Higher disposable income to lift FMCG

BS Bureau

Fast-moving consumer goods are one of the largest industries in India and are dominated by multinational companies and the unorganised sector. The latter enjoy preferential manufacturing status in a few categories and fiscal concessions.

Most FMCG products are yet to penetrate a majority of Indian households. Most multinational companies, till the mid-nineties, focused primarily on the urban middle-income class and above. With increasing product penetration in these income groups, companies are tapping the rural and the low and lower middle-income groups.

The industry has witnessed a slowdown in the past two years with most major companies recording single-digit sales growth. Despite weak sales, most companies have managed to report relatively strong profit growth because of depressed raw material prices and reductions in working capital requirements.

Belying fears of a flood of imports after the removal of quantitative restrictions, imported FMCG products have barely made a dent in the performance of domestic manufacturers. Given the relatively low value and bulk nature of most consumer products, the case for an import-based supply model appears weak in the FMCG sector. However, some manufacturers have successfully used the opportunity to launch niche brands that were hitherto available in the gray market.

Key issues:

Slowdown in sales is the biggest issue facing the industry. Some major categories, such as soaps and detergents, have witnessed declines while others registered single-digit growth. Soap sales declined by around 12 per cent in volumes in January-November 2001 over the corresponding period the previous year. Similarly, detergent sales declined by around 4 per cent in volumes in the same period.

Factors that can be addressed in the Budget:

• Broadly, the government can boost offtake by reducing direct taxes. This will have the dual effect of increasing disposable incomes and improving the general consumer sentiment, especially among urban households.
• Reduction in indirect taxes. Assuming manufacturers pass on such reductions, this will help them in breaking the affordability barrier.
• Some specific suggestions that have been suggested by various industry chambers include:
• Reduction in the basic excise duty on aerated rinks from 16 per cent to 8 per cent.
• Removal of the 16 per cent special excise duty on aerated drinks.
• Increase in the limit on products with 35 per cent abatement to 40 per cent.
• Increase in the abatement limit on ice-creams from 40 per cent to 50 per cent.
• Reduction in the excise duty on processed foods (branded and packaged jams, jellies, drinks made from fruit pulp, biscuits, waffles and wafers) from 16 per cent to 8 per cent.
• Removal of differences in excise duties between branded and unbranded goods.
• Reduction in the excise duty on sugar-boiled confectionery up to MRP of Rs 2 from 16 per cent to 8 per cent.

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