FMCG: A mixed bag is in the offing

There will be some benefits and some loses, but overall no major impact expected

The fast moving consumer goods (FMCG) industry has been moving slow for the last couple of years, due to saturation of demand in urban areas and due to difficulties in expanding to rural markets. The industry, historically branded as defensive sector, has found itself vulnerable to economic slowdown. One of the largest direct and indirect employment providers, the sector has strong backward linkages to spur growth of other industries, and in turn, the economy.

Prolonged recession and poor agricultural output has affected the FMCG sector now for quite some time. The competition is hectic and unorganised players are making things difficult for the organised FMCG majirs.

Current industry status

Cosmetics and Toiletries:

The present level of consumption of toilet soaps in India is still very low compared to other countries. The primary reason for the low consumption has been the lack of affordability of these products to a large section of the society, particularly in the rural areas. The growth in the toilet soaps industry has been stagnant at 3%-4% in the last few years in spite of a higher potential.

Industrial oils constitute a major input and significantly impact the cost of soap. Domestic availability of industrial rice bran oil has been continuously declining and the shortfall is being met by the soap industry through import of industrial oils like palm fatty acid distillate, crude palm stearine etc. The high rate of customs duty of 30% on such oils have adversely affected the growth prospects of the toilet soap manufacturers.

Grey imports are emerging as a big threat to fast moving consumer goods produced in the country. Such imports do not incur any expenditure on advertising and take a free ride on the demand and goodwill built by the local producer or licensee of the trademark. Consequently the benefits of economics of large-scale production could not be availed. Toothpaste has been dereserved on 20th May, 2002 but the toothpowder and toothbrush are still reserved for small scale sector, which impedes modernisation and scale economies.

Cigarettes:

During the year 2001-02, cigarettes production has shown a negative growth of 11%. In fact the industry has registered declining volumes for the third consecutive year. However, the market in terms of value has been growing with increasing share of filter cigarettes.

Having seen a sharp decline in the industry volume in FY01-02, and consequential loss to the revenue, the Finance Minister was pleased not to increase any excise duty on cigarette this year in his last Budget proposals (of Feb'02). This has helped in bringing stability in the prices.

Even though there was no hike in levies on cigarettes in the 2002 Union Budget, the Industry could not recover lost volumes due to imposition of fresh State taxes, the enacted or proposed ban on outdoor advertising and cigarette smoking in public places by several State Governments, continued availability of cheap smuggled cigarettes, increasing awareness of the health hazards associated with smoking, sluggishness in rural demand and continued recession of Indian industry severely affecting the cigarette industry. Moreover, due to monopolistic market share of multinationals, Swadeshi companies continued to be under pressure.

Driven by the base effect, the growth rate, in the current FY03, the core cigarette business has slowed over the past three quarters, from 10.1% YoY in F1Q03 to 5.7% in F3Q03. Industry estimates that cigarette volumes likely grew around 2-3% in F3Q03, compared with 5-6% in F1H03.

Food and Beverages:

1.Tea

The Indian tea industry is at a crossroads. Domestic demand has not picked up despite the aggressive promotional campaigns of the Tea Board and the industry players. With exports also falling, domestic tea prices have suffered one of the worst blows in recent history.

The eleven months since April '02 have proved a disaster of sorts for the tea industry. Most teas have sold below production costs and unless something sensational happens in the next couple of months, nearly all tea companies are expected to report losses.

Another important aspect of the dwindling fortunes of the tea industry has been the proliferation of bought leaf factories (BLF). In the absence of complete data on the total production in the BLF sector, the industry is not quite sure about the total production vis-a-vis total demand. Low exports mean more tea is available domestically. And with the absence of a complete picture on the overall stock positions, it has become virtually impossible for tea producers to get better values for their teas.

2.Aerated Soft drinks/Water

Aerated soft drinks industry can contribute significantly to the Indian economy. It has been estimated that if this sector is allowed to grow to its potential it can create direct employment of 95,000 jobs in the next three years and a further 250,000 jobs in the overall economy. Thus there is an urgent need to encourage this industry.

