The new NDA-led government presented its first union budget to a backdrop of huge expectations. Challenges such as obstinate GDP growth of less than 5 per cent for two consecutive years, persistent economic uncertainty globally, economic slowdown impacting the demand for exports as well as a low manufacturing base and high inflation had all contributed to a major slowdown in India’s retail sector.
The new government in power had limited time to present a budget with firm solutions. By identifying limited room for the fiscal plan, the government chose to present a budget with interim measures that the nation required at this juncture of economic instability:
For the retail sector, we rate the budget as follows:
- Impact on the consumption story: Positive
- Impact on overall prospects for retail: Neutral
- Impact on specific segments of retail: Positive for retail real estate developers, footwear, textiles, MSME suppliers, jewellery, electronics retailers, but negative for manufacturer retailers of imported phones.
- Impact on retail real estate: Positive
Measures And Impact On Retail Sector
For the retail sector as a whole, there is some (albeit indirect) good news. The tax breaks to consumers (raising the minimum threshold for tax, increase in the deductions for housing loans and under section 80C for investment income) will boost consumer sentiment. Increasing the tax exemption limit by Rs 50000 for taxpayers who are below the age of 60 years is positive for the FMCG sector, as rise in income will allow more discretionary income in the hands of consumers.
The policy direction on GST being implemented in FY15 is good, and reiterates that it will indeed come to pass. Retailers who had put their preparations on hold in 2013 will take notice and start to change systems and processes as part of their strategic priorities for FY15.
The budget has paid due heed to food inflation. To mitigate price volatility in agricultural produce, it set aside a specific sum for establishing a Price Stabilisation Fund. The announcement that the Central Government will work closely with the State Governments to re-orient their respective APMC Acts can help remove bottlenecks in the supply chain and help achieve food price stability. The Government, when required, will now also undertake open market sales to keep prices under control. Organized retail will benefit from this, as will the consumer.
Additionally, the focus on warehousing and the investments into this vital segment will help the retail sector. With the warehousing sector receiving Rs.5000 crore, the sector will witness strengthening of supply chain network in the country, which has been a major requirement for this sector for a very long time. The measures that the budget has undertaken will improve post-harvest storage and reduce damage to produce, and boost the expansion of processing capacity of retail warehousing. The reduction in excise duty on specified food processing and packaging machinery will further enhance investment in processed foods.
The focus on skilling is also important for retail. The ‘Skill India’ initiative will enhance the structural programs already underway and benefit retail by generating more qualified manpower for the sector.
The budget has provided added focus on the MSME sector by the setting up of a high-level committee which will interact with trade and industry on regular basis to ascertain areas requiring clarity in tax laws. This will benefit retail suppliers. FDI-funded manufacturing units will now be allowed to sell their products through retail, including e-commerce platforms, which brings renewed clarity to retail marketplace.
The real estate sector is likely to see increased capital infusion on account of the clarity of the tax treatment of REITs. This will help enhance commercial capacity for retail real estate. In order to further encourage real estate development, FDI investment norms in terms of minimum required area for development has been lowered from 50,000 sq. mts. to 20,000 sq. mts. This is a big positive for retail, since a number of smaller projects, neighbourhood centers, and smaller cities will now be able to draw the attention of retail funds.
As promised in the new government’s manifesto, the creation of 100 smart cities across India has been proposed. The budget has allocated Rs. 7,060 Crores towards this end, thereby giving a financial sign-off for this concept. Some of these will be development of satellite townships across major metros, and this will give a further boost in developing these cities and make them ready for modern retail.
Segment-Wise Impact
- Footwear: The footwear retail segment will benefit in terms of growth in margins on account of the reduction in excise duty from 12 per cent to 6 per cent on the retail price of branded footwear price-tagged in the range of Rs. 500-1000.
- Packaged Foods: The reduction in excise duty for specified food package industry from 10 per cent to 6 per cent should benefit manufacturer retailers of packaged foods.
- Aerated Drinks: The additional 5 per cent excise tax to be levied on cold drinks is a negative from a consumption perspective. Whether this added cost will be passed on to the consumer or be diluted by promotional offers remains to be seen.
- Telecom Products: The levy of 10 per cent basic customs duty on telecom products will discourage imports. India is a major market for imported telecom products like phones and tablets, and this levy could result in increased prices of imported smartphones and tablets. This will have some impact on the product mix of specialty telecom retailers.
Overall, the biggest aspect was that this was not a populist budget, but that it took a ‘bottom up’ approach that does not propose big-bang reforms but reiterates and expands on the key messages that the new government has been pushing since it assumed office.
About the author: Shubhranshu Pani is the Regional Director – Retail Services, JLL India
