In the last couple of months, the retail sector has shown several signs of recovery, with business at the same levels due to the pandemic, and is aiming for a complete revival on all metrics. However, with the sudden rise of the third wave, several concerns have again started to bother the retail industry. Given the current scenario, the industry expects the government to make the right decision that will not only get them through these times but also ascertain a complete revival of the sector.
For instance, according to the Retailers Association of India (RAI), the retail industry achieved 96 percent of the pre-covid sales in September 2021, driven by the rising demand from consumers. Experts believe that the increasing purchasing power has led to growing demand.
Consequently, the government ought to take actions, bring measures or programs for the sector that may further impact the growth in the consumption, or at least not let the consumption go down to the pre-September levels.
Harsha Razdan, Partner and Head, Consumer Markets and Internet Business, KPMG in India agrees with the same, saying, “Considering the overall dip in consumer sentiments, we could expect the Budget to focus on stimulating consumption by providing disposable income in the hands of the consumer, job creation and augmenting public spending, whilst maintaining fiscal discipline.”
Current Challenges To The Sector
Apart from the focus on maintaining consumer demand, there is a need for careful consideration of the factors that have long held the sector back.
“The abnormal surge in the price of raw materials, which started increasing over a year ago, has cast a shadow on revenue forecasts and continues to pose a grave challenge for companies," said Dinesh Chhabra, Chief Executive Officer, Usha International.
Further, Chhabra added, "In addition, supply-chain logistics issues are also adding to the burden for businesses. For a brand, uncompromising in their quality business becomes unviable, unless the part of the price rise is passed on to the consumer. This rise in prices is impacting consumer spending, adversely affecting the recovery and growth of our economy.”
Parag Kulkarni, Managing Director, A. O. Smith India added, “The consumer durables industry has faced challenges with raw material costs for more than a year, and we are optimistic that the Union Budget will help reduce cost pressures for manufacturers and improve affordability for consumers. The budget may also look at reducing taxes on eco-friendly and energy-efficient products, which could help drive demand and increase consumer adoption of sustainable products."
Increased material costs of production and logistical challenges seem to be some of the common challenges that the industry is facing. The government is expected to keep these factors in mind while devising the budget for the year.
Last year though there was no major change in terms of income or corporate taxes, there was no additional tax burden as well which was expected on the account of the second Covid wave. This year the retail sector expects more given the sustained damages in the last two years.
"Reducing the overall tax burden and simplification of compliances could be the twin objectives the sector is looking forward to. Providing additional tax deductions on investment in retail infrastructure, higher depreciation on capital goods used in the sector, allowing input GST for all marketing expenses including free samples, marketing collaterals, etc. are some of the areas that could be looked at," Razdan further stated.
Parag Kulkarni, Managing Director, A. O. Smith India said, “The consumer durables industry has faced challenges with raw material costs for more than a year, and we are optimistic that the Union Budget will help reduce cost pressures for manufacturers and improve affordability for consumers. Water purifiers and water heaters have become essential household items. We expect the budget to help rationalize tax rates on these consumer durable items, increasing the popularity and need for these products in India."
Ramesh Kapoor, Chief Financial Officer of Numero Uno also shared his views: "For products up to Rs 1,000 MRP, retaining 5 percent GST will benefit everyone in the society as this will help maintain the prices under control without compromising on the quality. In these challenging times, it is crucial to balance everything well. Hence, 5 percent GST for Rs 1,000 MRP products can do wonders for everyone."
"GST has centralized India’s tax system; therefore, adding fuel a part of it will lower the prices that can help customers to get products at better rates and will help in keeping inflation under control. For a fashion brand, getting cotton and other raw materials at a better rate will push businesses to handle the manufacturing part well," Kapoor further added.
In fact, in the modern Indian retail industry, which is expected to grow at a 15 percent CAGR to reach 18 percent by 2025, the three major retail categories that are driving the growth are apparel and accessories (18 percent retail penetration), consumer electronics (6 percent retail penetration) and home and living (6 percent retail penetration). For further growth in the sector, these categories need not only the direct benefits in terms of taxes, but incentives through indirect means.
“We believe that the budget needs to focus more on value creation, including special incentives and subsidies for consumer electronics and component manufacturing. We all agree that India has strong goodwill in the world market. The country will have immense growth opportunities by taking advantage of innovative new technological aspects that facilitate the lives and governance of its citizens. We want a stronger impetus for reinventing the Digital India campaign with better reach, faster, more efficient technology, and a planned schedule,” said Mandeep Arora, Managing Director, UBON.
“Currently, GST paid on construction of buildings/ showrooms used for retail is not allowed as deduction/ credit and hence becomes a part of the overall cost. Any respite/ relaxation on such blockage may be the right ameliorative step which the industry needs,” Razdan further added.
What of the Retail Trade Policy?
A National Retail Trade Policy, which is said to be in the final stages over a year now, is said to be soon shared for public consultation. The policy will cover multiple areas such as ease of doing business, streamline compliances on retail businesses under a single umbrella. Actually, the retail trade in India is governed by many laws: the Shops and Establishments Act, Competition Act, Consumer Protection Act, Essential Commodities Act, and the Legal Metrology Act, etc. Additionally, retailers may need to obtain 16 to 25 licenses to open a store in many cases.
A large number of laws, compounded by state-level variations in implementation, create immense complexity for retailers, especially those with a pan-Indian footprint, according to a report by industry body CII and consulting company Kearney. The trade policy is likely to address those changes by putting forth a more simplified approach.
Razdan stated, “Recently, the government has informed parliament that it proposes to have a national retail trade policy. The policy objectives are slated to increase employment, accelerate investment, bring infrastructure development, and usher growth in the Indian economy. Preparation of a draft national retail trade policy is a step forward and public consultation is also likely to begin soon. The industry sincerely hopes for the national retail trade policy to become a reality sooner than later.”