The government focus so far has been to provide protection to the domestic companies by managing the import duty structures to the domestic advantage.
In the last budget (2004-05), the government laid stress on agriculture reforms, in a bid to integrate the countrywide food market. The government also took its first tentative steps towards a VAT regime, addressing the long time demand from the industry. But the tax regime is marred by ambiguity and government's inability to get the message across to the small producers.
The government's focus on road, rail and power development will indirectly benefit the FMCG industry in the long run.
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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 2002-03 |
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Budget 2003-04 |
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Budget 2004-05 |
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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 custom duty of refined palm oil to 75%
Concessional rate of 5% custom duty on tea and coffee plantation machinery
Excise duty on dairy machinery reduced from 16% to 0
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%
Area specific excise duty exemptions to continue
20% dividend distribution tax for corporates who invest in debt funds |
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[Read more on Budget 2004-05] | |
| Key Positives |
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Rural penetration levels are still low. Also, according to estimates, only about 8-10% of the total food production is consumed in processed form (US$ 90 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.
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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.
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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.
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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.
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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.
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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 give nightmares to large companies. | |
This is part of Equitymaster's Budget 2005-06 series. Equitymaster.com is one of India's premier finance portals. The Web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.
