FMCG Industry: Hopes For Implementation of GST

Fast Moving Consumer Goods (FMCG) companies are balancing growth through volume and price. The strong consumption demand has continued to grow, thus fuelling the volume growth for most of the FMCG companies. On the other hand, to protect their margins, companies in the sector passed on some of the rise in raw material prices to their consumers. The companies are also managing their business in an efficient manner to curb some of the other expenses. Also, advertisement and promotion expense, regarded as a key factor for the sector, has remained muted for most of the companies.

Meanwhile, inflation has showing signs of cooling off which is evident from the fact that the Wholesale Price Index (WPI) for the month of January came in at 6.55 per cent, which is below the Reserve Bank of India (RBI)’s comfort zone of 7 per cent. Food articles showed a negative growth of -0.52 per cent on a YoY basis. Even though the sector is one of the investors’ favourite, at uncertain times it still faces headwinds like increasing competition, sustaining of margins, etc. Having said that, in the past one year the companies in the sector have performed well which can be seen from the following table:

• Allocation of Rs 300 crore to bring 60,000 hectares under palm oil plantations. This imitative will result in a yield of about 3 lakh tonnes of palm oil annually in five years.
• Interest subventions proposed to be enhanced from 2 per cent to 3 per cent for providing short-term crop loans to farmers who repay their crop loans on time.
• Approval to set up 15 more mega food parks from the existing 15 food parks.
• Credit flow for farmers raised to Rs 4,75,000 crore from the previous Rs 3,75,000 crore.
• Basic custom duty reduced for specified agriculture machinery to 2.5 per cent from the previous 5 per cent and on micro irrigation equipment from 7.5 per cent to 5 per cent.
• Decision to index the wage rate notified under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) to the Consumer Price Index (CPI) for agricultural labour.

• Higher spending on rural infrastructure development. This would reduce the supply side bottlenecks which actually fuels inflation in the economy and affects the sector.
• Increase in MGNREGA will further fuel the rural demand which will benefit the FMCG players.
• This year the sector does not expect any increase in excise duty and direct taxes.
• General exemption from excise duty should be granted to refining of vegetable oils and manufacture of vanaspati.
• Excise duty on packaged drinking water may be bought down to 4 per cent from 10 per cent and thereafter should be zero in the next year.
• Biscuits should be treated as merit goods and therefore applied a lower rate of VAT or exempted from VAT which would be in line with bread.
• Value-added products in milk such as Milk Maid and other processed packaged products should be exempted from VAT.
• Implementation of GST and allowance of FDI in multi-brand retail will further be positive for the sector. Many taxes like CST, excise, sales tax, value-added tax, entertainment tax and luxury tax will be replaced by GST. With the implementation of GST the distribution cost of the FMCG companies which range approximately in the range of 2 to 7 per cent of the turnover will come down.
• Maintain tax stability in excise duty rates in case of the cigarette and tobacco industry.

Conclusion 

Overall we believe that the excise duty would not be hiked in the coming budget as it will fuel inflation. Companies would bear the cost to a certain extent and would then pass it on to the consumers. This time too the government will continue allocating a higher portion of the expenditure towards infrastructure development and this in turn will increase the per capita income of people in the rural area, thus leading to higher consumer spending. Soap manufacturers are facing high input costs due to the high palm oil prices.

Further, rupee depreciation to some extent has further affected their margins. Therefore there could be some exemption of excise duty on the vegetable oils. We also expect some deduction on VAT for the biscuit manufacturing companies which will benefit them. One could probably expect some positives on the implementation of GST and also on FDI in multi-brand retail which will further benefit the sectoral companies.