 Budget 2004-05: FMCG
The last three years have been a difficult phase for the sector. The volatility in agricultural sector, competition from regional players and price discounts have put pressure on topline growth. But if per-capita income is expected to grow at a healthy rate in the future, will FMCG sector continue to lag economic growth?
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2% education cess corporation tax, excise duties and custom duties |
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Increase in custom duty of refined palm oil to 75% |
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Concessional rate of 5% custom duty on tea and coffee plantation machinery |
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Excise duty on dairy machinery reduced from 16% to 0 |
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Excise duty on preparations of meat, poultry and fish halved to 8% |
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Excise duty on food grade hexane (used in the edible oil industry) halved to 16% |
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Area specific excise duty exemptions to continue |
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Focus on development of agriculture, infrastructure, education and health |
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20% dividend distribution tax for corporates who invest in debt funds |
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The education cess will add marginally to the tax burden of all FMCG companies |
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The dividend distribution tax on debt funds is likely to adversely effect the other income components of companies like Britannia, Nestle and HLL who have big chunk of their investment folio in debt funds |
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The measure to abolish excise duty on dairy machinery is a positive for companies like Nestle |
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Concessional rate for tea and coffee plantation machinery is a positive for Tata Tea, HLL, Tata Coffee and other such companies |
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Duty reduction in food grade hexane will have a marginally positive impact on companies like Marico and HLL |
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Area specific excise exemptions for North East, J&K, Himachal Pradesh will continue to encourage FMCG companies to relocate to these areas. |
Post budget comments from Marico
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Though the agriculture, infrastructure, education and health focus will not have any visible immediate impact on the FMCG sector, we believe, these measures are a positive for the development and growth of the FMCG sector in India. Notwithstanding the marginal increase in taxes, our outlook for the overall FMCG sector continues to be buoyant from a 3 to 5 year perspective. Expectations of good monsoons in FY05 are likely to aid the positive sentiment over the near term. |
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Adi Godrej - Chairman, Godrej Consumer Products Limited
Is there anything that the government should do for the FMCG sector?
No, I think the Indian economy is in a mode now where one should not be looking at the government for things. Of course, there are some anomalies that need to be corrected, and some direct tax issues. We hope that VAT will come in quickly. So, there are issues, but I do not think that now government issues are as important as in the past.
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Budget wish list: Essel Propack |
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Peak custom duty rate should be reduced to 15% from the current 25%. |
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Special Additional Duty (SAD), which is currently charged at 4% should be waived off. |
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No restrictions on import of Second hand Machinery |
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100% Cenvat Credit on Capital Goods should be allowed in the same year |
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The scope of Section 80-M of the IT Act needs to be amended to include dividends received by an Indian company from another Indian company and also dividends received from its JV or subsidiaries situated abroad.
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Other Wish list |
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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. |
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Quality check on imported FMCG products and effective enforcement of copyright laws. 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. |
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More focus towards networking the food supply chain, which will enable free flow of food related products across the country, to the benefit of both manufacturers and consumers. For the government, it will mean effective utilisation of food stocks. |
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As per CII, excise duty difference between 'branded' and 'unbranded' food products existing at present should be removed to encourage consumers to move from unhygienic unbranded foods to hygienically packaged processed foods. |
| Budget 2001-02 |
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Budget 2002-03 |
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Budget 2003-04 |
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| From 35-55% to 75% for crude edible oil
From 45-65% to 85% for refined edible oil
From 35% to 70% for copra, coconut, tea and coffee
From 25% to 55% for crude palm oil
Development allowance of tea industry raised to 40% from 20%
All food preparations based on fruits and vegetables (pickles, sauces, ketchup, juices, jams etc.) made completely exempt from excise duty
Excise on cosmetics and toiletries halved to 16%
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Increased focus on agricultural reforms with an aim to integrate the countrywide food market
Deregulation of the milk processing capacity
Excise duty structure largely untouched. Only for tea, the duty was reduced from Rs 2 per Kg to Re 1
Customs duty on tea and coffee doubled to 100%
Duty on imported pulses upped to 80%
Import duty on wine and liquor slashed from 210% to 180%
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Excise on biscuits reduced to 8% from 16%. Excise on soft drinks and sugar boiled confectionery also reduced
All states to switch to VAT in FY04 (deadline now has been extended till end FY05)
Loans to agriculture and to small-scale sector will now be available at maximum 2% above prime lending rate (PLR)
Development plans for roads, ports, railways and airports
Customs duty on alcoholic beverages reduced
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| [Read more on Budget 2001-02] |
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[Read more on Budget 2002-03] |
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[Read more on Budget 2003-04] |
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| Key Positives |
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| Rural penetration levels are still low. Also, according to estimates, only about 7-8% of the total food production is consumed in processed form (US$ 75 bn). This speaks for itself, highlighting the scope for growth. The planned development of roads, ports, railways and airports, will increase FMCG penetration in the long term. |
| 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. |
| Owing to India's cost advantage, many MNC companies have started using their Indian operations as their manufacturing base. Alternatively, some Indian companies have tested foreign shores like Bangladesh, Sri Lanka and the Middle East among others. |
| The proposed introduction of VAT at the start of FY06 is a long term positive for the FMCG sector. This had been a long pending demand of the FMCG sector. Post this, the tax ambiguity will get reduced, benefiting the sector. |
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| Key Negatives |
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| Weakness in the economy has led to a slowdown in demand for FMCG products. The topline growth of many FMCG majors has thus, declined. Resurgent economic numbers in FY04 did nothing to change the scenario. New entrants in the sector have heightened competition in key segments like soaps and detergents, putting pressure on profitability. |
| The infrastructure for free transport of goods is not adequate in the country. Also, the fall in agricultural output continues to cast on FMCG sector's prospects in the short term. |
| A large part of the branded market continues to be threatened by spurious goods and illegal foreign imports. In times of weakened consumer demand such menaces continue to nightmares to large companies. |
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