Indian Budget 2011-12: FMCGs seek reduction of input prices, streamlining of taxes
Shukti Sarma 17 February 2011

The profit margins of the fast moving consumer goods sector have been affected by spiralling input costs recently. These businesses have also been bothered by inconsistent taxation and excise duties

The Union Budget this year is not expected to have anything worthwhile for the market. Already expectations in most sectors are low. For, after a dismal year dominated by high inflation and corruption, there's a lot that the government will have to straighten out.

One of the sectors that have been hit hard by spiralling costs is the fast-moving consumer goods business. But the fourth largest sector in the country by market size has a modest wish list for the finance minister that includes a reduction in the food prices and a viable more simple tax structure.

According to financial brokerage Sharekhan, high food inflation and surging inpurt costs are likely to affect the growth of the Rs130,000-crore business sector in the near term.  

"The FMCG sector would expect growth in the coming year, in volume terms," said Milind Sarwate, chief of finance, HR and strategy, Marico Limited. "Chronic inflation will hurt India's growth potential. In addition, if the inflation is because of abnormal or undesirable factors like greedy intermediaries, or avoidable supply-chain bottlenecks, the government should act in time."

Input costs have spiralled due to a hike in prices of vegetable oils and other agri-products. Increasing ad-spends have also deflated margins. In the last quarter, FMCG giant Hindustan Unilever performed poorly despite its aggression and some other prominent names like Dabur, Marico, Emami and GCPL recorded only marginal profits.

While consumption levels and consequently sales for these businesses has gone up, profit margins have suffered. As a result, all these companies have undertaken price hikes. Now there's anxiety over the volumes. Recently, tensions in the Middle East and the North African (MENA) region have compounded the worries for some Indian FMCGs that have acquired units in this growing market in the past couple of years.

Taxes is another important area where the consumer goods sector is also seeking a change through the implementation of the Direct Taxes Code (DTC) and Goods and Services Tax (GST). The inconsistent rates, particularly for excise duties, have been a bother for producers in different parts of the country and companies are hoping that the new codes will streamline taxes and duties are merged with GST.

Adi Godrej, head of the Godrej group, estimates that the implementation of GST and DTC will result in a 10% growth for the sector. He also says, "All surcharges on income-tax should be dropped. The minimum alternate tax and dividend distribution tax rate must be reduced to 10%-12%. Lower rates of taxes will lead to stronger GDP growth rates which in turn would lead to increased tax collections."

But there is a catch in the implementation of GST as some daily-use products like edible oils are not in the excise duty list and hence get concessional VAT in many states. The application of GST in this case will increase the cost of these products and inconvenience customers.

The FMCG sector has been looking more closely at the rural market to expand its business. "Most of India's GDP growth now comes from the urban areas and it is important to de-bottleneck that part," says Mr Sarwate of Marico.

Last year there were ugly spats between big brands like Cadbury and Anchor Foods over copyright infringement. Strengthening the regime on intellectual property rights will help avoid such unnecessary irritations.

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