FMCG Sector: Budget 2013 Preview

Fast Moving Consumers Goods (FMCG) companies are often considered as a defensive bet because of India’s consumption-driven growth story. This helps the companies to grow at a decent pace, despite the business cycle they are in. However, these companies have recently faced some issues in terms of volume growth as a result of lower disposable income from the consumers’ end. According to media reports, even the rural sales are declining, hurting the companies’ topline.

With the forthcoming Budget, FMCG companies have some expectations from the Finance Minister (FM), which could revive the consumer sentiments helping the sector to perform well going ahead. However, before going through this year’s wish list, let’s take look at the FMCG-specific announcements made in last year‘s budget.

Following are some of the key Budget announcements made for FY13 with respect to the FMCG sector:

• The excise duty was increased to 12 per cent (FY13) from the earlier 10 per cent (FY12). The industry players had not expected this hike as it created inflationary pressures.
• A clear guidance was not provided about the Goods and Services tax (GST) implementations. 
• Excise duties were also increased in case of tobacco products against the expectations.
• The target for agriculture credit limit was raised by Rs 1,00,000 crore to Rs 5,75,000 crore in 2012-13 on a YoY basis. 
• Further, the FM retained the interest subvention scheme for providing short-term crop loan to farmers at a 7 per cent interest rate. An additional subvention of 3 per cent was available to prompt paying farmers.
• The exemption limit for general tax payers was enhanced from Rs 1.8 lakh to Rs 2 lakh, giving a tax relief of Rs 2,000. Further, the upper limit of 20 per cent tax slab was raised from Rs 8 lakh to Rs 10 lakh. The additional income generated from this helped the individuals to spend more, thus benefiting the sector

• A clear roadmap for Goods and Services Tax (GST) from the FM. Various media reports suggest that GST would be implemented from the next year (April 2014), but the industry expects a positive development in the area. This is because the GST will bring down the distribution costs of the FMCG companies, which are currently in the range of 2 to 7 per cent of their turnover. 
• No hike in excise duty. If hiked, it would certainly be passed on to the consumers, which will further fuel inflation. Also, hike in prices may reduce consumer spending, hammering the overall growth of the companies. 
• An increased allocation of funds to rural infrastructure development and various rural employment related schemes like MGNREGA which will increase the rural spend.  
• Higher exemption limit for tax payers, which would leave consumers with more cash and thus be a positive sign for the consumer space.
• The Indian tea industry should be given an interest subsidy at 5% on the applicable rate of interest on the funds specifically borrowed for the activities of replanting.
• The existing ban of FDI in manufacturing of cigars, cigarettes and other tobacco related products should be further strengthened in order to protect the domestic manufacturers, employment and revenue interests.