Budgets Implications on FMCG Sector

The Budget gives more focus on the agricultural/farm sector that will boost the rural income thus providing better growth prospects to the FMCG companies. With 12.2% of the world population living in the villages of India, the Indian rural FMCG market is something no one can overlook. Better infrastructure facilities will improve their supply chain. Also, with rising income and growing consumerism, FMCG sectors are likely to benefit. Growth potential for all the FMCG companies is huge as the per capita consumption of almost all products in the country is amongst the lowest in the world. Further, if these companies can change consumer's mindset and offer new generation products, they would be able to generate higher growth in the future.

Points to remember

• Farm sector has been given the top priority. Agriculture investments to go up to 2% of GDP
• Duty on edible oil has been reduced
• Excise duty exempted for all food mixes and biscuits
• Custom duty on Sunflower oil (crude and refined) reduced by 15 per cent while exempted from additional CV duty of 4 per cent Customs duty on food processing machinery and their parts is being reduced from 7.5% to 5%
• Excise duty has been fully exempted on biscuits of per kilogram
• Excise duty on food mixes, including instant food mixes, has been reduced from 16% or 8% to Nil
• Free samples and displays are exempt from the purview of FBT
• Footwear - Excise duty on parts of footwear reduced from 16% to 8%
• Venture capital investing in dairy industry will get a pass through status
• Better rural infrastructure development to be an area of focus
• Increase in dividend distribution tax from 12.5% to 15%
• 1% higher education cess to charged
• The dividend distribution tax on dividends paid by money market mutual funds and liquid mutual funds increased to 25 % for all investors
• No implementation of value-added tax (VAT) on cigarettes
• Specific excise duty on cigarettes increased by about 5%

CHANGES EXPECTED

• The focus in agriculture will benefit rural income that in turn will help FMCG companies Thrust on Increased investment in agricultural activities and rural infrastructure would be positive for the sector
• Increase in spending towards upliftment of rural populace to lead to increased demand for durables in the long term
• CST reduction expected to lower manufacturing costs of FMCG players
• Reduction of excise on food mixes is beneficial to ITC, as this segment is a new growth area
• FMCG companies spend a lot of money on advertising and brand building. Exclusion of samples and displays from FBT will help them in promoting their products
• Better infrastructure will help better access and more distribution network to the FMCG companies. It will help them improve the supply chain
• Companies have huge investments in the liquid funds, the higher tax on dividend distribution will reduce their other income. The impact of higher tax (cess) on the industry is likely to lower net margins, albeit marginally. Also all the FMCG companies will benefit from the infrastructure development funds that will boost to rural income

HLL, Marico, Dabur and ITC will benefit out of it.

1. Britannia and ITC are likely to benefit due to reduction in excise on biscuits
2. ITC will also benefit from the reduction of excise duty on instant mixes
3. Duty reduction on edible is a positive for companies like Marico
4. Positive for footwear companies like Bata, Liberty Shoes and Mirza International

Source: Indian Budget 2007-08 - Part I - Fast Moving Consumer Goods (FMCG)

Thanks Mr. Finance Minister for this hygienic budget for FMCG Sector !!

Nitin Kochhar (http://www.fmcgmarketers.com/; www.fmcgmarketers.blogspot.com)