Good times ahead for the FMCG industry

Finally it is out. The budget that is! And the good news is that it’s a sensible one. There are happy faces all around and the best part is that, for once, there is an overwhelming majority of people in the country who endorse the finance minister’s budget.

Manmohan Singh’s budget of 1991 was the path breaking one which started the economic reforms rolling and successive budgets have happily enough not reversed the trend.

One industry that is set to forge ahead, thanks to the impetus given to it by the current budget, is the food processing industry. The budget has provided that the food-processing sector including fruits drinks/preparations, pickle, ketchup and the like would be completely exempted from excise duty. This is being done to encourage the industry and reduce the wastage of fruits and vegetables in the country.

The major FMCG players involved in the production of these products will undoubtedly heave a sigh of relief. These companies include FMCG giant HLL, manufacturer of Kissan pickle, jam, ketchup and fruit punch, Nestle (Maggie ketchup and pickle), Dabur (Real fruit juice), Pepsi (Tropicana fruit juice), Heinz (tomato ketchup) and Marico (Sil jam).

Apart from this, the domestic tea and coffee industry is also likely to benefit significantly from the budget, since the finance minister has announced doubling of the customs duty on imported tea and coffee to 70 per cent from 35 percent. Also development allowance for tea plantations from the current 20 per cent to 40 per cent will give a major fillip to the sector. The sector has been facing stiff competition from cheaper imports, and demand has remained sluggish.

Tata Tea, Hindustan Lever and Nestle will be the biggest beneficiaries as result of this.

Most FMCG companies declined to talk on the budget for now. However, according to analysts: "HLL will benefit the most. Dabur will be the other major gainer as will Nestle since it has the highest percentage of sales in the food processing segment."

Viewing the Budget positively, analysts said: "The Budget has been a sensible one. It will be welcomed by all in the FMCG industry. Another analyst commented that besides large FMCG companies the budget would also be a boon for small-scale units in the food processing industry.

According to a market consultant, "The zero excise duty is not a novel thing but had been done away with by previous governments. This eventually burdened consumers with steep prices of the products. At least for a few years now, it should keep the excise duty on this particular sector as it will help this industry to grow.

An overview of the food processing industry

Though India is the world''s second largest producer of fruits and vegetables, hardly five percent of the produce is processed. India is the land of spices producing all varieties worth over Rs. 3,500 crore ($900 million) amounting to 25-30 percent of the world production, which is processed for value-addition and export. It grows 22 million tonnes of oilseeds covering most of the varieties. Other important plantation products include tea, coffee, cocoa and cashew.

According to estimates, 30 per cent of the annual produce of vegetables and fruits of India is wasted due to lack of preservation facilities. This is equal to the annual produce of fruits and vegetables of the whole of UK! This fact alone indicates the vast scope that exists in food processing technology in terms of cold chains and food preservation industry.

The Indian food industry’s sales turnover stood at Rs 140,000 crore in the year 2000.

It is estimated that this industry requires about Rs 29,000 crore in investment over the next five years to create necessary infrastructure, expand production facilities and state-of-the-art- technology to match international quality and standards.

According to official statistics, India exported processed fruits and vegetables worth Rs 6000 million in 1999-2000. The horticulture production is around 102 million tonnes. Foreign investment since 1991, when economic liberalisation started, stood at Rs 8,800 crore. Products that have seen a growing demand especially in the Middle East countries include pickles, chutneys, fruit pulps, canned fruits and vegetables, concentrated pulps and juices, dehydrated vegetables and frozen fruits and vegetables.

Among plantations in India, tea is a major foreign exchange earner. India is the largest producer and exporter of black tea. In coffee India is the second largest producer of coffee in the world after Brazil. With the announced increase in excise duty to 70 percent from 35 percent, the greatest worry of the Indian tea and coffee industry has been removed, that of the removal of quantitative restrictions from 1 Aril 2001. In the face of these India tea and coffee would have faced stiff competition within the country as well as from countries like Sri Lanka in tea and from Brazil in coffee.

The biggest bottleneck in expanding the food processing sector, in terms of both investment and exports, is lack of adequate infrastructure.

Without a strong and dependable cold chain vital sector like food processing industry, which is based mostly on perishable products cannot survive and grow. Even at current level of production, farm produce valued at Rs 70,000 million is wasted every year because there are not enough storage, transportation, cold chain facilities and other infrastructure supports. Cold chain facilities are miserably inadequate to meet the increasing production of various perishable products like milk, fruits, vegetables, poultry, fisheries etc.

Agriculture and agro products remain the most important sector of the Indian economy. They contribute nearly one third of the GDP and accounts for 64 percent of the workforce.

Reactions on the stockmarket

The prime minister, Mr Atal Bihari Vajpayee, has said that the budget is `forward looking'' and said the range of measures taken would help alleviate the suffering of farmers, boost industrial growth, stimulate investment and promote employment.

``It is a comprehensive Budget taking into account the prevailing economic situation in the country. It will accelerate overall growth and development, allaying apprehensions in people''s mind,'''' Mr Vajpayee told reporters here shortly after presentation of the budget in the Lok Sabha.

The stockmarket, reflecting the mood of industry, seems to be ecstatic with the budget. It witnessed a lot of volatility during the day. Marketmen said infotech stocks were the most sought after, followed by FMCG and media. Selling was witnessed in PSU and power stocks.

The Sensex closed today at 4,247, rallying by a massive 178 points (4.36 per cent) from its overnight close of 4,069. The Nifty rose 4.69 per cent to close at 1356.3. This rise, according to market sources, was the highest post-budget rally in the last three years.

The Sensex had, in fact, risen higher. The Sensex had dipped from its intra-day high of 4,265 during intra-day trade due to selling pressure. The market was particularly happy with the government decision to reduce dividend tax. The reduction in dividend tax from 20 per cent to 10 per cent has improved the overall sentiment. Concessions for software services also made the markets happy.
Among FMCG stocks Tata Tea rose by 5.85 percent and Nestle by 5.81 percent