economy matters, january 2014

44
ECONOMY MATTERS Volume 19 No. 01 January 2014 Inside This Issue Cover Story China GDP Slows Down Review of IIP, Inflation & Trade data Interview with Mr Akhilesh Ranjan, Ministry of Finance Interview with Mr R Seshasayee, Past President, CII Corporate Performance for 3QFY14 Special Feature: Policy Trade-offs by Dr Probab Sen Fiscal Situation Revenue Expenditure

Post on 14-Sep-2014

1.627 views

Category:

Business


0 download

DESCRIPTION

The world's second largest economy, China, is slowly recovering. Even more importantly, the latest forecasts by the World Bank suggest that high-income economies appear to be finally turning the corner. We cover this in the section on Global Trends in this month’s issue of Economy Matters. In the section on Domestic Trends, we discuss the trends emanating out of the recent releases on GDP, IIP, Inflation, trade, and monetary policy. The Sectoral spotlight for this issue is on Manufacturing, which remains an important sector for realizing the higher growth potential of the economy. The section on Taxation dwells on BEPS and carries an interview with Mr. Akhilesh Ranjan, Joint Secretary, Ministry of Finance, Government of India on some critical international taxation issues. In the Special Article, we provide a snapshot of Central Government’s fiscal health along with a detailed Q&A of Mr. R. Seshasayee, Past President & Chairman Economic Policy Council, CII, on the subject. The section on Special Feature carries an article titled “The Tradeoffs for Policy Makers in India Today”, by Dr. Pronab Sen, Chairman, National Statistical Commission, Government of India.

TRANSCRIPT

Page 1: Economy Matters, January 2014

ECONOMY MATTERSVolume 19 No. 01January 2014

Inside This Issue

Cover Story

China GDP Slows Down

Review of IIP, Inflation & Trade data

Interview with Mr Akhilesh Ranjan, Ministry of Finance

Interview with Mr R Seshasayee, Past President, CII

Corporate Performance for 3QFY14

Special Feature: Policy Trade-offs by Dr Probab Sen

Fiscal Situation

Revenue

Expenditure

Page 2: Economy Matters, January 2014

The world's second largest economy, China is slowly recovering, though the pace of

recovery has been rather lackadaisical. GDP for 2013 came in at 7.7 per cent- the lowest

print in 14 years. In 2013, China tried to maintain strong growth while rebalancing its

economy, by moving away from an investment-led growth model to one driven by

domestic consumption. Firm recovery in China is very critical for the global economic

prospects. The policy makers in China would need to adopt unconventional policy

measures to stabilise GDP on higher growth trajectory in 2014, which the country has

seen in the last many years. The rebalancing of economic growth in favor of domestic

consumption will be crucial in order to achieve this.

On the domestic front, the IIP numbers for the month of November 2013 were

disappointing and reaffirmed our belief that signs of turn-around are sporadic and at

best nascent. On a positive note, WPI inflation moderated to 5-month low in December

2013, driven by deceleration in food prices. RBI meanwhile, chose to hike interest rates

again in its third quarter monetary policy review held on 28th January 2014. CII is

disappointed with RBI's move as it is important for monetary policy to support growth

at this crucial juncture especially when WPI inflation has shown signs of moderation.

Low interest rates are the precursor for any meaningful recovery in both investment

and consumption demand.

Fiscal deficit has already widened to 95 per cent of the budgeted levels in the first nine

months of the fiscal, thus raising red flags in the economy. Sluggish revenue growth due

to weak GDP growth has been the main driver behind the widening deficit.

Unfortunately, the options available in front of the government are clearly limited,

given the fact that general elections are due soon. Any compression in plan expenditure

in order to meet the fiscal target can be detrimental to growth. Consequently, CII has

been advocating several unconventional sources of revenue for the government like

utilizing the cash-pile of PSUs, monetising the surplus land lying with them, clearing up

the funds held up in disputes and litigations etc time and again in its various dialogues

with the government.

