Union Budget and Its Impact on Food Industry

Rajat K. Baisya

Finance minister has said nothing in his proposal for the much needed agricultural sector. Food processing sector needs support and it has direct linkage with the processed food industry.

The finance minister Mr Pranab Mukherjee presented union budget 2009-10 after UPA took over office again post general election for the second term. Pranabbabu came back to this portfolio after years. He managed finance during Late Indira Gandhi’s time. This budget has been proposed after the interim budget headed by the Prime Minister himself when Chidambaram was shifted to Home portfolio. Pranabbabu’s budget proposal was termed by many as common man’s (aam admi) budget in keeping with the promises that the ruling party made to the electorate. UPA experienced significant advantage in the last election through their earlier two schemes, namely writing off the farmers’ debts and rural employment guarantee scheme (NREGA). Farmers’ debt waiver and debt relief scheme has been extended from June 30 2009 to Dec 31, 2009. Under NREGA a whopping 144% increase over previous year was proposed and an allocation of Rs 39100 crores was earmarked in the budget. Rural housing under national housing bank gets Rs 2000 crores. Indira Awaas Yojana allocation was increased by 63% to Rs 8800 crores and Bharat Nirman budget was increased by 45%. This budget has some social and rural face.

There is absolutely nothing for the food industry to be happy about it. Readers will recollect that immediately after the budget announcement the sensex dropped by reacting to the proposal sharply. It is only during the subsequent weeks that sensex recovered ground on the assurance of the finance minister. Industry expected that UPA government would propose some reforms and major course correction in tax structure to fuel growth impacted by the global slowdown. But nothing of that sort has happened which has upset the investing community. On the top of this it was questioned from where the fiscal deficit will be covered? Will the government resort to heavy borrowing to cover the deficit? How social sector and rural development and employment scheme will be funded? This budget thus appeared to be little inflationary. Post budget inflation rate, in fact, has gone up. Industry has nothing to be happy about this budget. But no one can, at the same time, say that this is a bad budget. Budget proposition was kept in line with the election promises and rural focus. A lot of emphasis was given in the infrastructure sector. Allocation of expenditure for transport sector grows by almost 20% with significant jump in rural roads, national highways and railways. Total funding in public-private partnership (PPP) projects can go upto Rs 100000 crores.

Now let us look at what can impact food-processing industry. Expenditure on subsidies drops substantially in a drop in fertilizer subsidies. Finance minister has said nothing in his proposal for the much needed agricultural sector. This sector needs support and it has direct linkage with the processed food industry. Finance minister also has promised to implement dual GST by April 2010. Global economic slowdown has impacted Indian exporters. Special package for the export sector hit by the global crisis was announced. For example, enhanced Export Credit and Guarantee Corporation cover at 95% to badly hit sectors extended upto March 2010 and 2 % interest subvention extended for exporters till March 2010 and special raw material for exporters exempted from custom duty etc. In food processing industry we have some sectors solely dependent on the export for survival. Although they have not been impacted so much as the apparel and garment sector but their order quantity has substantially lower than before. These provisions in budget will come as breather for them although in small doses. Commodities transaction tax has been abolished which is also a very welcome move in the last budget.

Food processing industry is specially signified by its large numbers falling in SME sector. Scope of presumptive taxation has been extended to small businesses. Businesses with turnover up to Rs 40 lacs will have to declare income @ 8% of the turnover. Small businesses are exempted from keeping books and payment of advance tax. Very small and tiny food businesses will fall in this category. Capital expenditure other than land, goodwill and financial instruments are fully deductible for tax purposes. This would mean that tax exemption is investment linked rather than profit linked proposed to boost investment.

The main advantage that will come to the benefit of the processed food industry will be the proposal the budget has for the rural sector. The investment in rural infrastructure and rural employment will increase rural income and hence consumption. But there is a big if there and that is that this huge provisions will really reach the rural population and will not be eaten up by the middlemen and inefficient government machineries. The rural infrastructure improvement will reduce the cost of transport and storage of agricultural produce required by the large processors. This will attract the investment in processing in the rural areas, which will in fact further fuel the growth. Because the cost of production will be low and there will be rural income generation. But the issue is whether that will really happen? The essence of this budget is therefore, lies in its implementation mechanism and functional efficiency of the system.

Subsequently, finance minister has announced the disinvestments of loss making PSUs. Poor public is paying for the losses that large PSUs are making and if this decision is implemented it will help government to garner additional resources to fund the various schemes as well in addition to reducing the burden of tax on general public. Now that CPM is off the back of the ruling party this is possible for the government to implement. But drastic reduction in fertilizer subsidy will increase the input cost to farmers that is a matter of concern.

Of late, finance minister has made an announcement that food-processing industry will enjoy tax holiday. This means that food industry, which is newly set up, can enjoy ten years of nonpayment of taxes. For new industry this is a very welcome move. But as I said in my earlier article that food industry does not make profit in spite of all these concessions because the basic industry structure is still not right. Unless industry players are not able to bring down the cost of product to fuel consumption and growth they will not be able to derive the benefit from these provisions of tax holiday. The poor performance of the organized retail sector has its impact on the small food processors. The tax holiday granted will help them to be more competitive and increase demand.

Although budget has nothing for the industry in particular, but indirect impact on the performance of the food processors should be there and to that extent we should be happy and work together to derive the indirect benefits for the sector.

 

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