With the Indian economy batling a prolonged slowdown, the FMCG sector has been the most badly hit, with companies registering tepid growth numbers.
In an interview with Moneycontrol, Arvind Varchaswi, MD, Sri Sri Tattva, discusses the key challenges being faced by the sector and expectations from the upcoming Union Budget.
Q. What are the key challenges the FMCG industry is facing currently?
The FMCG sector is facing a sharp slowdown in sales growth, though volume growth has seen a lower fall. This is indicative of pricing pressures, lower aggregate demand and slowing household savings that are acting as headwinds for the FMCG sector. Profitability has also shown a slower growth trajectory with adverse product mix and higher promotion costs eating into margins for the sector.
Q. Do you expect the upcoming Budget to address the key concern of demand slowdown and downbeat consumer sentiments?
Yes, we are hopeful of positive steps being taken to boost consumer demand across the nation.
We are expecting multiple measures from the Union Budget which will bolster sentiment and also stimulate demand in the economy through fiscal stimulus.
Q. There are hopes riding on the cut in personal income taxes as well. Do you believe the govt. should look at increasing disposable incomes to push growth?
It would be a welcome step. Giving some relief in personal income tax so that individuals will have higher disposable income to spend would help sales for consumer goods. The increased spending will push the demand and help in the revival of manufacturing sector and economic growth of the country. The returns to the government will be in the form of increased tax revenues as economic activity picks up steam.
Q. Is there a need to rationalise the current GST rates on FMCG & ayurvedic products to revive demand?
The current GST rates for Ayurvedic products range between 5-12 percent, while personal care and other products attract 12 percent and 18 percent GST.
For Ayurveda and health products that are our nation’s wealth, the present GST range of 5 percent to 12 percent may be re-looked at. A will to promote and spread these categories to benefit our large population will surely get a boost if these tax rates are cut.
Even in the personal care segment where the taxes for many categories reach 18%, a reduction will help bring about innovative and herbal products to a larger audience at better price levels.
Lower indirect tax rates can help benefit the end consumer. Every person aspires for a healthier alternative and a better lifestyle. We hope the government takes steps to support initiatives by industry to bring about quality beneficial products to people at large.
Q. Do you think schemes such as PM-Kisan have been instrumental in pushing rural consumption and should the govt. look at enhancing the scheme further?
The government has increased rural spending by a huge 22 percent in FY 2020, to a record level of Rs 4,34,000 crore . These schemes have been a strong contributor to the rural economy and these provide a much needed safety net for the rural households.
In addition to such schemes, attention to ensuring better price levels for our farmers and a robust distribution network including direct to consumer channels need attention from government and industry alike to make a stronger impact.
Q. What about other rural employment focused schemes such as MNREGA?
The spend on MNREGA has been around Rs 60,000 crore. This will need to be enhanced as stagnant rural wages and underemployment is believed to be one of the root causes of the current slowdown. There should be more budget outlay for rural employment scheme like MNREGA. This will provide a push to the rural economy , demand and growth.
Q. What is your Budget wishlist?
We expect further incentive for manufacturing companies and investments in manufacturing under Make in India and Start Up India. Also, we seek lower GST rates for Ayurveda and Health and beauty consumer products.
The need of the hour is to have incentives and schemes which boost the consumer demand.
We also need better credit facilities for small traders and businessmen.
Also, we wish the govt. works towards protection of the domestic industry against predatory pricing / dumping by globally dominant producers.
Q. What is your near-term outlook for demand and for the sector?
We expect the fiscal and monetary policies to have a positive impact on the economy , sentiments and on aggregate demand. Therefore, a recovery to begin from Q1 2020-2021 and a stronger recovery over the next four quarters .
We are very hopeful about the upcoming Budget. With some fiscal stimulus in the budget , we see the FMCG sector growing at 10 to 12 percent p.a. over the next 2 two years with profitability recovering faster as operating leverage benefits kick in.