Implementation of GST will boost the FMCG sector.- Business News
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Implementation of GST will boost the FMCG sector.

Execution of the Pay Commission report in the Budget can trigger strong surge in urban consumption spend.

  • February 16, 2016  
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Gautam Sinha Roy, Fund Manager, Motilal Oswal AMC

The fast moving consumer goods (FMCG) sector is one of the mainstays of India's domestic consumer driver growth hypothesis. Hence, it is an important sector to keep in mind for any government's Budget considerations.

Reduction in global crude prices and an increasing indirect tax collection trajectory have helped reduce the Central government's fiscal deficit levels. At the same time, the consumer economy is still not seeing broad-based recovery in many categories.

With the government's fiscal deficit improving, the FMCG and broader consumer sector will have their hopes high for some support to revive the currently weak consumer spending growth rates. Such support can come from tax reduction measures like income tax rate reduction or increase in tax slabs, which reduces the effective tax rate and, hence, allows increase in consumption spend of households.

The rural economy is seeing pressure in consumer spend, owing to weak monsoons in some areas as well as reduction in global prices of some key cash crops. So, any increase in spending on rural welfare programs such as NREGA and Indira Gandhi Vikas Yojana can support FMCG demand growth.

In last year's Budget, the NREGA allocation was increased by Rs 5,000 crore. A higher increase in the current Budget will be especially useful for rural consumption. Acceleration and clear roadmap on the Direct Benefits Transfer programme will also be helpful in putting disposable cash in the hands of the rural poor, which can aid bottom-of-the-pyramid consumption. Implementation of GST would result in uniform taxation for products and services across the country and also do away with the cascading effect of tax.

GST would also result in reducing the overall tax burden on products and services, thereby propelling demand. Every year, the government has been taking excise duty hike on cigarettes and anything more than a marginal hike in excise duty in the forthcoming Budget will impact the sector's growth negatively.

Implementation of the Pay Commission report is being looked forward to, as it can trigger strong surge in urban consumption spend. On the other hand, any further sharp increase in service tax levels would have a near-term impact on urban consumption. Any measure to help revive the growth rates in the textile sector as well the construction sector will be important from the FMCG perspective, too, as these sectors are two of the largest employers in the country with most of the jobs going to migrant labourers from rural areas.

In the last Budget, it was announced that there will be a reduction in corporate tax over the next four years, from 30 per cent to 25 per cent, which is a positive for FMCG companies paying close to peak tax and will compensate in some cases where indirect tax exemptions are going away.

Any road map on the same will be very useful. In the last Budget, the government had given fiscal deficit targets of 3.9 per cent, 3.5 per cent and 3 per cent of GDP for FY-16, FY-17 and FY-18, respectively.

While the FY-17 target is likely to overshoot slightly because of the Pay Commission recommendation, it will be interesting to watch whether the government can successfully juggle between providing fiscal incentives to propel growth, while sticking to these targets. Any huge increase could have implications from an inflationary perspective.

Written by Gautam Sinha Roy, Fund Manager, Motilal Oswal AMC