FMCG yet to pass on excise cuts to customers

While auto makers were quick to slash rates, FMCG and consumers durable companies were not sure of passing on to customers the benefits of duty sops announced by the government (in India).

Key FMCG players did not favor price cuts immediately as a major part of their manufacturing is undertaken at excise-free zones like Uttaranchal and Himachal Pradesh. Thus, the impact of excise duty reduction will depend on the ratio of manufacturing at excise free zones and production at non-excise free zones. An FMCG expert said the government has provided an environment to bring down prices and industry must respond positively by passing it on to consumers. A spokes person of another major FMCG who did not wish to be identified said, they will have to work out the impact and it is too early to say anything.

Almost all FMCG products fall in the three excise slabs where duties have been reduced. One could expect a marginal impact of the same on prices of products. Marico director says, since most of their manufacturing is at excise free zones, there will be no direct impact on pricing. The government’s move could spur demand and growth in sectors where manufacturing is done closer to consumer markets, such as bottling plants.

While the move is welcome, the FMCG manufacturers have to study and assess the exact impact and then decide if there is any price reduction to be passed on to consumers. FMCG companies will need to assess the impact in terms of cost benefits.

In the union budget for 2008-09 the finance minister had announced a 2% reduction in the peak level of excise duty to 14% on soaps, shampoos, hair products and color cosmetics. At that time the industry was reeling under the impact of rising costs of commodities which is why no major price reduction was passed on to consumers.

Even through the economic stimulus package aims to spur demand the consumer durable industry feels it is early to talk of price cuts as the overall mix has to be assessed. The companies are still assessing the impact. If manufacturers are willing to reduce prices and interest rates come down demand will go up, especially in case of consumer durables. Also, this is the season when people take time off to make purchases.

Since the durable industry is reeling under high input costs, there is unlikely to be a price reduction. Not all players are healthy in the consumer durable industry. The dollar has strengthened against the rupee, which has made imports of key machinery costlier. Despite the escalation in costs no price correction has been taken after the Indian festival season.

For the consumer durable industry it is a welcome move. The durable industry has been under enormous pressure on profitability despite top line growth.

Marginal impact on retail prices:

The excise duty cut applies to all manufactured goods except petroleum and those where the current rate is less than 4%, If manufacturers do pass on the cut a big if ex-factory should come down by 4% but retail prices are likely to decline less since over heads and other post production costs would not be affected. In a sort of mini budget, excise duty has been cut on all manufactured goods, except petroleum and those where the current rate is less than 4%.

The lower rates would improve the viability of projects. It is hoped private companies which had shied away because of high interest rates, would now show interest in implementing PPP infrastructure projects. If that happens, it would boost demand for steel, cement and other items. It would provide fresh employment opportunities for lakhs of unemployed. However, for the projects to have the desired outcome, IIFCL might have to act fast.