The Indian economy and board packaging

September 20, 2009 | By Naresh Khanna

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We have visited some label and packaging plants in the last month and asked the owners the perennial questions – How badly was packaging affected by the economic downturn? Which segments or sectors were hurt, if any? What is the situation now and do you the see the market strengthening?

The answers we have received in the past month have to been in the somewhat rosy light of the overall economy picking up. The Indices of Industrial Production figures for July released in the second week of September 2009 show that of the seventeen categories, only two contracted. This is a big improvement on the index of May and June this year that showed contraction in eight and five categories respectively. The year on year growth in industrial production for July at 6.8% is a clear improvement on the 6.4% industrial growth of July 2008.

We have spoken to several board-packaging leaders around the countries. Their views establish a consensus on the overall strength of the board packaging industry. For one thing the price of carton board itself is going up. There was a one Rupee per kilogram (2 cents US) increase in board prices about two months ago, and another increase of 75 paise (1.5 cents US) requested by the board mills in the past week.

How badly was board packaging affected by the downturn? The views range from not at all as far as FMCG, to perhaps an inventory glitch in pharmaceuticals in February 2009, to a view that there was an overall general affect from November 2008 to March 2009. As to the current situation and looking forward the views range from “business as usual” (meaning good), to “good because this is the season” and even, the financial year from April 2009 to March 2010, will turn out to be “exceedingly good.”

Inputs from the commercial printing segments have not been so rosy. While the magazine-printing segment has been hit with lower circulations and fewer advertising pages, it has stabilised. Even the annual report business is not bad. However the everyday product brochures and the printed collateral material that is the stuff of new product and car launches has suffered heavily in a period of austerity and soft launches.

Thus the overall economy and packaging market is seen as strengthening. The indicators apart from the industrial production index are the paperboard manufacturer’s attempt to flex their muscles on price. All of our respondents are optimistic and although they see the current year as one of consolidating capacities by improving productivity and price realisation the majority of them are just itching to grow – they will be ordering additional capacity before March 2010.

The Dutch packaging tax is not sustainable
The Netherlands Packaging Centre has sent a statement dated 15 September 2009 saying that the additional VAT on packaged products of about .2% is not sustainable although it has apparently been calculated on the basis of the carbon footprint of packaging. We reproduce the statement below:

The Dutch packaging tax is not sustainable. The tax will either be withdrawn completely or it will develop into an additional VAT on packaged products of about 0.2% (the current VAT is mostly 19%). This was the conclusion of the NVC Actualiteitencollege The Future of the Packaging Tax, given on September 14th by BDO CampsObers Tax Advisors.

Complete withdrawal of the packaging tax would be justified considering the fact that the basis on which the tariffs are calculated is wrong. This basis is the amount of carbon dioxide generated per kilogram of packaging material. This number is dependent on the way the energy is generated. Even more important, the application of the packaging material, the packaging of the product, is not taken into account. Packaging is temporarily integrating an external function and a product to enable the use of the product. Per definition, the (environmental aspects of the) user phase must be taken into account on any packaging issue.

The basis that has been chosen for the tariffs has also led to nearly insurmountable administrative problems. As every material has its own carbon footprint, a multitude of tariffs arise. This in return leads to a plethora of initiatives to ‘simplify’ the tax code. As a result, about eleven different ‘simplified’ deals have been made between the tax office and different branches (wine producers, paint manufacturers, far-east importers, etcetera).
These basically set the amount of packaging tax to be paid in relation to economic parameters like purchasing volume, turnover or downright estimates of the packaging used ‘on average’ in a particular sector of the economy. Whether a company should be a member of the respective organisation is subject to debate in terms of competition policies.

The future of the Dutch packaging tax seems quite clear. Either the tax will be withdrawn completely as the basis of the tariffs is wrong, or the tax will develop into an increase in VAT on packaged products.