The industry is both capital and employment intensive. It has also been proven by several studies that investment in this sector leads to a high multiplier effect and also provides enhanced revenue to the exchequer. This sector's growth provides a boost to a host of industries like transportation, refrigeration, packaging, plastics and glass apart from sugar.

Aerated soft drinks falling under Central Excise Tariff sub-headings 2201.20 and 2202.20 are having excise duty of 16% plus Special Excise duty (SED) of 16% where as all other processed food and beverages are free from SED. Aerated beverages are mass consumption products as 90% of the consumption is accounted for by middle and lower income groups as per NCAER study. The high level of excise duty of 32% (ED+SED) is having adverse impact on this industry. High excise duty has also increased the incidence of spurious aerated soft drinks.

3. Alcoholic beverages:

Alcoholic beverages have traditionally attracted high duties both at the central and state government levels for social reasons. High taxation has not only encouraged unauthorised sales but also resulted in the manufacture of spurious products.

Another feature of this industry has been the levy of state excise duty at varying rates across the country primarily for revenue purposes. For example excise duty on some premium products of rum varies from as low as 11.52% in Haryana to 144% in Uttar Pradesh.

The basis of levy of additional duty of customs (CVD) on imported liquor was changed with effect from 1st April, 2001 after the removal of QRs and import of liquor was shifted from restricted to free category. In the budget 2002-03 the basic customs duty on whiskey was reduced from 210% to 182%. The CVD on liquor was also rationalised from the earlier three slabs of 75%, 100% and 150% to two slabs of 50% and 75%. Taking into account the basic customs duty, CVD and 4% SAD, the total customs duty on alcoholic beverages now ranges from 212% to 413%.

4. Seafood:

The seafood industry has gone through a rollercoaster ride in its fortunes over the last couple of years. The industry, which registered an export turnover of Rs 6,443.9 crore in ‘00-01, saw a slight fall in exports the next year. Exports stood at Rs 5,957.05 crore the following year. This year the seafood sector hopes to achieve higher exports compared with the previous year.

But quality-related problems that plagued the industry in major export markets have affected industry performance. The allegations by health authorities of various countries that Indian seafood export consignments contain antibiotic residues have led to a series of rejections by these countries. Taking into account the gravity of the situation, the Indian government has banned a few major export houses from production and export of seafood. There were also allegations from the US seafood industry that several countries, including India, are dumping seafood, mainly shrimps, in the US market.

After a prolonged crisis, the industry was beginning to recover in the last couple of years. Aquaculture accounts for about 70% of Indian seafood exports, most of which is shrimp. The most important development in the last year's export performance of the industry is the rise of the US as one of the most important markets for the Indian seafood sector.

Prevailing tax rates and provisions

Cosmetics and Toiletries:

Excise duty structure:

	2001-02	2002-03
Toothpowder	Nil	Nil
Toothpaste	16	16
Toothbrush	4	8
Toilet Soap	16	16
Synthetic Detergents	16	16
Cosmetics and Toiletries	32 (16% + 16% SED)	16
INPUTS
Industrial Oil	Nil	Nil
Linear Alkyl Benzene	16	16
Nylon	16	16

Import duty structure:

	2001-02	2002-03
Toothpowder	35	30
Toothpaste	35	30
Toothbrush	35	30
Toilet Soap	35	30
Synthetic Detergents	35	30
Cosmetics and Toiletries	35	30
INPUTS
Industrial Oil	35	30
Linear Alkyl Benzene	25	25
Nylon	35	25

Cigarettes:

Excise duty structure:

	Excise Duty(Rs per ‘000 sticks)
	2001-02	2002-03
Non-filter (<60mm)	115	115
Non-filter (60-70mm)	390	390
Filter (<=70mm)	580	580
Filter (71-75mm)	945	945
Filter (76-85mm)	1260	1260
Filter (>85mm)	1545	1545

Import duty structure:

	Customs Duty(%)
	2001-02	2002-03
Non-filter (<60mm)	35	30
Non-filter (60-70mm)	35	30
Filter (<=70mm)	35	30
Filter (71-75mm)	35	30
Filter (76-85mm)	35	30
Filter (>85mm)	35	30

