 Budget 2006-07: FMCG
The FMCG sector is back on track and is on the path to recovery. Growth is being witnessed in urban as well as rural areas. However, this time around, smaller companies have walked away with larger gains as they follow a simple strategy, give the retailer higher incentives than those given by larger brand owners thus encouraging the retail shop owner to push their products more. Further, almost all companies have set up units in tax havens like Himachal Pradesh, Uttaranchal and Assam, which offer them a 100% 10-year tax and 5-year excise benefit. Read more
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Excise duty on Condensed milk abolished (16% earlier).
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Excise duty on Pectines and Pectates, used as a gelling agent in Jams and Jellies abolished (16% earlier).
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Excise duty on unbranded edible preparations of oil increased from nil to 8%.
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Excise on biscuits manufactured without aid of power will now attract a duty of 8% (nil earlier).
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Excise duty on Pasta reduced from 16% to nil.
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Excise duty on ice-creams exempted
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Excise on ready to eat packaged food reduced from 16% to 8%
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Excise on instant food mixes exempted
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Excise on soaps manufactured without power will now attract 16% duty
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Excise duty on processed meat, fish and poultry products reduced from 8% to nil.
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Excise duty on yeast exempted
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Duty reduction on condensed milk is a positive for companies like Nestle.
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Reduction in duty of gelling agents a positive for HLL, Dabur and Marico.
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Imposition of excise on unbranded edible oils a positive for Marico.
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Taxing unorganised biscuit sector a positive for Britannia.
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Abolition of excise on pasta will aid listed players like ITC
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Exemption of ice-creams from excise a positive for HLL
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Reduction of excise on ready to eat packaged food is a positive for ITC and Nestle
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Excise on soap manufactured without power to benefit HLL and Godrej Consumers.
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Yeast is widely used in bread and biscuits which will benefit Britannia
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With 12.2% of the world population living in the villages of India, the Indian rural FMCG market is something no one can overlook. Growth potential for all the FMCG companies is huge as the per capita consumption of almost all products in the country is amongst the lowest in the world. Further, if these companies can change consumer’s mindset and offer new generation products, they would be able to generate higher growth in the future.
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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 2003-04 |
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Budget 2004-05 |
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Budget 2005-06 |
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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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Increase in customs duty of refined palm oil to 75%
Excise duty on dairy machinery hived off from 16%.
Implementation of VAT across all states
Concessional rate of 5% custom duty on tea and coffee machinery
Excise duty on preparations of meat, poultry and fish halved to 8%
Excise duty on food grade hexane (used in the edible oil industry) halved to 16%
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| [Read more on Budget 2003-04] |
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[Read more on Budget 2004-05] |
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[Read more on Budget 2005-06] |
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| Key Positives |
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| Growth potential: Rural penetration levels are still low. Also, according to estimates, only about 7% to 8% of the total food production (US$ 75 bn) is consumed in processed form. 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.
| Increasing focus: Companies are increasingly focusing on key products and brands, cost efficiencies and rural markets to grow. This is a sign of market sophistication, both from the manufacturer's point of view as well as the consumer's point of view.
| The India advantage: 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, the Middle East and Pakistan among others.
| Favourable tax structure: The 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.
| Modern trade growth robust: Modern retailing stores are the future and are growing at exponential rates. With the modernisation of the retail sector, rapid growth in sales of supermarkets, department stores and hypermarkets is inevitable due to the growing preference of the affluent and upper middle classes for shopping at these types of retail stores. Since FMCG companies have tied up with these retailers, growth for FMCG companies will also be faster.
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| Key Negatives |
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| Increasing competition: New entrants in the sector have heightened competition in key segments like soaps and detergents, putting pressure on profitability.
| Monsoon related problems: Since demand for agricultural goods is strong, any lapse in output due to below than normal monsoons, can affect FMCG companies, as there will be a demand supply mismatch resulting in upward pressure on raw material prices.
| Unorganised threat: A large part of the branded market continues to be threatened by spurious goods and illegal foreign imports, which remain a challenge for large companies, particularly during times of cyclical downturns.
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