Budget 2011: Companies with rural thrust to benefit

This budget proposes a minor increase in annual disposable income by Rs2,000 for most individual taxpayers.

While this may disappoint urban consumers, a significant thrust would stoke demand in rural India — the proposal to increase credit outlay to farm sector in 2011-12 by Rs100,000 crore and offer an additional 1% farm loan subvention. Farmers will benefit from the combination of increased credit availability and lower credit cost.

Lastly, the NREGA wages indexed to CPI for agricultural labour will result in higher outflows to the beneficiaries. This will also have a cascading impact on wages in rural India.

The budget has been a mixed bag for consumer product companies.

The 9% real GDP growth forecast holds out significant growth in income and hence demand for products and services. However, the current inflationary environment would mean higher input costs and hence lower profits. The corporate tax surcharge is proposed to be reduced from 7.5% to 5% leading to a minor reduction in tax payout.

This will help most consumer firms who are faced with shrinking profitability in the current high inflationary environment. Select consumer durables categories such as mobile phones, ink jet and laser jet printers will benefit from the lower customs duty rates on components.

The overall proposal to retain the standard central excise duty rate at 10% is a relief for most companies in the sector. The proposal to enhance the lower rate of central excise duty from 4% to 5% will result in a range of processed food and miscellaneous consumer products becoming marginally more expensive.

The much speculated FDI (foreign direct investment) in multi-brand retail was not announced. The only budgetary proposal that has an impact on the retail sector is related to the cold chain infrastructure. The budget proposes to make capital investment in creation of modern storage capacity eligible for viability gap funding. Infrastructure status provided to cold chain investments will give the investor corporate tax benefits on the investment.

In summary, consumer product companies focused on the rural sector are likely to benefit the most.
Pankaj Gupta is practice head - consumer & retail, Tata Strategic Management Group