Aerated Soft drinks/Water

Excise duty structure:

	2002	2003
Aerated Soft drinks/ Aerated Water	32(16% basic + 16% SED)	32(16% basic + 16% SED)

Import duty structure:

	2002	2003
Aerated Soft drinks/ Aerated Water	35	30

Alcoholic Beverages:

Items	Additional Duty (CVD)
	2001-02	2002-03
Beer whose CIF price is upto $ 25 for a case of 9 litres	150	75
Wines having CIF price upto $25 for a case of 9 litres (12 bottles of 750 ml)	100	75
Wines having CIF price exceeding $ 25 for 9 litres case	100	50
Whiskey having CIF price upto $ 25 per case of 9 litres	150	75
Whiskey having CIF price of more than $ 25 per case of 9 litre	75	50

Import Duty Structure:

Items	2001-02	2002-03
Beer whose CIF price is upto $ 25 for a case of 9 litres	100	100
Wines having CIF price upto $25 for a case of 9 litres (12 bottles of 750 ml)	100	100
Wines having CIF price exceeding $ 25 for 9 litres case	100	100
Whiskey having CIF price upto $ 25 per case of 9 litres	210	182
Whiskey having CIF price of more than $ 25 per case of 9 litre	210	182

Processed Food:

Excise Duty Structure:

	Excise Duty (%)
Item	2001-02	2002-03
Branded and packed milk powder, butter, cheese and ghee	Nil	Nil
Concentrated (condensed) milk in unit containers	16	16
Sugar boiled confectionery	16	16
Cocoa butter, fat and oil	16	16
Cocoa Powder	16	16
Chocolate (inc. drinking chocolate)	16	16
Malted food for infants use	Nil	Nil
Malted food for other than infants use	16	16
Noodles in unit containers	16	16
Biscuits in retail packs upto 100 gms and price upto Rs. 5/-	8	16
Biscuits manufactured with the aid of power	16	16
Waffles & wafers having choclate	16	16
Branded and Packed Jams, Jellies and fruit juices	Nil	Nil
Instant coffee	16	16
Ice Cream	16	16
Branded and Packed food products "Not elsewhere specified"	16	16
Branded Mineral Water	16	16
Fruit pulp, fruit juice based drinks	Nil	Nil

Import Duty Structure:

Item	Customs Duty (%)
	2001-02	2002-03
Branded and packed milk powder, butter, cheese and ghee	35	30
Concentrated (condensed) milk in unit containers	35	30
Sugar boiled confectionery	35	30
Cocoa butter, fat and oil	35	30
Cocoa Powder	35	30
Chocolate (inc. drinking chocolate)	35	30
Malted food for infants use	15	15
Malted food for other than infants use	35	30
Noodles in unit containers	35	30
Biscuits in retail packs upto 100 gms and price upto Rs. 5/-	35	30
Biscuits manufactured with the aid of power	35	30
Waffles & wafers having choclate	35	30
Branded and Packed Jams, Jellies and fruit juices	35	30
Instant coffee	35	30
Ice Cream	35	30
Branded and Packed food products "Not elsewhere specified"	35	30
Branded Mineral Water	35	30
Fruit pulp, fruit juice based drinks	35	30

Industry expectations

General:

1. Upcoming Union Budget likely to be +ve for the consumer, coming ahead of a spate of elections. A populist budget would imply more money/sops for the consumer, benefiting urban demand
2. Govt. unlikely to tax farm income; no additional burden for rural consumer
3. Further rationalization of excise duties, which will have positive impact on demand. Industry sources point out that the much-talked-about VAT would be implemented in some form. Most companies are prepared for the change and hence the same should not impede overall business.
4. Most consumer companies pay tax at high rates and are high dividend payers. There could be a two-fold gain for them if the government were to reduce overall tax incidence and remove dividend tax.

