The change

The service tax rate has been increased to 14 per cent, with the net widened to include amusement parks and services engaged in alcohol production. The rise in tax rates can directly squeeze consumption; sectors such as restaurants are already hurt by reluctant consumers.

Basic excise duty has been upped to 12.5 per cent; set to turn costlier are tablets, cigarettes, iced teas, sweetened drinks, and condensed milk among others. At the same time, excise and customs have been reduced on other goods – LED/ LCD televisions and lamps, footwear, for instance, can turn cheaper.

On the other side, consumer purses can get fatter with direct tax changes. The government is set to lose ₹8,315 crore due to changes in direct tax. But the nature of the tweaks is such that consumers may be forced to invest more rather than enjoy a higher disposable income.

Exemption limits on health insurance premiums and investments in pension funds have been hiked.

As a result, incremental tax savings for an individual amounts to around ₹18,540 in the highest tax bracket but only if he makes full use of the investment options. This is unlike the previous budget which raised tax slabs, directly putting money into consumer hands. On the rural front, allocation towards the MGNREGA, at ₹34,699 crore is above the ₹33,000 in 2013-14. If tax collections are robust, this allocation will be stepped up by ₹5,000, making it the highest-ever allocation towards the programme, but this cannot be guaranteed.

The background

The rural factor has boosted sales of consumer companies such as FMCG and automobiles for years helped by rapid rise in crop prices, rural employment schemes and infrastructure development.

But now, with crop prices moderating and falling inflation, only slight hikes undertaken in minimum support prices and a lower emphasis on the MNREGA scheme, farm incomes are slowing.

Urban consumption has been stagnant for years now, given the high cost of living, and discretionary purchases flagged.

The verdict

If the outlay in the MGNREGA materialises to the full extent, the rural juggernaut can resume to support consumption.

Else, rural incomes can remain sluggish, especially with food grain production estimated to drop this fiscal. Urban consumption is also likely to remain sluggish for some time yet with minimal rise in disposable incomes.

What can further hurt discretionary consumption is if companies pass on hikes in excise duties via product prices.

FMCG companies that have a higher rural presence such as Jyothy Labs, Emami, and Colgate can benefit from a wealthier rural consumer. Hero Motocorp, Mahindra & Mahindra, V-Guard Industries, and Blue Star are other rural consumer plays.

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