Crisil believes an improvement in the distribution process of FMCG goods is a must to see the effectiveness of GST.
Rating Agency Crisil believes companies producing non-bulk goods will see a 20 percent reduction in their logistics cost once GST is rolled out. Besides the primary bulk commodities that are transported by railways, everything else can be categorized as non-bulk. To be effective, it is necessary to dismantle the existing central sales tax (CST), Crisil noted.
Speaking to CNBC-TV18, Ajay Srinivasan, director, Crisil Research said once the timeline is announced, firms can plan to set up warehouses. He added consumer durables will be the biggest beneficiary of GST and insisted that an improvement in the distribution process of FMCG goods is a must to see the effectiveness of the tax system.
Below is the transcript of Ajay Srinivasan’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: Ajay can you quickly tell us the essence of your report? What kind of cost savings and for whom?
A: Essentially, a large part of logistics cost are anywhere in the region of five to eight percent on sales. They will see a saving because of two reasons. One is the warehousing costs and inventory carrying costs will come down. Secondly, if check posts are also dismantled along with goods and services tax (GST). We will see a significant reduction in the cost of the transit of goods as well. Due to these two reasons, we believe that the logistics cost for several sectors, several normal goods could come down by up to 20 percent.
But, there are two necessary conditions for GST to be successful. One is that the levy of additional tax of one percent which is being envisaged right now. That is against the core principle of GST and that to our mind would not be a very good idea. The second thing is, today, almost a quarter of the journey time is lost because of stoppages which occur during the transportation of goods. And thereby it ends up adding a lot to the cost. And if check posts also are dismantled along with GST, it will lead to faster transit of goods and also lower inventory carrying costs.
So, if you look at the numbers broadly, we believe that over a period of three to four years, you will see up to a 20 percent saving in costs out of which approximately 15 percent will come because of lowered warehousing cost and lowered inventory carrying costs. And approximately five percent will come because of faster transit of goods.
Sonia: that is very good to hear that 20 percent will be sliced off the logistics cost. But you also write in your note that the cost gains will be lower for fast-moving consumer goods (FMCG) and pharma companies. How much lower do you think it could be and why is that?
A: If you look at it, we have spoken to a number of companies across each of these sectors and got a sense from them also how they believe GST will change the logistics scenario for them. And our sense today is that many corporates are still waiting to see the fine print. And only after they see the fine print, they will decide the final GST strategy and therefore a lot of the savings will not be front-ended. Over a three to four year period, you will see the savings materialise.
Coming to a specific question on FMCG and pharma, if you look at these two sectors, there are two very critical things which are required in these two sectors. One is that the goods need to be shipped from the distributer to the retailer in a very fast manner, so replenishment of stocks happens much more quickly compared to say, consumer durables. And secondly, also the consumers typically will not wait for a particular brand. Suppose, I go to a retailer and I find that a particular brand is not available, consumer should typically tend to opt for another brand. That is what dismantling existing distribution networks and also making sure that there is no risk of stock-outs would take a lot of time and effort on the part of FMCG and pharma.
And if you look at pharma for example, there is a heavy reliance today on carrying and forwarding agents (CFA) for the purpose of logistics. And these CFA agents also perform a lot of ancillary services such as inventory and maintaining the stocks at retailer end, etc. And our sense is that because of the need for faster replenishment of stocks at the retailer end and the absolute necessity to avoid any risk of stock outs at retailer level, for these two sectors, we could see much more calibrated movement towards GST and we will see a much lower reduction compared to consumer durables where a consumer may prefer to wait for a particular brand given the kind of sector that is.
Latha: Finally, you said that this one percent levy of sales tax will detract from the principle of GST, that point is taken. But will it lower the cost advantages in any fashion? Let us assume that for purposes of political expediency, the GST is introduced, even after giving that one percent to the states. Even then the gains, logistical and warehousing gains are going to be there?
A: Suppose you have this one percent tax levied, even for a short while, it will significantly bring down these gains. It is a very bad idea if you ask us, because what will happen is, suppose you transport a good to four states. Then it will straightaway add four percent to the cost. That is what it will elongate or further bring down any benefit because of GST. And these calculations are assuming that this one percent tax will not be there. And anyway since the government has agreed to compensate states for two years to the extent of 100 percent, our sense is that ideally one should not have this one percent additional tax being imposed because it will actually lead to the benefits of GST not being fully realised.
Latha: That point is completely taken, I am not arguing in favour of that tax at all. And everyone has realised now, that every time a good goes from one state to another, another one percent gets added. So, it is not just one percent, it will actually be four or five percent. I take your point. I am only saying that logistical gains nevertheless will continue. Only thing is that they get lessened by this extra four or five percent, right?
A: Absolutely, for example, we are saying, say, up to 20 percent over a three to four year period. Then is this additional one percent tax is introduced even for two years then this number could come down significantly, maybe even about 10 percent. That is what to realise the full benefits of GST, you will have to do away with this additional tax.
And one more thing which is less talked about is that GST provides a golden opportunity to actually stop the inefficiencies which have descended in our transport system because of check posts being there at every level at every state. And if you are able to do that also along with GST, it will lead to significant gains, not only in terms of transportational costs, but also because a truck can much more quicker across states. Potentially, it can also bring down the cost of transporting goods and inflation etc.