The Union Budget 2016-17 paved a foundation stone to give a long-term boost to the Indian economy. At first glance, the budget appears negative for the consumer goods sector, with excise duties being introduced or hiked in a few categories like apparel, jewellery, cigarettes and soft drinks. But it has a lot of measures to boost rural incomes and demand, which augers well for the future.
Successful implementation of budget announcements like increased spending on agriculture and social sectors along with farmers’ welfare, besides incentives for the food processing sector, will increase rural incomes, create employment in agriculture and allied sectors, and boost rural demand.
The biggest miss in the budget speech is the lack of mention of GST; at least a reference or a road map would have built more confidence.
Key budget proposals
- Relief to tax payers: The budget offered some relief to tax payers by raising tax rebate under Section 87A (for income less than Rs 5 lakh) and house rent allowance deduction limit (for those who live in rented houses and do not receive any house rent allowance from employer). This will lead to higher disposable income for tax payers and incentivize consumption.
- Improved focus on supporting agriculture and farmers’ income: The budget allocated close to Rs 36,000 crore for agriculture and farmers’ welfare and proposed to double farmers’ income by 2022. Although this would not have a short-term impact on rural spending, this will help uplift rural consumption over the longer run.
- Encouraging food processing in India: The budget allowed 100 per cent foreign direct investment through the FIPB route in marketing of food products produced and manufactured in India. Additionally, the budget proposed to reduce basic customs duty on cold chain and refrigerated containers to 5 per cent from 10 per cent, and duty to 6 per cent from 12.5 per cent. The incentives will benefit farmers, give impetus to food processing industry and create vast employment opportunities.
- Making dairy more remunerative: The budget allocated close to Rs 8,500 crore to be spent over the next few years as a part of various projects to make the dairy sector more remunerative to farmers.
- Allowing local retail shops to remain open all days of a week: In order to provide a level-playing field to the unorganised mom-and-pop stores, the budget proposed to make amendments in the Model Shops and Establishments Bill to allow local shops to remain open all seven days a week.
- Increase in excise duty on tobacco products: The budget hiked excise duty on all tobacco products by 10-15% except beedis. Additionally, the Seventh Schedule to the Finance Act, 2005 is being amended so as to increase the excise duty across all lengths of non-filter and filter cigarettes. The hike in excise duty will hurt demand for tobacco products.
- Increase in excise duty on beverages: The budget proposed to increase excise duty on water, including mineral water and aerated water, containing added sugar or other sweetening matter or flavoured to 21 per cent from 18 per cent. This could lead to higher prices of these products, if manufacturers decide to pass on the increase to consumers. In that case, demand for aerated drinks would get adversely impacted.
- Increase in effective excise rate on branded garments: The budget proposed to increase the applicable tariff value for branded apparel for excise calculation to 60 per cent of retail sale price in 2016-17 from 30 per cent of retail sale price in 2015-16. It could lead to higher prices as manufacturers are likely to pass on the hike. As we have seen in the past, higher prices could have a negative impact on consumer demand, which is already subdued.
- Increase in excise and customs duties on jewellery: The budget increased excise duty on articles of jewellery. It also increased customs duty on imitation jewellery to 15 per cent from 10 per cent. This will lead to higher prices and could impact demand.
- No commitment on implementation timelines for GST: Implementation of GST would be a significant development for the sector if it is done in a timely and efficient manner. It would streamline the tax system and reduce cascading effect on the cost of goods and services. The GST is a significant positive for consumer goods companies on account of greater parity with unorganised sector, as also because of its supply-chain benefits. However, the budget didn’t throw any light on the possible timelines for implementation of the GST.
Pinakiranjan Mishra is partner and national leader for retail and consumer products advisory services at Ernst & Young.
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