Chandrajit Banerjee

Director-General, CII

1

FOREWORD

JANUARY 2014

Page 3: Economy Matters, January 2014

The world's second largest economy, China is slowly recovering, though the pace of

recovery has been rather lackadaisical. GDP for 2013 came in at 7.7 per cent- the lowest

print in 14 years. In 2013, China tried to maintain strong growth while rebalancing its

economy, by moving away from an investment-led growth model to one driven by

domestic consumption. Firm recovery in China is very critical for the global economic

prospects. The policy makers in China would need to adopt unconventional policy

measures to stabilise GDP on higher growth trajectory in 2014, which the country has

seen in the last many years. The rebalancing of economic growth in favor of domestic

consumption will be crucial in order to achieve this.

On the domestic front, the IIP numbers for the month of November 2013 were

disappointing and reaffirmed our belief that signs of turn-around are sporadic and at

best nascent. On a positive note, WPI inflation moderated to 5-month low in December

2013, driven by deceleration in food prices. RBI meanwhile, chose to hike interest rates

again in its third quarter monetary policy review held on 28th January 2014. CII is

disappointed with RBI's move as it is important for monetary policy to support growth

at this crucial juncture especially when WPI inflation has shown signs of moderation.

Low interest rates are the precursor for any meaningful recovery in both investment

and consumption demand.

Fiscal deficit has already widened to 95 per cent of the budgeted levels in the first nine

months of the fiscal, thus raising red flags in the economy. Sluggish revenue growth due

to weak GDP growth has been the main driver behind the widening deficit.

Unfortunately, the options available in front of the government are clearly limited,

given the fact that general elections are due soon. Any compression in plan expenditure

in order to meet the fiscal target can be detrimental to growth. Consequently, CII has

been advocating several unconventional sources of revenue for the government like

utilizing the cash-pile of PSUs, monetising the surplus land lying with them, clearing up

the funds held up in disputes and litigations etc time and again in its various dialogues

with the government.

Chandrajit Banerjee

Director-General, CII

1

FOREWORD

JANUARY 2014

Page 4: Economy Matters, January 2014

Global Trends

Domestic Trends

Corporate Performance

China's economy, the world's second-largest, has

shown signs of stabilising, as 2013's growth rate

matched that for 2012. Gross domestic product (GDP)

grew at an annual rate of 7.7 per cent in the October-to-

December period, down from 7.8 per cent in the

previous quarter. With this, the full year GDP growth

came in at 7.7 per cent, higher than the government's

target rate of 7.5 per cent for the year. Coming to the

global economies, the latest forecasts for the world

economy released by the World Bank recently

suggests that after several years of extreme

weakness, high-income economies appear to be finally

turning the corner, contributing to a projected

acceleration in global growth from 2.4 per cent in 2013

to 3.2 per cent this year.

Industrial sector output contracted for the second

consecutive month in November 2013, despite a

supportive base effect. Industrial output declined to

2.1 per cent in November 2013, worsening from the -1.6

per cent print seen in the previous month. In a positive

sign, WPI based inflation moderated to 5-month low of

6.2 per cent in December 2013 as compared to 7.5 per

cent in the previous month on the back of cooling of

primary food inflation and subdued manufacturing

inflation. However, in an unanticipated move, Reserve

Bank of India (RBI) in its third quarter monetary policy threview held on 28 January 2014 chose to hike the repo

rate by 25 bps to 8.00 per cent, citing stickiness in core

CPI.

The analysis of the results of the firms in India, which

have declared their results so far for the third quarter

(Q3) of current financial year, suggests an

improvement in their financial result at the aggregate

level. It may recalled that the firms had recorded an

improvement in their sales growth in the second

quarter as well after disappointing previous few

quarters as per the RBI analysis of 2,708 listed non-

government non-financial (NGNF) companies. This

improvement in corporate performance for the last

two quarters is encouraging, especially, since it comes

at the back of a lackluster showing in the preceding

several quarters.

