It is unlikely that the 8-15% cut in corporate tax will lead to substantial consumption growth in the short run. Nor will consumer product companies cut prices immediately because their earnings would increase. The rate cuts, however, are likely to see a growth in advertising and marketing spends especially since the festival season is round the corner.
Around 40% of advertising spends in India happen during the festival season (September to November) and last year advertising spends during the festive season were upwards of Rs 25,000 crore. Though the expectation was upwards of Rs 30,000 crore this year, most advertisers chose to tighten purse strings because of the economic slowdown. "Companies were conservative because of the slowdown, but the corporate tax reduction has led to an improvement in sentiments. Since advertising in India is driven by sentiments, if there is a slowdown, the first thing most advertisers do is cut down spends. Now that companies will have more money in their hands, I expect them to loosen purse strings," points out Ashish Bhasin, CEO, APAC, Dentsu Aegis Network.
Bhasin is hopeful that the festival ad spends will meet the Rs 30,000 crore expectation. "The corporate tax reduction may not directly impact demand, but it will help companies put more money into marketing, you will also get to see more product launches in the forthcoming quarters," agrees former Dabur COO, Kannan Sitaram, who is now Venture Partner, Fireside Ventures. A positive sentiment will lead to increased ad spends and new product launches which in turn would boost consumption. In fact, new product launches in the past few months have been far and few across categories as companies have preferred to be conservative in a slow market.
Most new marketing initiatives are expected in the medium term. "Theoretically, companies can say that they would reduce prices, but in the short term their focus would be on investors and not much on consumers. They will first want to keep their valuation high," points out Arvind Singhal, Chairman, Technopak Advisors.
However, Anuj Sethi, Senior Director, Crisil Ratings, expects companies to partly retain the profits from the tax cut. "They will announce price cuts at the earliest, as growth of the FMCG industry has halved in the last one year. I expect price cuts to happen immediately and thereafter there will be a growth in demand too."
"If you see sentiments in the last 2-3 days, it doesn't seem like doomsday any more. If sentiments get better, consumption will automatically step up," says Girish Vanwari, Founder, Transaction Square. So, will one get to see shoppers flocking to the markets this festival season? It may not be business as usual, but experts do expect some spurt in festival shopping on positive sentiments.