Mumbai: Nothing is certain but death and taxes, yet ahead of the Union budget, companies and their investors were almost certain that the government would cut taxes on individuals to boost sagging consumption.
While the finance minister did cut taxes, the announcement came with a big caveat, and has resulted in a plethora of internet jokes on one hand, and great disappointment among companies and investors on the other.
Sameer Shah, head of finance for India and Saarc at Godrej Consumer Products Ltd (GCPL), said: “The budget does let down as far as consumption revival goes. There is more of prose than the numbers part of it. While the new personal tax slabs look good optically, one really needs to evaluate how much of this would translate into consumption growth.”
Experts on personal finance say that many individuals may be better off in the old tax regime that includes certain exemptions and so may not opt for the new regime, which has lower tax rates but hardly any exemptions.
Even in cases where there may be tax savings, some experts believe that these individuals may end up investing these surpluses.
Analysts at Nomura Global Markets Research said in a note to clients: “To boost growth, personal income taxes were rationalized, which is the right step; but we doubt it will stimulate consumption demand, as the propensity to save will be high.”
Note that the budget comes at a time when India’s real gross domestic product growth dropped to 4.5% in the September quarter and nominal GDP growth was just 6.1%. As the chart alongside shows, volume growth has fallen to the low single-digits for most consumer goods companies, while one of them, Marico Ltd, even reported a year-on-year decline in volume in the December quarter.
Indian companies across sectors such as automobile, retail and fast moving consumer goods (FMCG) are struggling to get consumers to loosen their purse strings.
Analysts add that rural markets have not been given enough attention, especially considering rural demand has been under pressure for some time now.
Credit Suisse Securities (India) Pvt. Ltd analysts said, “There is no stimulus for improving FMCG rural growth, which is at a 15-year low… (this) is negative for FMCG.”
FMCG market leader Hindustan Unilever Ltd (HUL) said in its December quarter investor presentation last week that rural demand growth is now about half that of urban centres. Note that a few quarters ago, rural markets were growing faster. For the December quarter, even as HUL performed better than its smaller FMCG peers, its management’s commentary has been quite sombre. In a post-earnings conference call, HUL chairman and managing director Sanjiv Mehta said, “Looking ahead, while the near-term market outlook is cautious, we are confident of the medium to long-term growth prospects of the FMCG sector.”
What could the budget have done?
“One of the things the government could have done is advance the infrastructure spending to the short run instead of spreading it over five years,” said Shah of GCPL. “Secondly, there could have been a road map on reducing the GST (goods and services tax) rates, which would have been a great way for consumers to use these tax savings. This is the sort of stimulus that would have kick-started the rural economy.”
With the budget out of the way, it appears that the recovery that consumer companies were anticipating will get delayed further.
“Essentially, if you don’t give stimulus, then growth recovery gets pushed further,” an analyst with a global broking firm said on condition of anonymity. “There are other repercussions, too. For instance, growth can spiral downwards, which can eventually impact the tax collections.”
Against this backdrop, the stock markets are likely to shower their love on companies that are resilient notwithstanding high valuations.
A case in point could be shares of HUL, which gained about 2% on budget day thanks to solid results in the third quarter. From a near-term perspective, there is a glimmer of hope about the favourable impact of the healthy rabi crop output.
But until there are visible signs of a sustainable recovery, consumer companies will continue to be on the hunt to find their missing consumers.
