IMPACT OF BUDGET ON FMCG SECTOR

By Bhargavi

After demonetization of Rs.500 and Rs.1000 currency notes, the sector which saw major hit was FMCG. So all those looking up to the budget had expectations that government will try to revive this sector.

However, instead of making any direct allocation to FMCG sector the government has made many indirect moves like focusing on youth, rural economy, agriculture, the housing and cleanliness. All these combined will lead to increase in consumption expenditure of individuals.

Expectations from Budget 2017- FMCG Sector

Giving money into the hands of consumers– With demonetization taking away the money from hands of the consumers, people expected that the post-budget the cash crunch will end and they will be able to exercise their spending power.

Ease of doing Business– If various taxes are removed and replaced by GST, the cost for FMCG companies on various products like soaps, oils will go down. Not only this, the supply side will be improved and lead time will reduce. This will also help companies in reducing the holding cost of inventory.

Outcomes and Impact of Budget on FMCG Sector

Reduction in income tax by 5% for individuals with income of 2.5 -5 lakhs will help in save 12500 annually. This will give more disposable income in the hands of people which will increase non-food expense. This tax cut will cost government somewhere around 15000 crore. We can expect that some of this will go to consumption and some for saving.

MGNREGA Allocation- Government this time made highest ever allocation to MGNREGA of 48000 crore. This will increase the income of the rural people which will again increase their spending power.

Increase in allocation to rural economy by 24%– With the aim to double the farmer’s income by next five years government allocated 1.87 lakh crore to boost the agriculture sector.

Government also made several other allocations to boost the rural economy which will increase farmers income;

  • Allocation of 5000 crore to micro irrigation fund by NABARD as part of their Per Drop per Crop Mission
  • Increase in sanitation expenditure in rural areas – Sanitation coverage has increased from 42% to 60%. This will increase the demand for personal care products and sanitary ware
  • Integration of fruits and vegetables with agro-processing units – This will help farmers get a better price for their products
  • Setting up of Dairy Processing Fund of 8000 crores– According to analysts, this fund will increase the farmer’s income by 50000 crores. Also, food segment in FMCG account for 19%, second highest after personal care products. A push to dairy products will directly lead to increase in production of food products
  • Safe drinking water to 28000 arsenic and fluoride affected habitants. This will be a welcome step for beverages company
  • Increase emphasis on Skill development in rural India– Emphasis on skill development and entrepreneurship will increase the employment in rural India which will increase the disposable income

Currently, FMCG sector derives 40% of its revenues from rural sector and rural sector spends 50% of its expenditure on consumption. Also, growth in revenues in rural markets is more higher paced than the growth of revenues in urban markets. Keeping all this is mind, the government has taken up steps in the right direction to boost the rural economy. This will increase the income of farmers which will raise their standard of living and hence the expenditure in food and personal care products.

Excise on Tabacco products– Government announced an increase in the excise duty on filter cigarettes by 6%. Duty on Pan Masala is up by 3% and on unmanufactured tobacco by 4.1%. Excise on machine made beedis have increased from 21 per thousand to 78 per thousand, that is almost 300%

This will negatively effect the revenues of companies like ITC, Godfrey Philip, VST etc.

Reduction in tax rate for MSMEs by 5%- Government reduced the tax rate for MSMEs from 30% to 25%. Close to 90% of companies belong to this category. This will increase the profits of MSMEs and will encourage them to scale up their production.

CONCLUSION– Overall Positive! the government made a good move by focusing on the rural economy as this segment has more growth in the context of FMCG sector. FMCG companies should devise strategies to market their products in the rural economy and the companies which already are leaders in the rural market will be able to take the share of growth.

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Budget Impact Analysis – FMCG and Consumer Durables Industry

By Nishant D’Souza

Year on year FMCG companies has posted robust results in their 3rd quarter reason being many major festivals happen during this period. However, the same was not emulated this year, companies posted flat or below par results as demonetization sent the FMCG sector into paralysis and the only budget could be the probable savior.

