1 Year of Modi Govt: Auto, BFSI, FMCG, Retail poised to grow but face policy paralysis
We take a look at the progress and setbacks in automobiles, BFSI, FMCG and Retail under the Modi government
The new NDA government with Prime Minister Narendra Modi had made many promises on the growth of economy at a time when it was at its lowest. This had brought about optimism to the economy and even global credit ratings agencies as well as global organizations had started looking favorably towards Indian economy, predicting that India would be the fastest growing economy in the next couple of years. However, the 7% plus growth predictions of India are based on the implementation of certain key policies and the growth of certain sectors in particular. In a previous on exchange4media we had seen some of the key sectors that would influence the growth of the Indian economy in particular. We take a look at four key sectors i.e. automobiles, BFSI, FMCG and Retail and the progress under the Modi government.
The automobile industry has been ailing apart from the December end quarter where it saw a small spike in sales. According to the Society of Indian Automobile Manufacturers (SIAM) the growth expectations in the passenger car sales has in fact been reduced to around 1% from the range of 2-4% earlier. The reason for the growth in sales in December was as a result of the 4-6% excise duty cuts that ended that month and as a result saw people buying to beat the price increase the following month. In fact prices of most automobiles have increased since then and have had an adverse effect on sales. In April the passenger vehicle sales had dropped by 9.50%, commercial vehicle sales had dropped by 24%, only two-wheeler sales were up 11.67%. In 2014 the growth in the automobile industry was 9% which was mostly due to the rise in the two-wheeler sales says the SIAM report. The passenger vehicle sales rose by less than 1% and commercial vehicle sales fell by nearly 12% in 2014.
According to SIAM the way to revive the automobile industry is the need for the government to provide some incentives. The excise duty cuts were first announced by the previous UPA government in order to boost sales of the ailing automotive industry. It was further carried on by the Modi government and had briefly seen a rise in sales during the December quarter. The end of the excise duty cut is potential growth decelerator for this industry in FY2016 according to the Accenture report India in FY2016. It says that the inverted duty structure will present further challenges. For instance, while excise duty on commercial vehicles is 8 per cent, it is 12 per cent for raw materials and engineering inputs. This is exactly what the removal of the excise duty is doing.
Another decision of the Modi government that could have bad implications on the automotive industry is the passing of the Draft Road Transport and Safety Bill put forward by India’s Ministry of Road Transport and Highways that auto manufacturers have to recall a particular model if 100 or more people report a defect. According to auto industry leaders this is a low threshold to trigger a recall and should be looked at on a case-to-case basis depending on the nature of the problem. If the bill passes automobile manufacturers will be penalized if 100 or so vehicles are detected as faulty.
On the positive side, the Make in India campaign by the Modi government has resulted in many international automobile companies investing in India. Some of them include China Electric Vehicle Consortium Pvt. Ltd. deciding to invest Rs.6.3 billion to set up an electric vehicle manufacturing facility in Sanand, Gujarat. Honda Motors looks to make its Rajasthan plant a base for supplying manual transmissions to emerging markets across Asia and Latin America. It also intends to set up the world’s largest scooter plant in Gujarat. Other international automobile companies such as Renault, Ferrari and Maserati plan to expand their operations in India.
Similar to the automobile industry growth in the FMCG space seems to have hit a rough patch. The overall consumer goods market has reduced to 7.5% in FY2015 from 10.6% in the previous fiscal year according to Nielsen data. The decline in the pace has been witnessed across urban and rural markets and covers food, home and personal care and over-the-counter products. The last time this industry had seen such a low single growth was during 2004-05 when it grew by only 8% that was due to a draught situation. This is the slowest growth for FMCG after a decade of double digit growth in the range of 15-17%. This news comes at a time when there is a bad monsoon season expected due to unseasonal rains and is expected to hit the FMCG sector the most. Farmer woes still continue as unseasonal rainfall has destroyed crops leaving them in heavy debt. This also in turn affects the spending power in rural areas which is large market for FMCG companies.
