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Impact of Budget 2018 on FMCG and retail

  • Highlights

  • The FMCG and retail sectors are key contributors to India’s GDP

  • A reduction in corporate tax was aimed at benefiting MSMEs in the sector

  • Increased standard deduction helped drive consumption

  • Several schemes launched that were pro-rural

Fast Moving Consumer Goods (FMCG) and retail sectors are vital contributors to India’s Gross Domestic Product (GDP). An increase in FMCG and retail sales boosts economic growth and helps increase jobs all over the country. In addition, sales numbers in these sectors are significant economic indicators because a rise (or fall) in consumer spending indicates whether the economy is racing ahead or slowing down. This is why retailers look forward to the budget for favourable growth conditions during the year.

‘Industry’ status to the retail sector

The retail sector is the second largest employer in the country after agriculture. However, it is not yet recognised as an industry. Retailers are of the opinion that allotting industry status would help them in many ways such as:

a) A separate ministry to regulate the retail sector
b) Greater exposure to investments from foreign investors
c) Easier access to finance from banks

But despite many expectations, the government did not change the status of this sector to ‘industry’ during the budget in FY2018. And with the FY2019 budget fast approaching, people in the retail industry are expectant of a positive announcement in this regard.

Reduction in corporate tax

Previously, companies with an annual turnover of less than Rs. 50 crore enjoyed a corporate tax rate of 25%. However, in the FY 2018 budget, the Finance Minister proposed a reduction in corporate tax to 25% for all companies that report a turnover of Rs. 250 crore. The aim to reduce tax was to benefit the entire class of Micro, Small, and Medium Enterprises (MSMEs). This was a welcome move since it would benefit nearly 99% of all companies (including FMCG and retail companies) that file tax returns in the country, according to the Retailers Association of India (RAI). Retail and FMCG companies can now save more on taxes that would not have been possible at a higher corporate tax rate.

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Increase in standard deduction

The increase in standard deduction is another measure that benefits the retail and FMCG sectors indirectly. The government introduced a standard deduction of Rs. 40,000 against travel and medical expenses. This would help increase the disposable income in the pockets of the common person and successively benefit the FMCG and retail sectors.

Pro-rural budget

Rural India is a vast market for the FMCG sector because it constitutes around 70% of the total population of the country. Therefore, any reforms announced in the budget for rural India would be a good thing for this industry. In the FY2018 budget, FMCG players had it good because the government announced a slew of schemes and benefits for farmers and the rural sector.

A hike in the Minimum Support Price (MSP) of Kharif crops by 1.5 times, for example, was a significant boost to the farming community. Similarly, the government announced greater spending to double farm income by 2022. These schemes can help the rural population to benefit from a more considerable disposable income. This, in turn, boosts the sales of FMCG and retail products in rural India.

Conclusion

There were no direct measures for the FMCG and retail sectors in the FY2018 budget. This may have been slightly disappointing for players in these sectors. But that said, the government has included many steps to increase the scope of consumption in numerous ways. This could have a significant impact on sales for these sectors.

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