Increased focus on agricultural reforms with an aim to integrate the countrywide food market. Announcement of deregulation of the milk processing capacity.
Measures to improve agri credit, as well as continued infrastructure development.
This year the FM has largely untouched the excise duty structure. Only for tea he has reduced excise from Rs 2 per Kg to Re 1 per Kg.
The government has also tried to safeguard domestic coffee and tea industry. The customs duty on these products has been doubled to 100%. Duties of imported pulses have also been upped to 80%.
Import duties on wines and liquors have been slashed from 210% to 180%.
Budget Impact
The government’s announcement of moves to integrate the food market is likely to improve the distribution and free flow of food and related products. The measures announced will also bring in more investments in the food-processing sector. Also, continued support for infrastructure development through increased outlays for roads, power, telecom and railways is a positive for development of the organised FMCG industry. All this will encourage companies like HLL, Nestle, SmithKline Beecham, Nirma and a whole range of FMCG companies in the long run. Rural penetration will gather pace.
The reduction in excise duty for tea as well as rise in import duties of tea and coffee, will benefit domestic players like HLL and Tata Tea. However, Nestle will have a minor impact as a result of the import duty hikes. Domestic tea and coffee prices may see a slight strengthening going forward.
Slashing of duties on imported wines and liquors will not have too much affect on the domestic players. Infact some of the domestic players like UB and Shaw Wallace have tie-ups with foreign companies to market their brands. This measure will help them expand the market for premium and quality liquor.
FMCG companies have a high dividend payout ratio (near 50% levels). Abolition of dividend tax is likely to encourage to companies to declare higher dividends.
Industry wish list
A reasonable VAT tax regime.
Complete de-reservation of consumer products sector. If it happens, it will enable Indian companies to undertake manufacturing on a mass scale resulting in operational and quality efficiencies.
Quality check on imported FMCG products. This would go a long way in filtering out import of sub-quality and discarded products, benefiting both the manufacturers and the consumers. Also, there should be a comprehensive policy to hit out at contraband imports.
Effective enforcement of copyright laws. This will help in checking the menace of duplicate products and help the brand owners and the consumers both. The government on the other hand, will realise more duties.
Key Positives
Rural penetration levels are still low. Also, according to estimates, only about 5% of the total food production is consumed in processed form (US$ 75 bn). This speaks for itself, highlighting the scope for growth.
As growth has shown signs of slackening companies are increasingly focusing on key products and brands, cost efficiencies and rural markets. This is a sign of market sophistication, both from the manufacturer’s point of view as well as the consumer’s point of view.
Key Negatives
Weakness in the economy has led to a slowdown in demand for FMCG products. The topline growth of many FMCG majors has thus, declined. The economy numbers still look sluggish.
The infrastructure for free transport of goods is not adequate in the country. Also, though the government has taken steps to introduce VAT, there are still concerns about the future tax structure.
