Great news for FMCG companies

The strong volume growth in the FMCG sector continued throughout 2006. Rising income, demographics and rising aspirational levels led to rise in sales both in urban and rural area. Value added and higher margin products too witnessed an increase in demand. The year was also witness to heightened consolidation activity in the sector, as companies acquired to spread their reach across the globe. However, on the margins front, they faced pressure due to higher input costs and inflationary pressure. Budget Measures

Farm sector has been given the top priority. Agriculture investments to go upto 2% of GDP.

Duty on edible oil has been reduced.

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 retail sale price equivalent of Rs 50 or less.

Excise duty on food mixes, including instant food mixes, has been reduced from 16% or 8% to Nil.

Free samples and displays are exempt form the purview of FBT.

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.
Budget Impact

Duty reduction on edible is a positive for companies like Marico.

Exemption of excise on biscuits is positive for Britannia, ITC and Parle.

Reduction of excise on food mixes is beneficial to ITC, as this segment is a new growth area.

With increase on focus on agriculture, the rural income is likely to go up. This will be beneficial to the FMCG companies, as rural areas are a big market for them.

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.
Sector Outlook

With 12.2% of the world population living in the villages of India, the Indian rural FMCG market is something no one can overlook. More focus on farm sector will boost the rural income thus providing better growth prospects to the FMCG companies. 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.
Company impact

Britannia and ITC are l likely to benefit due to reduction in excise on biscuits.

ITC will also benefit from the reduction of excise duty on instant mixes.

HLL, Marico, Dabur, ITC amongst another FMCG companies will benefit from the free sample removal from FBT purview as they can now increase their advertising. Also all the FMCG companies will benefit from the infrastructure development and boost to rural income.
Industry Wish List

Give infrastructure status to agri processing industry. Give tax breaks and incentives to the food processing industry. Consider a uniform VAT of 4% on all basic processed foods, nil or low excise duty on food grains, condiments and spices, fruits and vegetables along with strong fiscal support for research and development (R&D) in the food-processing sector.


Measures to boost farm & rural incomes through employment generation measures and increase in infrastructure spending


Exemption of sales promotion expenses and free samples from the purview of FBT (fringe benefit tax)


Reduction in import duty on Palm Oil to curb inflation


Quality check on imported FMCG products and effective enforcement of copyright laws. This would go a long way in filtering out import of sub-quality and discarded products, benefiting both the manufacturers and the consumers. Also, there should be a comprehensive policy to hit out at contraband imports.


More focus towards networking the food supply chain, which will enable free flow of food related products across the country to the benefit of both manufacturers and consumers. For the government, it will mean effective utilisation of food stocks.


As per CII, excise duty difference between 'branded' and 'unbranded' food products existing at present should be removed to encourage consumers to move from unhygienic unbranded foods to hygienically packaged processed foods
Budget over the years
Budget 2004-05
Budget 2005-06
Budget 2006-07




Excise on biscuits reduced to 8% from 16%. Excise on soft drinks and sugar boiled confectionery also reduced All states to switch to VAT in FY04 (deadline now has been extended till end FY05) Loans to agriculture and to small-scale sector will now be available at maximum 2% above prime lending rate (PLR) Development plans for roads, ports, railways and airports Customs duty on alcoholic beverages reduced
Increase in customs duty of refined palm oil to 75% Excise duty on dairy machinery hived off from 16%. Implementation of VAT across all states Concessional rate of 5% custom duty on tea and coffee machinery Excise duty on preparations of meat, poultry and fish halved to 8% Excise duty on food grade hexane (used in the edible oil industry) halved to 16%
Excise duty on Condensed milk abolished (16% earlier). Excise duty on Pectines and Pectates, used as a gelling agent in Jams and Jellies abolished (16% earlier). Excise duty on unbranded edible preparations of oil increased from nil to 8%. Excise on biscuits manufactured without aid of power will now attract a duty of 8% (nil earlier). Excise duty on Pasta reduced from 16% to nil. Excise duty on ice-creams exempted Excise on ready to eat packaged food reduced from 16% to 8% Excise on instant food mixes exempted Excise on soaps manufactured without power will now attract 16% duty Excise duty on processed meat, fish and poultry products reduced from 8% to nil. Excise duty on yeast exempted

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Key Positives


Growth potential: Rural penetration levels are still low. Also, according to estimates, only about 7% to 8% of the total food production (US$ 75 bn) is consumed in processed form. This speaks for itself, highlighting the scope for growth. The planned development of roads, ports, railways and airports, will increase FMCG penetration in the long term.

Increasing focus: Companies are increasingly focusing on key products and brands, cost efficiencies and rural markets to grow. This is a sign of market sophistication, both from the manufacturer's point of view as well as the consumer's point of view.

The India advantage: Owing to India's cost advantage, many MNC companies have started using their Indian operations as their manufacturing base. Alternatively, some Indian companies have tested foreign shores like Bangladesh, Sri Lanka, the Middle East and Pakistan among others.

Favourable tax structure: The introduction of VAT at the start of FY06 is a long term positive for the FMCG sector. This had been a long pending demand of the FMCG sector. Post this, the tax ambiguity will get reduced, benefiting the sector.

Modern trade growth robust: Modern retailing stores are the future and are growing at exponential rates. With the modernisation of the retail sector, rapid growth in sales of supermarkets, department stores and hypermarkets is inevitable due to the growing preference of the affluent and upper middle classes for shopping at these types of retail stores. Since FMCG companies have tied up with these retailers, growth for FMCG companies will also be faster.