Nothing to cheer about

Qualms regarding inflation, horrifying recession in the West and a slowdown in the Indian economy are the three demons that are evocating the Indian consumer.  And as the consumer refuses to loosen their wallet strings, small- and medium-scale retailers have faced the wrath of it.

From this year’s Union budget, retailers expected VAT (value added tax) and sale tax to be abolished. But in this year’s budget VAT and sale tax has not been abolished, but some tax incentives have been given. Now retailers are expecting higher disposable income in the hands of consumers as a result of tax benefits announced in the budget would spur consumption.

Organized retail players are a disappointed lot with no mention of the sector being made in the Budget 2009-10 by Finance Minister Pranab Mukherjee on Monday, 6^th July, 2009, but said tax incentives and development programmes will spur consumer spending.

“Unfortunately, the budget has not met our expectations of the tax release for the retail sector. On the personal tax front also, while surcharge has been done away with, loading of tax on perks in lieu of FBT (fringe benefit tax), might dampen the spirits,” said Rajesh Jain, Chief Finance Officer, Yo China.

The retail industry is disappointed as there was no mention of either Foreign Direct Investment (FDI), or industry status for retail, despite recommendation by the Economic Survey a week before the unveiling of the Budget to allow FDI in multi-format retail.

"The Union Budget 2009 includes measures that aim to leave more money in the hands of consumers (tax exemption limits for women and senior citizens are being increased, the surcharge of 10 percent on personal income tax will be eliminated) which will hopefully result in increased consumption,” said Mr N. V. Sivakumar, Leader, retail practice, PricewaterhouseCoopers India.  Select segments within the retail and consumer sector (such as branded jewellery, cold chain companies, manufacturers of some consumer durables) will witness some relief with duty elimination/reductions, as appropriate.  Participants in the retail and consumer sector that hoped for an increase in the FDI limit, the according of industry status and a rationalization of taxes may be disappointed; that said, some of the Budget's positive measures include tax incentives for setting up infrastructure of cold chain facility/ warehouse, GST introduction from 1 April 2010 and the abolition of FBT, added Sivakumar.  This Budget takes a moderate tone that is set towards maintaining stability, inclusive growth, development and fiscal responsiveness," added Sivakumar.

The fact that India Infrastructure Finance Company (IIFCL) will be given more flexibility and has been authorized to raise Rs 100,000 crore in for the development of the infrastructure sector is an indirect boon to the real estate industry. “Of late, an increasing number of infrastructure projects have a real estate component by virtue of a cross-subsidization principle. Therefore, boosting infrastructure projects gives an impetus to real estate, as well,” says Anuj Puri, Chairman & Country Head, Jones Lang LaSalle Meghraj.  “No mention was made on the undoing of service tax on rentals which were introduced in the previous budget. This is not going to improve the status in terms of commercial and retail leasing,” added Puri.

GST will assist companies in the retail sector to rationalise their distribution centres, leading to cost and supply chain benefits. A uniform GST would enable big retail players to manage product distribution across India through fewer distribution centres. At present, most modern retailers have a distribution centre in every state.

With concession for rural consumer as well, retailers could figure out a deeper penetration strategy to tap growth in rural area. Retail industry is already expanding into tier II and tier III towns. There is definitely a growth opportunity beyond urban markets, which one needs to tap on.

“The budget has positive question for the economy for the mid – long term where as in the short term, the budget is cautiously optimistic given the global economic environment consideration and therefore the right assessment will be the terms of consolidating business operations and performance level this year while retaining expectations of more pronounced reforms and revenue measures during the next year,” said Mr. D.K Jairath, COO, Hindware Home Retail.

Mr Jairath also added that FDI policy and other major bold initiatives for the retail sector and for the economic growth in general is only expected to happen in the eve of the next budget. In the meantime, the government has to delicately manage the severe concern on high fiscal deficit of 6.8 per cent planned this year in terms of managing higher government expenditure outlet and revenue receives.

“This is a consumption-encouraging Budget and is therefore quite positive in its intent and impact. Its various provisions will lead to an increase in the disposable income and higher purchasing power in the hands of the people, which will in turn, drive both necessary as well as conspicuous consumption,” said Mr.  Mehul Choksi, Chairman and CEO, Gitanjali Gems Limited.

For the jewellery industry, the extension of tax exemption on export profits by one year is a  very welcome relief because it will allow the industry to cope with the current downtrend and its fallout. The extension of interest subvention by six months is also going to have a favourable impact on the industry, added Mr Choksi.

In summary, the Budget will through direct and cascading measures have a positive impact on consumption and drive demand. On the negative side, the budget lacked the fizz element; it failed to titillate the retail industry in general, as issues on FDI and disinvestment were left untouched. But still   retailers are optimistic that tax deduction and other allied benefits will increase the purchasing power of the consumer.