands might start with performance marketing (e.g. social media promos to test demand, then scale up to brand-building campaigns on TV & OTT if early data is positive.

To Use Leading Indicators

An increase in “buy now, pay later” models spending through credit cards, or E-com EMI schemes can be a lead indicator.

Phased Strategy

Start with small, high-impact campaigns and continuously adjust based on evolving consumer behaviour.

Competitive Response Modelling

Watch for competitors A&P, though it risks of catch-up scenario, thus losing out in capturing the consumption surge. For instance: Maaza new ad campaign triggering Parle-Agro to enter sooner with their ad campaign for Frooti.

A. The Rural vs. Urban Asymmetry

Also there is fragmentation in market dynamics, between Urban and Rural market behaviour. Tax relief will primarily target urban middle-class, which has seen weakening demand in the latest reports but rural demand that drives ~33% of FMCG sales largely depends on factors like monsoon outcomes and farm incomes. Thus the brands will have to continue to work on dual strategy for both these segments.

B. The Inflation from liquidity

Even if demand revives, with the increased liquidity there is possibility of inflationary pressures along with high input costs (e.g., crude oil, supply-chain cost) could force brands to still divert funds away from A&P to protect the margins.

"In this high-stakes game, the winners will be brands that treat advertising as a demand catalyst rather than a demand indicator.

By leveraging Bayesian Updating, they can navigate uncertainty, adapt to real-time iterations.

If you liked this article, do let me know with your views

References

RBI https://www.rbi.org.in/scripts/PublicationsView.aspx?id=22784

Bayesian Update: https://www.stat.berkeley.edu/~aldous/134/lecture4.pdf