The government focus so far has been to provide protection to the domestic companies by managing the import duty structures to the domestic advantage.

In the last budget (2004-05), the government laid stress on agriculture reforms, in a bid to integrate the countrywide food market. The government also took its first tentative steps towards a VAT regime, addressing the long time demand from the industry. But the tax regime is marred by ambiguity and government's inability to get the message across to the small producers.

The government's focus on road, rail and power development will indirectly benefit the FMCG industry in the long run.

Key Positives Rural penetration levels are still low. Also, according to estimates, only about 8-10% of the total food production is consumed in processed form (US$ 90 bn). This speaks for itself, highlighting the scope for growth. The planned development of roads, ports, railways and airports, will increase FMCG penetration in the long term. As growth has shown signs of slackening companies are increasingly focusing on key products and brands, cost efficiencies and rural markets. This is a sign of market sophistication, both from the manufacturer's point of view as well as the consumer's point of view. Owing to India's cost advantage, many MNC companies have started using their Indian operations as their manufacturing base. Alternatively, some Indian companies have tested foreign shores like Bangladesh, Sri Lanka and the Middle East among others. The proposed introduction of VAT at the start of FY06 is a long term positive for the FMCG sector. This had been a long pending demand of the FMCG sector. Post this, the tax ambiguity will get reduced, benefiting the sector.		Key Negatives Weakness in the economy has led to a slowdown in demand for FMCG products. The topline growth of many FMCG majors has thus, declined. Resurgent economic numbers in FY04 did nothing to change the scenario. New entrants in the sector have heightened competition in key segments like soaps and detergents, putting pressure on profitability. The infrastructure for free transport of goods is not adequate in the country. Also, the fall in agricultural output continues to cast on FMCG sector's prospects in the short term. A large part of the branded market continues to be threatened by spurious goods and illegal foreign imports. In times of weakened consumer demand such menaces continue to give nightmares to large companies.

This is part of Equitymaster's Budget 2005-06 series. Equitymaster.com is one of India's premier finance portals. The Web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.