One of the key policies from the Modi government that the FMCG industry was looking for was the implementation of the goods and services tax (GST). This would remove the several taxes that these companies would have to pay which would vary from state to state across India and create a unified tax policy and would reduce their tax burden. However, the bill has been stalled and despite it being passed in the Lok Sabha it faces opposition in the Rajya Sabha. Though many sops for rural India was announced during the Union Budget such as allocating of funds for irrigation, roads and rural development schemes, a lot more needs to be seen in terms of their implementation.
RBI rate cuts, decline in fuel prices, stabilizing commodity prices and rising stock markets had helped the FMCG in the previous year to stabilize and grow despite problems faced. However, the rate cuts by RBI have been slow to come, fuel prices are again on the rise, with that commodity prices are also set to increase and finally the stock market has seen a recent slump. So all is not well for this sector and much support is needed from the Modi government for it to see double-digit growth again.
The banking, financial services and insurance sector (BFSI) sector under the Modi government has seen some changes. The government has announced lot of policies in the BFSI sector such as the financial inclusion policy, Jan Dhan Yojana, which plans to open 200 million new bank accounts by August 2015. Apart for this it has also announced many financial security schemes and pension schemes in order to boost household savings. This is one of the much needed things to boost the Indian economy according to global organizations such as the IMF. For the insurance sector the increase in FDI to 49% will definitely help to boost the industry which has been looking for fresh funds coming in. Apart from this there will also be new entrants in the banking and financial service sector such as IDFC and Bandhan Financial Services which have received banking licenses recently. This will boost the sector.
However, one of the biggest concerns for this sector is the bad loans and non-performing assets increasing. The World Bank has warned against the risks of bad debts and slowdown in credit growth, stuck-up projects and over-leveraged corporate sector as something that could weaken the banking sector. The gross NPAs for the banking sector is at 4.5% as of September 2014 and could go to 6.3% by March 2016 according to RBI’s Financial Stability Report. India’s banking system’s credit growth continued to slow down recording a growth of 9.5% YoY in March 2015 against 10.4% in February according to Finalytiks. Deposits also slowed down to 11.4% YoY in March compared to 11.9% in February.
In the insurance sector the biggest concern is the hike in service tax which was proposed in the Union Budget and will make insurance premiums costlier, which will result in reducing demand. Further to this the proposed 2% Swachh Bharat Cess on the value of any taxable service will further increase the costs of insurance services.
The retail sector accounts for 10% of the country’s GDP and employs more than around 8 per cent of the population. The sector has seen good growth during the year under the Modi government although there are many policy changes and reforms that this sector would like to see in order to improve growth. The retail sector is expected to grow to $818 billion in 2015 growing at 14% YoY, from $717.83 billion in 2014. The ecommerce retail industry has seen large growth during the year, though it is still a small part of the sales. In 2014 it accounted for $5.30 billion which grew from $3.59 billion in 2013. In 2015 the total online retail is set to touch $7.69 billion, a growth of 45.2%. Ecommerce is expected to keep growing and push the retail industry sales up as not only Amazon, Flipkart, Snapdeal and other ecommerce players up their game, many even getting into the brick and mortar retail space. While on the other hand traditional retailers such as Reliance Industries and Aditya Birla Group plan to launch their own e-tailing operations this year.
Apart from this many global players are eyeing the Indian market and are looking to invest more in the market. US retailer Gap which has tied up with Arvind Lifestyle looks to set up 40 franchise-operated stores in phase 1 efforts. Swedish retailer Hennes & Mauritz plans to spend Rs.7.1 billion to set up 50 stores across India over the next few years.
However, one of the biggest policy decision that the Modi government has faltered at in this sector is the pushing of FDI in multi-brand retail. The government was looking to push for it until it faced opposition from within the BJP party itself. The government in fact seems set not to pass the bill that will allow foreign retailers to enter the market. This will definitely impact this sector. Apart from this is the passing of the GST bill which will definitely help this sector, but currently seems to be stuck in limbo. Apart from this other government decisions such as increase in service tax from 12.36% to 14% is expected to leave little cash in the wallets of consumers to make spends on retail. These will all limit the growth of retail in the coming year unless the Modi government can act upon them now.
These key sectors for the growth of the Indian economy currently hang in the balance. Despite many hiccups in the previous year if it acts now to bring about change we will see the economy back on the growth track.
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