FMCG's Budget wish list - Views on News from Equitymaster

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FMCG's Budget wish list

Jun 29, 2009

As the D-day (Budget announcement) comes closer, companies are venturing forth with their expectations, and so FMCG companies are not way behind. Further, with the rain gods not very pleased this year, the Rs 1,016 bn industry is banking on the government to take measures. Recent measures
On account of the recent slowdown witnessed, the government had reduced the taxes and duties to boost the volume growth in the FMCG sector. In December 2008, the excise duty was reduced from 14% to 10%. In February 2009, the excise duty was again reduced from 10% to 8%. Import duty on crude palm oil, soybean oil and sunflower was slashed to zero during the year.

What they wish for in this budget?

Rural focus: FMCG companies want the government to continue its focus on the rural sector in the forthcoming budget. Employment generation and infrastructure spending is needed to improve rural income. Rural India accounts for more than 40% consumption in major FMCG categories such as personal care, fabric care, and hot beverages. FMCG companies are witnessing a 40% growth in rural sales as against 25% in urban areas. Further, given the low penetration, these companies are banking on rural areas for volume growth. Hence, continued focus on rural development is needed.

No roll back of reduction on duties: The companies are hoping that the government does not roll back the duty cuts given during the start of the year. If done, this would increase their costs. While they can pass it on to the customers, volumes may get affected.

Simplified tax structure: The taxes should be converged instead of charging multiple taxes. Also, confusion on the classification of items, rates across the states still exist on account of VAT. Problems for interstate transfer of goods continue to exist on account of CST (central sales taxes). The industry wishes that the government would grant total exemption for all categories of biscuits from excise as well as reduction in VAT from 12.5% to 4%.

Tobacco: ITC in particular is hoping that reclassification of tobacco products is done. Currently, cigarettes face the highest taxes as compared to other tobacco products, thereby causing significant price differentiation. The cigarette industry has been suffering from low volumes in recent times due to higher excise duties.

Tax exemption for consumers: There are talks of raising the exemption limit in case of personal income. This act would result in more income in the hands of the people, thereby leading to higher purchasing power.

Going forward
Delay in the monsoons and drop in value growth as per AC Nielsen's latest data, the FMCG majors are aggressively pushing for volume growth ahead of margin preference. Hence, we believe that if the rural area focus continues, the FMCG sector would stand to benefit. Also, by not rolling back the duty cuts, margin pressure would ease to some extent.

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