Manufacturing sector has played a robust role in driving

the GDP growth in the 2005-11 period, when it was

growing at around 9 per cent CAGR. However, since

then, industry has posted an overall slump, with

manufacturing GDP growth at around 3 per cent in 2011-

12 and at around 1 per cent in 2012-13. This is in sharp

contrast to the over 10 per cent average annual growth

that the sector needs in order to reach its aspiration of

25 per cent share in national GDP by 2022, as envisaged

by the National Manufacturing Policy. However,

multiple opportunities exist even in this environment;

new avenues are still opening up. The depreciation of

the currency in 2013 has lent optimism to Indian

manufacturers as regards exports. A good monsoon

has raised hopes of strong rural demand. Overall,

industry is more confident of achieving a higher growth

going forward as compared to previous years.

With the fiscal deficit having reached 95 per cent of the

budgeted estimates for the entire year in the first nine

(April-December 2913) months already, the Finance

Minister's firm call of not breaching the red-line of fiscal

target of 4.8 per cent this year looks increasingly

difficult. A challenging domestic and external

economic environment has kept the revenue growth

low, while expenditures have so far not shown any

signs of abatement. Given that the general elections

are due soon, the options available to the government

to restrict the fiscal deficit within the budgeted levels of

4.8 per cent are clearly limited. The urgent task,

therefore, is to prune expenditure while trying to boost

government revenues, especially tax revenues. The axe

is bound to fall on plan expenditure and that in turn will

have a negative impact on the growth momentum.

Under this scenario, it is best for the government to opt

for getting revenue from unconventional sources. CII

has suggested several innovative measures to prop up

the government's revenue stream.

Sector in Focus: Manufacturing

Special Article

EXECUTIVE SUMMARY

32ECONOMY MATTERS

CO

NT

EN

T

Cover Story

With the fiscal deficit having

reached 95 per cent of the

budgeted estimates for the entire

year in the first nine (April-

December) months already, the

Finance Minister’s call of not

breaching the red-line of fiscal

target of 4.8 per cent this year

looks increasingly difficult. In the

Special Article, we provide an

analysis of the fiscal situation so

far and its impact on the overall

growth prospects.

Inside This Issue

Executive Summary .................................................03

Global Trends

04China GDP Slows Down to 14-year Low but Crosses Official Target

Domestic TrendsGDP, IIP, Inflation, Trade, Balance of Payments, Monetary Policy08

Taxation

BEPS Action Plan on TP16

Corporate PerformanceProfitability Improves Sharply for Services, while for Manufacturing Remains Subdued in Q3 20

Economy Monitor ................................................... 38

Special ArticleFiscal Situation

30

Sector in FocusManufacturing

23

Special Feature

36

Interview with Mr. Akhilesh Ranjan, MoF

Fiscal Situation

Reining in the Fiscal Deficit

Subsidy Bill

Mr R Seshasayee , Past President, CII

Bidisha Ganguly, Principal Economist, CII

The Tradeoffs for Policy Makers Dr. Pronab Sen, Chairman, NSC

Mr Ameya Kunte ,Taxsutra.com

JANUARY 2014

Page 5: Economy Matters, January 2014

Global Trends

Domestic Trends

Corporate Performance

China's economy, the world's second-largest, has

shown signs of stabilising, as 2013's growth rate

matched that for 2012. Gross domestic product (GDP)

grew at an annual rate of 7.7 per cent in the October-to-

December period, down from 7.8 per cent in the

previous quarter. With this, the full year GDP growth

came in at 7.7 per cent, higher than the government's

target rate of 7.5 per cent for the year. Coming to the

global economies, the latest forecasts for the world

economy released by the World Bank recently

suggests that after several years of extreme

weakness, high-income economies appear to be finally

turning the corner, contributing to a projected

acceleration in global growth from 2.4 per cent in 2013

to 3.2 per cent this year.

Industrial sector output contracted for the second

consecutive month in November 2013, despite a

supportive base effect. Industrial output declined to

2.1 per cent in November 2013, worsening from the -1.6

per cent print seen in the previous month. In a positive

sign, WPI based inflation moderated to 5-month low of

6.2 per cent in December 2013 as compared to 7.5 per

cent in the previous month on the back of cooling of

primary food inflation and subdued manufacturing

inflation. However, in an unanticipated move, Reserve

Bank of India (RBI) in its third quarter monetary policy threview held on 28 January 2014 chose to hike the repo

rate by 25 bps to 8.00 per cent, citing stickiness in core

CPI.

