GST to squeeze margins of basmati exporters

The profits of branded basmati rice manufacturers and exporters are likely to be squeezed due to the five per cent Goods and Services Tax (GST) effective July 1.

Earlier, the aromatic rice was either subject to value added tax or was tax-free, from state to state.

At present, the impact of a five per cent GST would be nullified due to a sharp increase in prices abroad. Official data shows India’s perunit average realisation from basmati rice exports at $995 a tonne for April-May, compared to $790 a tonne for the corresponding period last year.

“Prices have risen 25 per cent over the past few months on the building of a pipeline inventory in Iran, the largest importer, comprising over a quarter of India’s annual basmati rice export, and the Middle East. There is fear in the market that Iran might stop issuing licenses for basmati rice import. Hence, importers there are building inventory to avoid any shortage,” said Gurnam Arora, joint managing director, Kohinoor Foods.

Despite reduced Iranian demand, India recorded four million tonnes of basmati rice shipment during 2016-17, almost similar to the previous year. With China opening its door by registering 14 Indian companies for basmati rice export, these shipments are likely to rise in the coming years.

“Imposition of GST is likely to put branded players in a somewhat disadvantageous position, compared to the unbranded rice segment. More likely, the branded players will witness some erosion of profitability, as they'd look to absorb the GST impact and maintain pricing parity with the unbranded segment,” said Deepak Jotwani, assistant vice-president at ratings agency ICRA.

Another issue if that the GST applies to only brands registered under the Trade Mark Act. Those with established but non-registered brands are likely to benefit and many in the sector have petitioned the Union finance ministry to resolve this.

The basmati rice industry was primarily export-oriented. However, over recent years, the domestic market has expanded significantly. There have been concerted efforts by large companies to establish their brands in the domestic market. Coupled with the increased penetration of modern retail stores, and increasing purchasing power of consumers, this has aided the growth of basmati consumption in the domestic market. There has also been a shift from unbranded to branded basmati. The domestic market has now become as strong as the export market for most basmati companies in the organised sector.