Agribusiness and FMCG - Post-budget sectoral point of view

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India’s Finance Minister Arun Jaitley presented his maiden budget on Thursday,10 July 2014, bringing an end to an unprecedented run-up of hope and hype. He has sought to provide impetus to the infrastructure, manufacturing, tourism, and financial sectors in this year’s federal budget, making a valiant effort to live up to the twin promises of economic growth and good governance of the Narendra Modi government.

The budget echoed the strong intention and spelt out the initiatives of the government to effectuate the ease of doing business in India. We believe, if Budget 2014 is to be different, it will depend on the will and implementation effort of the new government.

As we absorb and process the Finance Minister’s speech and the Budget 2014 proposals, please find attached our in-depth analysis of the key budgetary proposals impacting the Agriculture and FMCG sector.

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Agribusiness and FMCG - Post-budget sectoral point of view

  1. 1. Agribusiness and FMCG Post-budget sectoral point of view INDIA UNION BUDGET 2014
  2. 2. Table of contents 1. Context 3. Key policy/fiscal/tax proposals 5. Unfinished agenda
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3 Context Where are we Agriculture is an important sector of the Indian economy which contributes to about one-sixth of the GDP, 11 per cent of exports and more than 50 per cent of India’s workforce. While agriculture’s contribution to India’s GDP has fallen from 30 per cent in the financial year 1991 to less than 15 per cent in FY13, the contribution to employment continues to remain the same – being a key source of income for a large number of low income households. Also, India is one of the most populous nations of the world, and on an average, food contributes nearly 50 per cent of all expenses. Agriculture and allied sectors grew at a CAGR of 3.6 percent in the 11th Plan (2007-12) much below the target of four percent. It is widely believed that it is important for agriculture to grow at four percent for India to achieve an overall growth of seven to eight percent. Key issues/challenges The Indian agriculture faces several structural challenges. Growing fragmentation and diminishing size of land holdings have severely impacted farm productivity, efficiency and modernisation. Additionally, there has been a growing shift towards non-farming occupations in the recent years leading to a severe shortage of workforce in several parts of the country. Other challenges include continued reliance on monsoons for irrigation, poor post harvest infrastructure leading to high food wastage, lack of adequate market infrastructure to enable proper price discovery and realisation. NDA stance Reforming agriculture forms an intrinsic part of the ruling party’s plan to bring the economy back on track and to control rampant price rise. BJP’s manifesto highlights the importance of strengthening the traditional employment bases of agriculture and allied activities and an urgent need to mobilise resources to enable infrastructure development. In this regard, BJP has been advocating several initiatives like, the national river grid and national agriculture market which could revolutionalise Indian agriculture. NDA’s stance reinforces these priorities and the current budget may be seen as an initiation of the roadmap for the vision projected by the ruling party. What was expected The agriculture and food sector has been performing below par over the last few years and the future looks challenging due to a weak monsoon. Therefore, the expectations from the Union Budget 2014 were high. There was an immediate need to focus ‘strategic’ or ‘long term’ initiatives to bring sustainable growth in the sector. This required a two pronged strategy – to deal with the inherent challenges on one hand, and to ensure long term asset creation on the other.
  4. 4. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4 Key policy/fiscal/tax proposals in Agribusiness Key announcements Announcing irrigation schemes, the Finance Minister (FM), similar to his predecessors, reiterated the need for reducing dependence on monsoons. Allocating INR1 billion towards an initial study, the FM also laid the foundation for the much anticipated national river grid project. The government also announced a plan to introduce soil health cards in ‘mission mode’ and establish mobile testing labs. Additionally, there were indications by the finance minister that a new urea policy was in the pipeline. The work performed under the Mahatma Gandhi National Employment Guarantee Scheme (MGNREGA) has now been linked to agriculture-related activities. To complement this measure, INR50 billion have additionally been set aside towards the Rural Infrastructure Development Fund (RIDF) and INR50 billion towards scientific warehousing to minimise post-harvest losses. Setting up an INR5 billion-worth price stabilisation fund, the budget introduced several schemes to improve market infrastructure with an aim of creating a ‘national market’. Setting a credit target of INR8 trillion for banks, the budget also introduced several measures to improve credit availability to landless farmers and farmer producer organisations. Impact Projects such as the national river grid have the potential of revolutionalising Indian farming if implemented in a timely and effective manner. To improve productivity, there is a dire need to stop soil degradation stemming from imbalanced use of nutrients. The Government’s plan to implement soil health cards on ‘mission mode’ and establishing mobile testing labs could help in promoting balanced use of nutrients and other sustainable practices. The FM’s mentioning of the formulation of a new urea policy indicates towards a potential modification of the Nutrient -Based Subsidy (NBS) regime