Budget: A major boost to FMCG sector

The FMCG sector reported strong growth last year. As per an AC Neilson report, FMCG sales grew 16.2 per cent YoY over April-May 2009, lower than the 19 per cent YoY growth achieved in FY09.

Price-cuts on account of lower inflation and excise duty reduction from 14 per cent to 8 per cent led the FMCG companies to reduce their product prices in a bid to boost volumes.

The volume growth has continued to remain strong. While the slow onset of monsoons could play spoilsport, growth from underpenetrated segments and greater contribution from the rural areas would enable companies to maintain robust growth momentum going forward.

As per FICCI, the FMCG industry is set to grow 20-30 per cent in 2009-10, up from 10-20% in 2008-09. The growth would be driven by the launch of new products and increasing rural consumption.

Budget Measures

	Focus on the rural areas to continue. Sustained focus on agriculture growth, direct subsidy to farmers and extension of debt waiver for 6 months has been provided.
	Allocation under Rural Employment Guarantee Scheme (NREGS) increased by 144%.
	Excise and custom duty cuts provided at the start of the year to continue.
	Process for the smooth introduction of the Goods and Services Tax (GST) will come in effect from 1st April, 2010.
	4% duty maintained on paper and paperboards, biscuits, sharbats, cakes and pastries.
	Investment linked tax incentives to be provided to the businesses of setting up and operating 'cold chain' warehousing facilities for storing agricultural produce.
	Tax exemption on personal income increased from Rs 150, 000 to Rs 160, 000.
	Fringe benefit tax (FBT) abolished. Surcharge of 10% on personal income-tax also removed.
	No changes made in the corporate tax rates.
	Rate of minimum alternate tax (MAT) on book profits has been increased from 10% to 15%, but with a provision of carrying forward the tax credit on MAT to ten years from the current seven years.

Budget Impact

	Rural focus, employment generation and infrastructure spending will improve rural income. Rural India accounts for more than 40% consumption for major FMCG categories. FMCG companies are witnessing a 40%growth in rural sales as against 25% in urban areas. Further, on account of low penetration these companies are banking on rural areas for volume growth. Hence, continued focus on rural development would benefit the sector.
	GST is a tax on consumption and FMCGs form the core of the consumption basket. The government's announcement regarding GST will usher in a single tax regime across product categories. It will lead to rationalisation and simplification of the consumption tax structure at both the centre and state levels, thus bringing relief to the consumers.
	The tax incentives provided to cold chain warehousing facilities would give a boost to the food processing industry. 30% of the produce does not reach the end consumer, but gets wasted annually. This results in low prices for farmers and higher cost for consumers. Though private players are investing in cold storage facilities, support from government is needed on priority basis.
	Exemptions on the personal income tax would increase the income in the hands of the consumers, thereby increasing spending.
	The FMCG sector will benefit with the removal of the fringe benefit tax as it adds to the costs unnecessarily.

Company Impact

	Strong rural focus would aid companies like HUL and Dabur which earn 50% of their revenues from these regions. Colgate, Marico and ITC will also benefit as rural areas contribute 30% to their revenues.
	ITC will benefit on account of no duty hike in paper and paperboard. Also, excise duties on cigarettes have been kept constant.
	Though Britannia was hoping that the government would grant total exemption for all categories of biscuits from excise as well as reduction in VAT from 12.5% to 4%, keeping the central excise duties constant would be a positive.
	The measures taken on the direct taxation front would benefit the whole sector as it would lead to higher disposable income, thereby higher spending.