A Growth Oriented Budget but Nothing Significant for Industry

A Growth Oriented Budget but Nothing Significant for food processing Industry

Rajat K. Baisya

One cannot possibly brand the Union Budget 2007-08 as anti-growth by any stretch of imagination although industry reacted sharply immediately after the budget announcement. Stock market which is the barometer of the industry mood nosedived 4% with sensex crashing by 541 points and investor losing over Rs 1.6 lakh crores of wealth in one single day. It is interpreted that some of the loss is due to global phenomena. Stock exchange in China lost 5% a day earlier so was the loss suffered in Wall Street on the same day. But the fact remains that there is nothing in the budget for industry to cheer. The year 2007-08 will mark the beginning of the Eleventh Plan.

This year’s budget is focusing more on the fundamentals. Education, healthcare, rural sector, agriculture and to a lesser extent infrastructure issues have addressed by the Finance Minister. One can recollect that for last couple of months since last quarter of 2006 there was lot of discussion on the theme “all inclusive growth”. There were seminars after seminars including the one organized by FICCI where two Nobel laureates and some leading economists came and addressed the delegates talking about the need to deliver the fruits of globalization to those who are now not included. It has been argued that there is about 300 million population who have to be brought into the main stream development process. While economy is growing at a healthy rate of around 9 % this section of the population were not the beneficiary and therefore whether such urban centric growth will be sustainable was the question being addressed in the Planning Commission. The outcome of the budget as I can see has greatly been influenced by those thoughts and therefore FICCI has reason to be happy about seeing the social issues that have been addressed.

Agricultural growth rate at around 2.3% is rather low as against the desired level of 4%. The budgetary measures such as irrigation, farm credit, ground water resources, certified seed plantation crops and subsidies to small and marginal farmers as well as death and disability insurance cover to the rural landless will definitely help. Finance Minister also indicated expeditious implementation of infrastructure projects being set up thorough public-private-partnership (PPP) model. He also announced two ultra mega power projects in addition to finalization of plans for the next phase of the National Highways Development Programme. Budget has also done well on the primary and vocational education sector. Strengthening of the Sarva Shikashya Abhiyan will definitely help to broaden the net of primary education. Similarly increased allocation to the health sector including some measures to achieve zero-level growth of HIV/AIDS and Drinking Water Mission will improve the quality of rural life. The peak rate of custom duty has been reduced from 12.5% to 10% which will ease global supply into the Indian market and will force local producers to be more competitive. The central sales tax (CST) for inter-state movement of goods has been reduced from 4% to 3% as per commitment. This will be reduced every year by 1 % till it is finally withdrawn which is an attempt to bring in uniform tax regime and do way with complexity in tax structure and for wider implementation of VAT regime. With the reduction of CST, goods will be cheaper. Government has also attempted to address the issue of inflation which is around 6% now. In the pre-budget period the price of motor spirit and high speed diesel has been reduced to contain the spiraling price rise particularly for daily food and grocery items. The increase in spend in education is to the tune of 32%, on health by 22% and farm credit has gone up by 28%. These collective measures on agriculture, infrastructure, education, inflation and health with emphasis on rural sector will have their beneficial impact on the industry in general and processed food industry in particular.

The primary issue the food industry is facing is to make processed food product affordable to a wide section of the consumers which is only possible if the price is brought down to an acceptable level. Time and again we have seen whenever the price is reduced the volume went up exponentially. And price cannot be reduced without bringing the cost down proportionately. The measure the budget attempted to address should bring down the input price of raw material. Education should help employment and therefore growth in income. Retail sector alone is looking for a huge number of educated youth for working in retail outlets. Hence consumption expenditure should also increase. This helps the food industry.

If we come to specific measures for food industry it will appear to be nothing. The measures like excise duty exemption for all kind of food mixes including instant food mixes is not of great significance. This is a small industry. Only recently MTR got acquired by a Norway based company as MTR was going through difficult phase. The excise duty exemption will now benefit this multinational. The edible oil sector will benefit from the custom duty reduction as well as from removal of special countervailing duty of 4 %. Similarly reduction of duty on plastic will help lowering the prices of packaging material which is a welcome scenario.

The custom duty on food processing machinery has been reduced from 7.5% to 5 %. This will make imported machineries still cheaper and technological as well as capacity up-gradation much more feasible.

The low priced biscuits variety can now become cheaper. Budget has provided the excise duty exemption for the biscuits whose retail selling price does not exceed Rs 50 a kg. According to me, only unbranded biscuits and glucose biscuits will come under this category. As such the margin on glucose biscuit is low and that constitute the bulk of the sales volume for the biscuit companies including the large organized players. I am therefore, afraid that big brands may not reduce the price but keep it same instead to improve the bottom line profit of their business.

Finance Minister could have reduced the duty and tax burden drastically in this budget to fuel growth in addition to whatever measures which are fundamental to economic growth that he addressed. He has therefore, lost a big opportunity. Possibly he has to look at the revenue earnings for the government to take care of many social sector needs and therefore could not go for any drastic reduction in corporate tax as well duty cuts. He also has to perform a balancing act in the budget. But this year’s budget also will cast possibly the mood of future budgets. And if agriculture sector performs processed food industry will also do better. Given strong fundamentals, industry now has to fight it out for survival and growth. I therefore would like to call it a growth oriented budget.

 

-- This article was first published in "Processed Food Industry" monthly magazine.

 

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