The Indian FMCG industry has been faced with black swan events in recent times, which might prove to be obstacles for some and opportunities for others. The demonetisation announcement of Nov 8th saw 86% of the currency exit the market overnight. However, resilient Indian consumers, manufacturers and trade in general adjusted rapidly, resulting in a timid impact of around 1.5% on overall FMCG sales in the months of November and December 2016. Cushioning the fall was the stock level in trade pipelines that continued to feed the robust consumer demand, despite the temporary drop in shipments.
Notwithstanding the constant flux, the FMCG industry has continued to grow well with manufacturers and retailers adapting to change with nimbleness. There has been widespread growth in the FMCG sector across all population strata. The macroeconomic trends also seem to be in the same direction with prediction of a good monsoon, low food inflation levels, the 7th Pay Commission announcement of a 23.5% (approx.) hike in Income for central government employees and pensioners and higher outlay commitments for MGNREGA.
GOODS AND SERVICES TAX
Economists and business strategists agree that the GST will increase compliance with tax regulations. The GST mechanism has a self-policing impact, so the entire value chain will be incentivised to be GST-compliant.
Of interest is the short-term impact, the medium-term (“settling-in” period) and the long-term steady state.
In the long-term, with uniform taxation for the whole country, inter-state movement of goods will be facilitated, resulting in a major change in sourcing and supply chain infrastructure and consequently, greater efficiencies.
The new regime is likely to improve efficiencies and lower cost of production for a majority of FMCG products. However, the unorganised market and the wholesale sector are likely to face challenges during the implementation in the short term.
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