India’s Union Budget 2020 may give glimmer of hope to FMCG players, says GlobalData

Amidst the prolonged slowdown of the economy, Indian finance minister Nirmala Sitharaman announced the Union Budget 2020 with a slew of measures to strengthen the twin engines of economic growth, consumption and investment, and put back India on growth trajectory towards a US$5 trillion economy. To boost the growth of fast moving consumer goods (FMCG) sector, the government has proposed widening of tax slabs and reduction of tax to drive consumption by putting more money in the hand of consumers and reviving the overall demand, says GlobalData, a leading data and analytics company.

Shagun Sachdeva, Consumer Insights Analyst says: “Due to the slowdown and challenging global environment, tax revenues have been sluggish, which makes it tough for the government to place a streamlined budget. For tax rates, rationalisation of personal income taxes might be the right step and it looks good optically, however, we need to take a closer look on how much of this would translate into consumption boost.”

From the government’s perspective, union budget will give fiscal stimulus to the economy through higher spending and abolishment of dividend distribution tax (DDT) to revive the economy.

Shagun adds: “The government has tried to make the private investment attractive and restated its commitment in improving the ease of doing business through abolishment of DDT following a reduction in corporate taxes in September 2019. However, we need to see the meaningful impact of abolishment of DDT in the longer run as companies may simply choose to pay higher dividends rather than reinvesting in business.”

Budget 2020 also included 16-point action plan for agriculture and government’s commitment to doubling farmers’ income by 2022. The government has set aside US$22.4bn for FY21 along with an additional US$17.2bn for rural development.

Shagun explains: “This is a welcome move and large consumer-facing companies can expect revival in demand. Tax reductions, simplified tax regime, rural development and high agricultural productivity will prove to be economy boosters.”

In the Union Budget, the finance minister also focussed on changing custom duties to boost the domestic processing and manufacturing. Various measures such as rise in tariffs, abolition of exemptions, provisions related to safeguards and anti-dumping duties, regulating Free Trade Agreement (FTA) imports and others will boost ‘Make in India’ program.

Shagun continues: “The move will is expected to keep the imports down, incentivise domestic businesses and create an ecosystem to boost India’s exports.  However, major international FMCG players across food and grocery items, shoes, ceiling fans, wooden furniture, kitchenware, appliances, hairdryers, shelled walnuts and other categories would be disappointed. Sweden-based furniture maker, Ikea, will be impacted with the customs duty hike in furniture and many other home furnishing categories. While, international footwear players such as Puma or Adidas have to struggle to absorb the duty hike and we can expect the product discounts to go down and final price to go up.”

The budget also paid closer attention to women entrepreneurship, education, and small traders and micro small and medium enterprises (MSME)’s. For higher studies, the budget allocated degree level full-fledged online education program of the top 100 institutions acclaimed by National Institutional Ranking Framework.

At the same time, there has been a rise in excise duty on cigarettes, hookah, and other tobacco products. This will lead to higher price of cigarettes, which will go up by 5-6% across small and large sticks.

Shagun concludes: “The budget has addressed the challenges Indian economy was facing since last few months right from high public debt, falling demand, dwindling private investment to a largely shaking agricultural sector.

“FMCG and the retail sector were pinning hopes on Union Budget of 2020 to revive consumer confidence, especially in the rural markets. Most of the FMCG players have given thumps up to the budget and are hopeful to reap the benefits and win back the lost consumers.”

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