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.