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Friday, Jul 09, 2004

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The jam in the Budget

R. Subramaniam

WITH all the freebies thrown in to attract investment to food processing, one hopes to see significant investment and more importantly, lower prices in processed foods.

The Indian processed foods industry, leaving aside Maggi, soft drinks and Lays chips, has hardly grown, caught in a vicious cycle of low investment, high prices and low consumer acceptance. Also, the industry has been repeatedly complaining that the kind of produce that the Indian farms come up with, horticulture especially, is not fit for processing. With significant sops in taxes and overall thrust on agri-produce marketability, there is hope that this will change, but, of course, the Government can only do so much. It can create the right and conducive conditions for investment but it is for industry to discover the magic point where demand meets its product offerings.

The significant thing — VAT — had already been committed. If this goes as reiterated in the Budget there would be significantly freer flow of goods and increased competition and likely lower prices for products where there is not much value addition, such as edible oils, due to the taxes moving into a value-added mode. Given the April 2003 fiasco, let us keep our fingers crossed on this and also hope for a comprehensive VAT roll-out.

There was not much to expect otherwise. Prices of FMCG products are high more due to the monopolistic/semi-oligopolistic nature of the industry rather than due to high tax levies, which is evident from the fact that categories such as detergents and toothpastes have seen falls in prices — steeply, in real terms — on competitive activity. One hopes that the 2 per cent cess will remain pocket change and be absorbed by the manufacturers in the current high competition environment rather than be passed on to consumers!

With the FMCG industry having achieved high penetration in various categories, growth in core urban markets is going to be driven not by sale of essentials such as soaps or detergents or shampoos (how many more of these are you going to use?) as incomes rise but rather by increased sale of non-essentials, be it cosmetics (more aptly, personal grooming products) or processed foods. These are the lifestyle and highly income-elastic products which can drive FMCG.

Given the nascent stage that the processed foods industry is in in India, growth can be explosive for the companies that hit the sweet spot; just see what Maggi did to Nestle all through the period when every other large FMCG company was crying wolf about no growth. With a huge base of fruits and vegetables produced locally there is no reason why a knife soon won't be used — in the metros of Shining India — to open packs of processed food to microwave rather than to cut vegetables!

(The writer is Director of Subhiksha, the Chennai-based discount retailing chain.)

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