Industry Says Excise Duty Cuts Welcome, But Not Enough

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Indian Finance Minister Chidambaram attends session at World Economic Forum in DavosMumbai/New Delhi: Finance minister P. Chidambaram ’s attempt to boost growth by lowering duties on consumer durables and autos may do little to revive consumption in the economy, as consumer sentiment is unlikely to change with small measures even as larger issues like a common goods and services tax remain unaddressed. Nonetheless, every small reduction in duties and taxes is a step in the right direction, say industry experts.

On Monday, the finance minister reduced the excise duty from 12% to 10% on consumer durables and automobiles for the period up to July. The rates would be reviewed at the time of the regular Budget, once a new government is elected, following the general election scheduled by May.

“Every cut in duties and excise is welcome. But what we really need is a change in the consumer sentiment for consumption to increase,” saidKishore Biyani, founder and chief executive officer, Future Group, parent of Future Value Retail Ltd, Future Lifestyle Fashion Ltd and Future Consumer Enterprises Ltd, which runs retail chains such as Big Bazaar, Food Bazaarand eZone, an electronics and durables chain. He added that a 2% excise cut will “not really help” change sentiments and boost consumption.

To be sure, the two percentage point cut in excise duty will not really see the prices of consumer durables drop as margins in the industry have been under stress, as it relies heavily on imports which have become costlier due to the depreciation in the rupee.

“So with this move, the pressure on pricing will go down (for manufacturers),” said a spokesperson for industry body Consumer Electronics and Appliances Manufacturers Association (CEAMA) while explaining that for the end consumer this would not mean reduced prices as companies are unlikely to pass it on to consumers.

Likewise for the consumer packaged goods manufacturers.

“There were no expectations from the interim budget,” says Harsh Mariwala, chairman and managing director,Marico Ltd, adding that we should not read much into the interim budget as not much will change in a short period.

The reduction in customs duty on non-edible oils will have a favourable impact on input cost pressures seen across the soaps category, said Vivek Gambhir, managing director, Godrej Consumer Products Ltd. However, “as far as stimulating demand is concerned, much more will depend on overall GDP growth and consumer sentiment getting more positive,” he added.

The Indian consumption story has come under pressure as consumers have been cutting back on discretionary spending and even reducing their consumption of daily essentials and packaged goods like soaps and shampoo. For instance, growth in the Rs.45,000 crore consumer durable industry in 2013 was just 5%, down from 14% in 2011. Likewise, the consumer packaged goods industry saw sales shrink 0.5% in the third quarter of 2013 from a year ago, according to a December report by market research firm Nielsen and Co. In terms of value, sales improved by 6%, but all of it was driven by price increases, said Nielsen. This compares poorly with 2012, when volume growth was around 10%, said the report, authored by Sameer Shukla, director of Nielsen’s India unit.

Growth by volume represents the component of sales growth on account of selling more units of a product; value growth is mainly a function of price increases.

While sales growth has been slowing for the past two years, the trend has accelerated in the last 12 months, as India’s economic growth hit a decade’s low in the last fiscal year and inflation remained at heightened levels. The Reserve Bank of India (RBI) expects inflation, measured by the consumer price index (CPI), to top 9% in the three months to 31 March, and range between 7.5% and 8.5% a year later. Consumer prices rose 9.87% in December, the fastest pace in a basket of 17 Asia-Pacific economies tracked by Bloomberg. Consumer inflation eased to 8.97% in January but the relief was mainly on account of lower prices of fruits and vegetables, which some fear may not sustain for long.

On a positive note, the interim Budget has avoided populist measures and has tried to keep a check on the fiscal deficit, which eventually would help in bringing down inflationary pressures.

“The interim budget has avoided populist tendency in order to build a strong economic direction for the future,” said Govind Shrikhande, managing director, Shoppers Stop Ltd, who expects the cut in excise duties to benefit the automobile and consumer durable manufacturers and retailers.

Moreover the relief in excise will ensure there is “no upward movement in pricing pressure going forward”, said Shantanu Dasgupta, vice-president (corporate affairs and strategy), Whirlpool of India Ltd.

The excise cut will also help the local value addition industry for mobile handset manufacturers. “The mobile handset market in India is currently at 220 million annual sales and growing rapidly especially in the smartphone segment. However, the market is significantly import oriented. Restructuring the excise duty could encourage local value addition, which is aligned to the national ICT and telecom objectives,” said Jaideep Ghosh, partner, KPMG Advisory Services Pvt. Ltd.