FMCG Sector Counts On Tax Cuts To Fast-Track Recovery This Festive Season

The Centre's proposed reduction in GST rates is expected to spur demand for categories such as packaged food and daily essentials, raising hopes for a quicker recovery of the fast-moving consumer goods industry.

Under the proposal, the existing 12% and 28% GST slabs will be scrapped, leaving only the 5% and 18% slabs. Food and beverages currently taxed at 12% could move to the 5% slab if the proposal is formalised, reducing the tax burden on several mass-consumption and daily essential items like edible oil, branded rice, butter, ghee, instant noodles, juices, and dry fruits. Home and personal care categories, however, could see limited price benefits since most of these goods fall under the 5% and 18% tax slabs.

"So, for products that end up with a lower GST rate, we'd invariably pass on those savings directly to consumers through price cuts," Mayank Shah, vice-president at Parle Products told NDTV Profit. "That, coupled with favourable macros, in turn, would help boost consumption even more."

Smaller packs priced up to Rs 30 could see an 8-10% increase in grammage, while bigger ones priced at Rs 50 and above would see about a 5-7% reduction in their sticker prices, according to industry executives.

"Most of our core products like ghee, butter and cheese are expected move down to the 5% slab, benefitting both consumers and producers," said Jayen Mehta, managing director at the Gujarat Co-operative Milk Marketing Federation Ltd, which markets dairy products under the Amul brand. "Take for instance a 500 ml pack of butter priced around Rs 300, a GST cut to 5% would result in a straight MRP reduction of around Rs 15."

High tax rates have kept the consumption of ghee— which is the second largest dairy product after milk— confined mostly to the unorganised sector. "But with the lower GST coming in, it should help change that with people consuming more branded and better-quality ghee," Mehta added.

After months of sluggishness, companies are now expecting a gradual demand recovery aided by easing inflation, good monsoon, sustained momentum in rural markets and some green shoots in urban demand. Kirana stores have also been stocking up more ahead of the festive season, lifting sales of staples to chocolates. The expectations of tax cuts by Diwali, set to celebrated in October, could further boost consumption.

Krishna Khatwani, head of sales, Godrej Consumer Products Ltd. believes rationalisation of GST slabs has the potential to unlock demand across segments. "In urban centres, we could see consumers upgrading more easily to premium formats as affordability improves. In rural, we would look to pass more value to customers through lower price points or higher volume for the relevant categories... This could accelerate trials and category adoption, further improving volume growth for the industry."

Manish Aggarwal, director, Bikano, Bikanervala Foods Pvt., echoed similar sentiments. "A more simplified and rational GST structure will provide much-needed relief to the FMCG sector, particularly for companies like ours in the packaged foods and snacks space where margins are under pressure. We look forward to further clarity on the revised rates."

"The potential reduction in GST would mean more purchasing power in the hands of consumers," said Ritesh Arora, CEO - India Business & Far East, LT Foods Ltd. "Moreover, during festive season, consumers usually increase their discretionary spending, so a more affordable price point would drive higher offtake. This can also lead to new trials, driving volume growth."

Analysts say that listed players like Gopal Snacks, Nestle India and Dabur are expected to benefit the most from a GST-driven demand boost.

"If the tax rate reduces to 5%, Bikaji (80% of revenue) and Gopal Snacks (85% of revenue) are likely to benefit; Nestle India will see tax reduction in about 30% of its portfolio (instant noodles, pasta, and ketchup)," according to an Emkay Securities note dated Aug. 17.

Dabur will see partial benefits, especially in their beverages and Chyawanprash segments, which make up about 23% of their India revenue. Then, ITC, with around 11% of its revenue coming from the 'other FMCG' segment—things like noodles, juice, and dairy—might also gain. Britannia, whose dairy and wafer products account for less than 5% of India revenue, could benefit as well. Additionally, Marico and HUL are likely to benefit as well, although their share of revenue in this context is limited.

In the home and personal care space, most products are taxed at 18% GST. But there are some exceptions: hand wash and toothbrushes are at 5% and sanitary pads are nil — which are likely to stay that way. Baby care is 12% now, potentially moving to 5%, while mouthwash is 12%, possibly moving to 18%. "As such, direct benefits for HPC companies are expected to be minimal," noted analysts at Emkay.