to ensure optimised use of fertilisers. Linking MGNREGA to farm activities and increasing outlays for infrastructure building is a positive move, which could cease the continuous migration of workers to non-agriculture sectors while creating productive agricultural assets. Improving market infrastructure could go a long way towards improving price discovery and realisation, leading to improved farmer remuneration and the much-needed disintermediation in the sector. However, a lot still needs to be done at the grassroot level to improve last mile connectivity for product and information flow, which may require significant contribution from states. Finally, credit to farmers has been a major sore point for the sector over the past years. While renewed focus on long-term loans for asset creation is a welcome move, close monitoring of grant applications may be required. Summary Overall, the focus on asset creation and productivity enhancement indicates a positive thrust to address the critical bottlenecks faced by the sector while creating an enabling environment for sustained growth.
  5. 5. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 5 Key policy/fiscal/tax proposals in FMCG Key announcements • Personal income tax exemption limit raised from INR0.20 million to INR0.25 million • Customs duty on key raw materials such as fatty acids used in the manufacture of soaps reduced to zero • Specific excise duty on cigarettes increased by 11-72 per cent • Excise duty on aerated waters containing sugar increased to five percentage points to 17 per cent • Basic customs duty on colour picture tubes removed • Basic customs duty on LCD or LED panels below 19 inches removed • Excise duty on processing and packaging machinery used for food processing lowered to 6 per cent from 10 per cent • No decision on relaxing the rules and raising FDI levels in multi-brand retail as yet. The FM has indicated that they will wait and build a consensus on this before arriving at a decision. There is a strong indication on raising the FDI levels in B2C e-commerce. Impact Overall, the consumer markets industry was expecting some clarity on aspects such as, GST and industry status to retail, which it still awaits. These are major bottlenecks in industry growth at the moment which need to be resolved at the earliest. Increase of income tax slabs is likely to increase disposable incomes of consumers which may have a positive impact on the industry. Apart from this, there are few major positives that the consumer markets industry can takeaway from the recent budget. The reduced customs duties on LCD and LED panels as well as parts of memory cards that are used in mobile phone handsets will stimulate demand and help boost consumption. This move will also encourage local production and provide an impetus to the domestic LED/LCD panel industry. A similar reduction in duties on footwear, apparel, precious and semi-precious stones will make these cheaper in the hands of the consumers’ thereby increasing consumption. Duty reduction for the manufacture of soaps and oleo-chemicals will also have a positive impact on the FMCG manufacturers in the form of cost savings which in turn will trickle-down to the consumers. The increase of duties on tobacco products was expected, but there may be a need to rationalise the same. Growing incidence of tax is leading to increase in the sale of counterfeit products in the industry, which lead to loss of tax revenue and greater health concerns due to lack of quality standards. Summary While indirect benefits accruing to consumers may positively impact the sector in the form of increased spending, much needs to be done in terms of initiatives which directly impact the sector, such as implementation of GST and industry status to retail.
  6. 6. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 6 Unfinished agenda What remains While the budget listed several initiatives which are strategic in nature, benefits would only accrue if these are implemented in a timely manner. There is a need to closely monitor the progress of these initiatives and at the same time involve the states to make a change at the grass root level. Reforms are also needed in land holding and ownership acts to enable land pooling and to deal with growing fragmentation. Land acquisition continues to remain a hurdle for development of food parks as well. Greater focus also needs to be on allied industries where credit availability continues to remain a problem. Focus on the source of credit (direct/indirect) rather than activity (post harvest, storage, distribution, etc.) in the past has led to uneven credit distribution. What is expected going forward. While the budget has broadly focussed on strategic or long term imperatives of increasing growth in the food and agricultural sector, the initiatives need to be aggressively implemented in a time bound manner. Some other key initiatives that may fast track this growth include: • Incentivised shift towards sustainable agriculture methods such as drip-irrigation • Focus areas for infrastructure development; farm machinery and technology • Involving states to fast track creation of agri-marketing infrastructure and improving accessibility to farmers • Adding more dimensions to the soil health cards initiative; creation of a national technology enabled knowledge hub for improvement in farm practices for promoting and disseminating information to farmers.
  7. 7. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 7 Thank You The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMGInternational”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarksor trademarks of KPMG International. Contacts: Dinesh Kanabar Deputy CEO and Chairman – Sales & Markets T: +91 22 3090 1661 E: dkanabar@kpmg.com Rajat Wahi Partner and Head Agribusiness and FMCG Sector T: +91 9560 482220 E: rajatwahi@kpmg.com

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