Union Budget 2025: FMCG industry calls for tax reforms, rural growth incentives, and quick commerce support

The FMCG industry is emphasizing reforms that could help tackle urban consumption slowdown, strengthen rural markets, streamline taxation, and enhance manufacturing capabilities.

By
  • Indrani Bose,
| January 22, 2025 , 8:41 am
Tax reforms remain a key ask across the board.
Tax reforms remain a key ask across the board.

With the Union Budget 2025-26 around the corner, the FMCG industry is emphasizing reforms that could help tackle urban consumption slowdown, strengthen rural markets, streamline taxation, and enhance manufacturing capabilities.

Shivaraj Jayakumar, Practice Leader, Consumer & Internet at Praxis Global Alliance, highlights the importance of introducing higher income tax exemptions to boost disposable incomes. “Indian economy is facing a slowdown. The Q1 and Q2 GDP data have not been encouraging, and the net GST collections have grown by 3.3% YOY. With consumption accounting for over 60 percent of India’s GDP, boosting disposable income is critical to reviving demand. Relaxing the basic income tax exemption limit under the old regime from INR2.5 lakh to INR3.5 lakh could lead to higher disposable income. A 5-7% increase in disposable income for middle-income households could lead to a 6% rise in consumer spending on FMCG, capital goods and other essential goods.”

To address declining mass-segment consumption, Jayakumar also suggests reducing GST rates on mass-consumption FMCG products. He proposes cutting GST on personal care and packaged foods from 18% to 12%, which he believes could stimulate an 8% increase in volume sales of mass-market FMCG products. This, in turn, could lead to higher tax collections from increased consumption and contribute a 0.5% boost to GDP.

The need for targeted rural development incentives has been echoed by several industry leaders. Jayakumar highlights the potential of rural markets, which account for over 35% of FMCG consumption. He expects the government to allocate INR 10,000 crore to an FMCG Rural Growth Fund to strengthen rural distribution networks and offer tax rebates for companies investing in affordable rural product lines. “A 10% growth in rural FMCG sales could contribute an additional INR 50,000 crore in annual revenue for the industry,” he says.

Manish Anandani, Managing Director of Kenvue India, emphasizes that rural markets have emerged as the “nerve centers of growth” despite tough times in urban areas. “We look forward to continued infrastructure investments, digital advancements, government-led rural employment schemes, and targeted allocations for rural distribution networks to accelerate this growth momentum. With enhanced public spending, focus on fiscal stability, and tax reforms, one can unleash growth for the FMCG sector and fuel sustained economic development to navigate global challenges.”

Saugata Gupta, MD & CEO of Marico Limited, adds to this by highlighting the importance of strengthening rural distribution networks, technology upgradation, and infrastructure development. “These measures will bolster the rural agricultural and non-farm economy, enhance rural consumption, and directly and indirectly create new job opportunities.” Gupta also stresses the role of private-sector investments in infrastructure in driving job creation, productivity, and economic growth.

An expanded Production-Linked Incentive (PLI) scheme has also garnered support from the FMCG sector. Shivaraj Jayakumar suggests extending the scheme to consumer goods like home appliances, personal care products, and small consumer electronics. “An expanded PLI scheme will bolster India’s domestic manufacturing capacity, reduce import dependency, and address demand-supply gaps. It is projected to attract substantial investments in the sector, drive industrial output, and create over 1 million jobs within five years.” Gupta echoes this, stating that supporting MSMEs and easing their credit access is crucial for India’s economic growth.

Tax reforms remain a key ask across the board. Aasif Malbari, CFO of Godrej Consumer Products Ltd., believes rationalizing GST rates on essential FMCG products and lowering oil import duties could uplift the consumption economy and drive sustained growth. Similarly, Saugata Gupta stresses the need for tax relief measures for middle-class and salaried segments to enhance disposable incomes, which would translate into higher demand and economic activity.

Sustainability is another priority for the industry. Jayakumar advocates for introducing a 150% weighted tax deduction on R&D expenses for FMCG companies innovating in sustainable packaging and health-focused products. “Enhanced R&D incentives would promote innovation, creating premium and sustainable product categories with higher profit margins.” Sanjeev Asthana, CEO of Patanjali Foods Ltd., calls for government support in promoting Indian food and ethnic products, which he says would not only boost the sector but also celebrate the nation’s culinary diversity.

The rise of quick commerce has also drawn attention. Jayakumar suggests regulating quick commerce practices to curb predatory pricing and ensure fair trade practices. “This will safeguard the livelihoods of over 30 million Kirana stores and 8 crore small retailers and distributors, which are vital to India’s retail ecosystem. A level playing field will promote sustainable competition and ensure transparency, strengthening consumer trust in e-commerce.”

Role of Quick Commerce in FMCG Growth and GST Challenges

The rise of quick commerce players, which are critical to the FMCG sector’s growth, has also brought to light unique challenges faced by startups in their growth phase. These companies are spearheading India-led solutions for faster delivery of essentials, formalizing employment, and enhancing consumer convenience. However, access to working capital remains a significant hurdle.

Ramesh Bafna, CFO, Zepto highlights the struggles that startups encounter in managing liquidity due to early-stage losses and limited access to affordable credit. “For startups in their growth phase, access to working capital is vital. Yet, traditional financial institutions often hesitate to provide credit at attractive rates, given the typical early-stage losses as startups invest in technology and processes to achieve product-market fit. A hidden but untapped source of liquidity lies in the GST input tax credits, which remain locked until profitability is achieved. This creates a counterproductive cycle, tying up funds that could otherwise fuel growth.”

To address these challenges, Bafna proposes solutions to unlock liquidity through reforms in GST credits. These include:

Unlocking GST Credit for RCM Payments: Permitting the use of input tax credits for Reverse Charge Mechanism (RCM) payments, reducing cash outflow burdens.

Cross-Utilisation of GST Credits: Allowing IGST and CGST credits to be utilised across group companies, freeing up cash flow for larger ecosystems.

Tradable GST Scripts: Introducing a tradable GST scripts mechanism through a GST exchange, enabling startups to sell scripts at a discount for immediate liquidity.

Assessment and Refund Framework: Developing an annual assessment framework for GST credits, similar to direct taxes, to enable timely refunds for startups.

These reforms, if implemented, could significantly improve the liquidity of quick commerce startups, which are integral to driving last-mile FMCG consumption.

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