Budget will fail to bring inflation under control4 min read . Updated: 28 Feb 2011, 08:13 PM IST
Budget will fail to bring inflation under control
With no mention of foreign direct investment (FDI) in multi-brand retail or a road map for the reduction of the huge difference between wholesale and retail prices, the increased government spends on agriculture, cold chain, warehousing and logistics in Budget 2011 will fail to bring inflation under control and have any impact on the consumer-facing sectors, said retail and consumer industry analysts.
Inflation found a total of nine mentions in the first 12 pages of the finance minister’s budget speech. The budget also used all the keywords from the goods and services tax (GST), the direct taxes code (DTC) to the unique identification. The populist budget aimed at aiding consumption with subsidies in kerosene and liquefied petroleum gas and even a marginal reduction in the personal income-tax exemption limit.
Even as the budget puts more money in the hands of the Indian consumer it has widened the service tax net, thus nullifying the effects of tax exemption. Moreover, it also introduced a 10 % mandatory levy on branded apparel.
For a large part of Indian consumers, primary food items such as milk, fruits, meat, fish and poultry will see no respite as there were no radical announcements in the budget.
“There have been a few food security measures, but their success will depend on the delivery mechanism. One is not sure how adequate the other efforts to manage inflation are. Inflation would indeed have a serious impact on disposable income with consumers—a major driver of the fortunes of the FMCG (fast-moving consumer goods) sector," said Milind Sarwate, chief of HR, finance and strategy, Marico Ltd.
Besides giving retail FDI a miss, the 10% mandatory levy on branded apparel will only add to the costs of the retail industry and will have to eventually be borne by consumers. The organized Indian retail industry is already facing challenges in pricing because of the increase in input costs, including doubling of cotton prices.
“The minimum impact of all these, would be 10-15% on retail prices. This would definitely impact the demand of garments," said Govind Shrikhande, customer care associate and managing director at Shopper’s Stop Ltd.
During his budget speech, the finance minister jokingly sought divine intervention to ensure a normal monsoon and faster growth. That didn’t amuse Manish Mandhana, joint managing director of Mandhana Industries Ltd, a textile manufacturer.
He said the budget overlooked the demands of the textile industry even though the sector is one of the largest employment providers and foreign exchange earners.
“It leaves me to reckon that with his budget also, he expects industry to look to the gods rather than to expect any help from the government," he said.
To be sure, the budget had a few positives such as the cut in the surcharge on taxes, no increase in excise duties, a focus on infrastructure and a boost in rural incomes with investments in cold storage and food parks.
“Overall, it is a sound budget. From an FMCG sector perspective, the widely expected increase in excise duty was not resorted to, which will benefit soaps and diapers. Another good development is reduction in surcharge from 7.5% to 5%," said A. Mahendran, managing director, Godrej Consumer Products Ltd. “So, as the surcharge comes down, even with the base MAT (minimum alternate tax) rate being hiked from 18 to 18.5%, it (the effective rate) remains unchanged. In addition, the FM (finance minister) has clearly given a signal of GST coming through soon which will benefit the sector."
Besides, the prices of consumer durables will also be maintained this year as there is no hike in excise duties. “We do not foresee any price changes in the consumer electronics sector linked with the Budget," said R. Zutshi, deputy managing director, Samsung India Electronics Pvt. Ltd.
Balu Nayar, managing director, Morpheus Capital Advisors Llc, which launched a ₹ 400 crore fund in December 2010 for the packaged consumer goods sector, said: “This is not a radical budget with big headlines."
The budget lacks vision as it does not give a long-term road map for employment creation, increasing farmer productivity or farmer income, said Arvind Singhal, chairman, Technopak Advisors Pvt. Ltd, a retail consultancy firm. “What is required is reforms of a different order and magnitude."
The reaction of stocks on the Bombay Stock Exchange were mixed. Stock prices of India’s largest organized retail firm Pantaloon Retail (India) Ltd lost 6.26% to close at ₹ 261.3 and Shopper’s Stop gained 2.28% to close at ₹ 354.9.
Likewise, with no increase in excise duties, ITC Ltd led the 4.47% rise in the FMCG index to 3,432.42 points on Monday. But the consumer durables index was flat with just a 0.01% gain.
• There is only negative news for the retail sector. We expected some relief on the service tax, which hasn’t happened. Secondly, he further hiked excise duties on apparel. It’s a whammy. The finance ministry is known to do this to the retail industry repeatedly.
• Frankly, I was not expecting too much. People were expecting FDI in retail. Nothing much happened across the board.
—Govind ShrikhandeMD, Shoppers Stop
• This is a very positive and good Budget, and has no unpleasant surprises for anyone. It has laid emphasis on the right aspects by continuing with economic and taxation reforms.
• I would hope budgets in the coming years to continue to be non-events, same as in most mature economies, where they do not generate such hype.
—RC BhargavaChairman, Maruti Suzuki
• The Budget has nothing significant for the luxury sector. It would’ve helped if tariffs were reduced to encourage young consumers to purchase premium products. The import duty on luxury products is 35-40% and there’s an urgent need to reduce it.
• Apart from encouraging global brands to open in India, sops should’ve been given to developers to create premium malls.
—Shatrujit Singh TikkaGroup adviser,Louis Vuitton