Measures and their impact:

  • Income tax has been lowered from 10% to 5% for individuals in tax slab 2.5 lakh- 5 lakh – This will greatly benefit the youth considering the fact that many falls in this tax bracket. Even individuals earning up to 8 lakhs will surely make an effort to bring their taxable income within the 5 lakhs tax slab. We shall see a launch of many entry-level products in the white goods sector.
  • Increase in MNREGA allocation from 38,500 crores to 48,000 crores year on year – MNREGA scheme provides a minimum of 100 days of guaranteed wage payment to every individual who has opted to do unskilled manual labor. MNREGA has already been a success in providing employment for rural folks during off-season farming. Considering the fact we had good monsoon in most parts of the country and with this increase in MNREGA allocation FMCG companies having exposure in rural areas will greatly benefit. FMCG companies will amend their existing products into smaller packs to attract rural attention.
  • Reduction in presumptive tax from 8% to 6% under section 44AD for gross payments received through electronic mode – This will benefit professionals and we can expect a rise in white goods sales with summer soon approaching. I don’t see mom and pop stores declaring taxable income even after this tax discount.
  • Reduction in corporate tax from 30% to 25% for companies with an annual turnover below 50 crores – Many raw material supplying companies fall within this tax bracket, we can expect a reduction in the cost of raw materials.

A lot of initiatives have been undertaken to revive agricultural growth and increase the focus of investments in rural areas:

  1. A target of 10 lakh fixed per person as agricultural credit and overall target of 10 crores for the financial year 2017-2018.
  2. Extension of tenure of loans under Credit Linked Subsidy Scheme of the Pradhan Mantri Awas Yojana to 20 years.
  3. Allocation for agriculture sector has increased by 24% to Rs 1,87,223 crores.
  4. 8,000 crores set aside for dairy processing infrastructure fund.

Additional surcharge of 10% on annual income over 50 lakhs will surely come as a dent on the revenues of the high-end service industry.

Apart from the change in excise duty on cigarettes no other change in service tax or excise duty was witnessed. Abolition of Foreign Investment Promotion Board should witness the much needed FDI in the consumer durable industry. Overall this budget has greatly helped in meeting the expectations of the corporates who have been vying for an increase in the personal disposable income.

 

Budget Series 2017-18-#4 Impact on Consumer Durables Sector

Anuprash Baruah & Abraham Mathew

“And more than the quality of its institutions, what distinguishes a developed country from a developing one is the degree of consensus in its politics, and thus its ability to take actions to secure a better future despite short-term pain.” – Raghuram Rajan – Fault Lines

This quote sums up India’s direction with demonetization, our balancing act of a budget and no change in the repo rate as of yesterday.

Consumer durable goods are purchased with the intention of keeping them for a long duration. The consumption of durable goods is considered similar to an investment. This is so because they are bought every few years. In this insight, we try to evaluate the near future outlook for the industry in the light of the Union budget.

Industry Size (2016-17)
The industry is divided into two major segments:-
• Household appliances – 66,620 Crore INR
• Gems and jewellery
o Export – 2,39,600 Crore INR
o Domestic – 2,70,000 Crore INR

Major impacts:

  1. Decrease in taxable income for 2.2-5 Lakh INR bracket: This will lead to an increase in discretionary income, thus increasing demand for jewellery and household appliances. There are 2 Crore people that will benefit from this reduction.
  2. 2% increase in employment generation activities like MNREGA: The government is cushioning the demonetisation through subsidies. They are using employment as a sustainable way to boost consumption.
  3. Increase in capital expenditure: The 10.7% jolt in capital expenditure will have positive impacts on employment and income multipliers. Increases : Power(51%), Road transport(31%), Rail(19%), Shipping(16%).
  4. Increase in power expenditure: More access to power will also boost household appliances demand in the long run.
  5. Rural sector support: This includes increasing coverage under crop insurance (to 40%) along with increasing the base of subscribers. Also, there is continued support for rural road construction and MNREGA. According to CRISIL: “A study on the consumption patterns of workers benefitting from the rural roads program shows workers tend to allocate a larger proportion of their discretionary spending on durable goods (new and second hand), education, paan, tobacco, intoxicants, toiletries, and household commodities. The sectors producing them, therefore, can expect some boost due to budgetary measures”. Therefore we can expect a boost in demand. According to Godrej appliances, they are focusing on releasing more entry level products as this is the area with high demand and growth in the rural sector. We can expect other players to target the same segment.
  6. Pent-up demand from demonetisation impact: There is a current pent-up demand from demonetisation, it is expected to be satisfied in FY2018. Being a durable good, the decrease in income will only delay the consumption and not eliminate the demand.
  7. Growth of organized players (only gems and jewellery): Due to demonetisation, the gems and jewelry unorganized sector took a hit. This will strengthen the market standing of the organized players.
  8. GST implementation: If and when GST is implemented, it will result in up to 30% savings on logistics costs to consumer durable companies. This industry is said to be the biggest gainer from GST. Overall, it is a positive outlook for consumer durables. We can also see more of a rural focus entering the industry.