Cosmetics and Toiletries:

1. Customs duty on industrial oils used in the manufacture of toilet soaps should be reduced to have a differential of 10%.
2. Customs duty on LAB (Tariff heading 3817.10) used for production of synthetic detergents should be reduced from 25% to 15%.
3. The abatement on MRP on soaps, detergents and scouring preparations should be enhanced from 35% at present to at least 40% subject to the need for it being proven by data on post manufacturing expenses, sale costs etc.
4. Suitable provision may be made to deal with grey imports of branded products.
5. Toothbrush and toothpowder should be dereserved from SSI.
6. The description at Sl. No. 146 of Notification No. 21/2002 should be amended to include 6.6 Polyamide (Nylon).
7. Reduction in list of items reserved for SSI such as toothbrush, toothpaste, toys.
8. Reduction in peak rate of customs duty on import of Cosmetics, toiletries and personal care products
9. Reduction in import duties on LAB, N-Paraffin, Soda Ash, Benzene, catalysts, fatty acids
10. Imposition of excise duty on Zero duty items like soaps from SSI, toothpowder etc

Cigarettes:

1. For cigarette industry an overall 5% increase in indirect taxes is being expected (be it excise duties increasing or some sort of VAT applied). Anything greater than this would impact cigarette volumes.
2. The specific excise duty structure according to length of cigarettes should continue. The current length slabs should also be maintained at the same level.
3. AED on cigarettes at specific rates should continue even after implementation of VAT.
4. Strengthen the checkposts on Nepal and Bangladesh borders to curb the entry of contraband
5. Marginal increase in excise on bidis, increased import duty on cigarettes reimported for re-exports

Food and beverage:

The government could give segment-specific benefits for the food and beverage industry.

Tea

1. Withdrawal of excise duty on loose teas to boost sentiments for the ailing tea industry.
2. The customs duty on machinery for value addition and quality upgradation needs to be reviewed and subsequently lowered.
3. The thrust in tea export relies largely on quality upgradation and value addition. In addition to the demand for a waiver of customs duty on certain items, the industry also hopes that nil duty rates should be applied on tea packaging machines as well. The current basic rate of duty on these items is 25%.
4. Abolition of excise on packet tea

Aerated Soft drinks/Water

1. Special Excise duty (SED) on aerated soft drinks/waters should be removed.

Alcoholic Beverages:

1. To meet WTO commitment, Basic customs duty on wines and spirits can be reduced as under:

2003 – 166%
2004 – 150%

2. As CVD has been levied in lieu of state excise duty, state governments should not levy any additional tax on imported liquor.
3. The bonded warehouse storage limit of one month without the payment of interest should be brought back to the earlier limit of 6 months.
4. A separate ITC(HS) clarification code should be created for whiskeys and other liquor covered under the main heading 2208.30 for bottled and bulk imports, so as to facilitate monitoring of the value and volume of imports.
5. The state governments should lift the restrictions on the sale of imported liquor.

Seafood:

1. Exporters have demanded that there be a drastic reduction in the customs duty on the capital equipment imported. This is very essential for the exporters to compete successfully with other Asian countries like China, Thailand and Vietnam.
2. Since the industry is being organised in SEZs, the units here should also be allowed to sell in the domestic market.

Processed Food:

1. Reduction in customs duty on milk powder, coca
2. Reduction in customs duty on various food based items like soups, sauces, ice cream aerated water etc
3. Imposition of excise duty on various food products attracting zero duty at present like dairy products, sauces, soups, jams, and flour preparations

Analyst expectations

1. Increase in excise duty in cigarettes to be marginal if any, and non-inclusion of cigarettes in the VAT regime.
2. Increase in excise duty on other tobacco products and increased custom duty on tobacco imported for re-export
3. Imposition of 6% excise duty on packaged foodstuffs and dairy and culinary products.
4. Reduction in peak rate of customs duty will increase competition from imports while lower duty on detergents intermediates.
5. Imposition of excise on soaps from SSI.
6. Reduction in excise on tea.

Best Pre-budget Buys/Sells

Overall budget will be neutral to the FMCG sector benefiting it in some way and adversely affecting it in some other way. Companies like Gillette and Birla 3M, which are import-dependant, will be major gainers from reduction in peak import duty.

Run-up to the Budget 2003

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