Union budget 2010-11 gives FMCG companies some food for thought

Broadened income tax slabs provide and opportunity for the FMCG companies to cater to a set of
richer consumers but rising input costs, fuel prices and excise hike may hinder the growth in demand
as a price rise for most of the FMCG products seems imminent. Also the tax benefit seems to be the
most beneficial for the upper middle income strata of the society and hence large pool of urban
middle and lower middle income families will find coping up with spiralling inflation more difficult

Hyderabad, Andhra Pradesh, February 27, 2010 /India PRwire/ -- At the first look, the Union budget
2010-11 aims at providing further booster to the economic growth with a tight grip on the broadening
fiscal deficits. Measures such as broadening of income tax slabs and plenty of bounties for rural India
provide fresh liquidity in the economy and are aimed at lubricating the growth engines with rippling
multipliers. However, the impact of this budget on the FMCG industry is surely one gray area which
can only be unfolded with time. Pinaki Mukherjee, Lead Consultant - Consumer Markets, Datamonitor
India felt, the impact of the budget on the FMCG industry will be far reaching than it is thought and
may as well enforce the companies to have a re-look at their broader strategies in the medium to
short term.

The immediate cheer over tax relieves rapidly disappeared by the rising concerns over the impact of
hike in excise duties, MAT and fuel prices. "Only about the top 12 percentile of the Indian population
may expect a tax relief. However, for the vast majority of the population this tax relief does not mean
anything", Mukherjee pointed out. "Rather UPA Governments ongoing focus on 'inclusive growth'
theme through a number of measures to boost the rural economy may bring in reasons to celebrate
for the FMCG companies" he added.

Most of the big FMCG companies in India including HUL and Dabur have manufacturing facilities in
the excise-free zones. Therefore, although 2% excise hike may not pinch them at all, rising fuel and
other input costs may result in further bleeding of margins if the incremental cost is not passed on to
the consumers. In addition, a hike in MAT and bringing in products such as chocolates, biscuits,
sanitary napkins, diapers and toilet papers under fresh or additional tax net will definitely result in
companies having to pay higher tax in the current fiscal. So the most important question, will the
companies resort to increasing product prices? "Indian consumers have always preferred certain price
points for the lower SKUs. Companies therefore may not like to alter the popular price points of Rs. 2,
5 and 10, but higher volume products will definitely see a price hike. However, a robust monsoon later
this year may soften the pressure on the input costs", commented Mukherjee.

Analysts with Datamonitor India believe the prices for most of the consumer durables and automobile
products will go up in the near future and this will absorb the additional money in the form of tax relief
from the hands of the urban upper middle income consumers. "Increase in the prices of products with
negative price elasticity of demand such as tobacco products may crunch the consumers' wallet share
for discretionary spending on food products such as non-ethnic snacks, ice creams and chocolates."

In rural India, although the mass population is expected to be financially better off, higher prices of
two-wheelers and other necessities may limit the rise in demand under inflationary conditions. "Rural
India will see a combination of demand-pulled and cost-pushed inflation and this will be much better
than mostly cost-pushed inflation for basic FMCG products in urban India to continue to provide
tailwind to continue the GDP growth" averred Mukherjee. So already rural India-pro FMCG companies
in India may further increase their focus on the hinterlands to drive growth.

Upper middle income group of consumers will see a higher rise in their net income as the tax liabilities
reduce. This may provide some food for thought for the FMCG companies in India. "Products with
'masstige' positioning may particularly do well in the near future. Companies may shift their focus from
volume-led growth measures to cater to this high-value segment by promoting products with
aspirational positioning. Continued wave in adopting health and convenience food and beverages
may help in strengthening this trend", pointed out Mukherjee.

Therefore, the overall impact of the Union budget 2010-11 on the FMCG industry is far-reaching than
it seemed initially. FMCG companies continued to hold contradicting and varying views on the impact,
however, among the few key points which have been unanimous is the imminent price hike to push
the CPI further unless Lord Indra blesses India with a bumper monsoon in the immediate future.