Higher penetration, per capita consumption, increasing population base, and rising household income continued to drive the growth in the FMCG sector in FY08. The Rs 700 billion FMCG sector grew by 12% YoY in 2007.

Rural regions, where nearly 70% of India's population resides, accounted for 34% of the off take for FMCG products. Since urban regions are already matured, the rural region is expected to be the key growth driver. In urban areas, introduction of newer, convenience and higher end products propelled the growth. However, concerns with respect to the increasing competitive environment, input cost pressures and infrastructure bottlenecks continued to worry.

Industry Wish List

FICCI

• The VAT on processed foods should be reduced from existing high levels. The perishable foods should attract VAT of 0% whereas non-perishables should attract VAT of 4%.
• Excise duty should be reduced, while central excise should be exempted. Taxes should be converged instead of charging multiple taxes.
• Infrastructure status should be accorded to agri-processing industry. Tax breaks and incentives should be given to the food processing industry as it establishes a vital linkage and synergy between the two pillars of the economy-industry and agriculture. Further, establishment of cold chain and other modernized technology for up gradation of storage handling and transportation should be granted infrastructure status and the tax benefit to spur its growth.

Confederation of Indian Industries

• The 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.
• Thrust on better packaging should be made. Import duty on packaging machinery should be nil. Incentives, wherever necessary, should be given to the input side like capital goods, infrastructure development, new technology, etc for the domestic packaging industry. Also the taxes should be rationalised. These initiatives would help to reduce the wastages and raise the quality of exportable food products.
• Pro-rural policies to promote the growth of rural areas. As per ASSCHOM, FMCG sector will be witnessing more than 50% of its growth in the rural and semi-urban segments by 2010.

Budget over the years

Budget 2005-06

• 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 tae 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%

Budget 2006-07

• 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

Budget 2007-08

• 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 per kg 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.

Key Positives

Rural penetration levels are still low: According to estimates, only about 7% to 8% of the total food production is consumed in processed form (US$ 75 bn). 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

Newer products: As growth has shown signs of slackening companies are increasingly focusing on key products and brands, cost efficiencies and rural markets. This is a sign of market sophistication, both from the manufacturer's point of view as well as the consumer's point of view. With rising consumerism and changing lifestyle the demand for value added products is increasing.

Cost 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 and the Middle East among other.

VAT: The proposed 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.

Retailing: FMCG companies have partnered with modern retailing stores and as this format is the future. Growth will be faster because modernisation of the retail sector will be reflected in rapid growth in sales of supermarkets, department stores and hypermarkets, because of the growing preference of the affluent and upper middle classes for shopping at these types of retail stores, given the conveniences they offer such as shopping ambience, variety and a single-point source for purchases.

Key Negatives

Competition: New entrants in the sector have heightened competition in key segments like soaps and detergents, putting pressure on profitability

Higher input costs: The companies witnessed rise in the input prices during the year. Higher crude, wheat, palm oil prices amongst others pressurized the margins. Though the companies took effective price hike of the final products, a further hike would lead to loss of market share.

Infrastructure: The infrastructure for free transport of goods is not adequate in the country. Also, the fall in agricultural output continues to cast on FMCG sector's prospects in the short term.

Spurious goods: A large part of the branded market continues to be threatened by spurious goods and illegal foreign imports. In times of weakened consumer demand such menaces continue to nightmares to large companies.

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