Favourable GST needed to tame food inflation: Icrier study

If the inflation in food products is to be brought under control, we need a robust food processing sector, for which a favourable tax regime is crucial, according to a report.

Issued on Thursday by the Indian Council for Research on International Economic Relations (Icrier), it has said allowing foreign direct investment (FDI) in multi-brand retailing will not suffice to fight surging prices.

Much will depend, it has said, on how the food processing sector is treated under the proposed Goods and Services Tax (GST) regime and whether there will be a single GST.

The report has a survey to buttress this point. “The findings countered some  of the popular beliefs in this  regard,” it has said.

Wholesale  Price Index-based food inflation reached almost 20 per cent in November, compared to a little over 18 per cent in the previous two months.

The report said what could bring down inflation was to ensure the food processing sector faced uniformly low tax and other fiscal and regulatory barriers were removed.

FDI in multi-brand retailing is, however, seen as a help by 95 per cent of the respondents in the survey. They felt it would provide them a wider choice of products and brands, beside helping to get better deals and discounts on products.

At the issue of the report, Union Agriculture Minister Sharad Pawar said much the same thing, that GST implementation would benefit the food processing sector, struggling with myriad tax structures.

The aim of GST is to remove barriers to movement of goods and services across states. However, it is not  likely to come into effect in the life of this Lok Sabha; the Empowered Committee of State Finance Ministers recently rejected the Centre’s proposal to bring alcohol and petroleum products under it.  The Icrier report’s focus was on non-alcoholic beverages. It said this  sector accounted for almost one per cent of India’s gross domestic product and was expected to grow by double-digits annually in the next 10 years, better than other manufacturing sectors.

Criticising the current structure of providing subsidies to develop cold chains and like facilities, the report said in most cases these subsidies did not benefit the industry much. The gains were eroded further by a multi-layered tax structure and the high cost of doing business.

“It is often argued that bottled water is a luxury commodity and, therefore, it faces high and differential taxes…in a country like India where it is difficult to get clean drinking water, such steps are anti-poor,” the report said. It suggested India learn from the experience of countries such as the UK, Canada and Australia. These have used low taxes to streamline the agro-supply chain.      

The report said India’s ability to emerge as a manufacturing hub for non-alcoholic beverages was inhibited by poor infrastructure such as power shortages and inconsistent supply of raw materials, and high duties on intermediate products, especially packaging material.

Unless reforms were initiated at a rapid pace in this sector, Indian companies will relocate elsewhere and use the free trade agreement route to cater to the domestic market, the report added.      

The size of the Indian non-alcoholic beverages sector is estimated to be in excess of Rs 30,000 crore.