The analysis of the results of the firms in India, which

have declared their results so far for the third quarter

(Q3) of current financial year, suggests an

improvement in their financial result at the aggregate

level. It may recalled that the firms had recorded an

improvement in their sales growth in the second

quarter as well after disappointing previous few

quarters as per the RBI analysis of 2,708 listed non-

government non-financial (NGNF) companies. This

improvement in corporate performance for the last

two quarters is encouraging, especially, since it comes

at the back of a lackluster showing in the preceding

several quarters.

Manufacturing sector has played a robust role in driving

the GDP growth in the 2005-11 period, when it was

growing at around 9 per cent CAGR. However, since

then, industry has posted an overall slump, with

manufacturing GDP growth at around 3 per cent in 2011-

12 and at around 1 per cent in 2012-13. This is in sharp

contrast to the over 10 per cent average annual growth

that the sector needs in order to reach its aspiration of

25 per cent share in national GDP by 2022, as envisaged

by the National Manufacturing Policy. However,

multiple opportunities exist even in this environment;

new avenues are still opening up. The depreciation of

the currency in 2013 has lent optimism to Indian

manufacturers as regards exports. A good monsoon

has raised hopes of strong rural demand. Overall,

industry is more confident of achieving a higher growth

going forward as compared to previous years.

With the fiscal deficit having reached 95 per cent of the

budgeted estimates for the entire year in the first nine

(April-December 2913) months already, the Finance

Minister's firm call of not breaching the red-line of fiscal

target of 4.8 per cent this year looks increasingly

difficult. A challenging domestic and external

economic environment has kept the revenue growth

low, while expenditures have so far not shown any

signs of abatement. Given that the general elections

are due soon, the options available to the government

to restrict the fiscal deficit within the budgeted levels of

4.8 per cent are clearly limited. The urgent task,

therefore, is to prune expenditure while trying to boost

government revenues, especially tax revenues. The axe

is bound to fall on plan expenditure and that in turn will

have a negative impact on the growth momentum.

Under this scenario, it is best for the government to opt

for getting revenue from unconventional sources. CII

has suggested several innovative measures to prop up

the government's revenue stream.

Sector in Focus: Manufacturing

Special Article

EXECUTIVE SUMMARY

32ECONOMY MATTERS

CO

NT

EN

T

Cover Story

With the fiscal deficit having

reached 95 per cent of the

budgeted estimates for the entire

year in the first nine (April-

December) months already, the

Finance Minister’s call of not

breaching the red-line of fiscal

target of 4.8 per cent this year

looks increasingly difficult. In the

Special Article, we provide an

analysis of the fiscal situation so

far and its impact on the overall

growth prospects.

Inside This Issue

Executive Summary .................................................03

Global Trends

04China GDP Slows Down to 14-year Low but Crosses Official Target

Domestic TrendsGDP, IIP, Inflation, Trade, Balance of Payments, Monetary Policy08

Taxation

BEPS Action Plan on TP16

Corporate PerformanceProfitability Improves Sharply for Services, while for Manufacturing Remains Subdued in Q3 20

Economy Monitor ................................................... 38

Special ArticleFiscal Situation

30

Sector in FocusManufacturing

23

Special Feature

36

Interview with Mr. Akhilesh Ranjan, MoF

Fiscal Situation

Reining in the Fiscal Deficit

Subsidy Bill

Mr R Seshasayee , Past President, CII

Bidisha Ganguly, Principal Economist, CII

The Tradeoffs for Policy Makers Dr. Pronab Sen, Chairman, NSC

Mr Ameya Kunte ,Taxsutra.com

JANUARY 2014

Page 6: Economy Matters, January 2014

54ECONOMY MATTERS

GLOBAL TRENDS

China GDP Slows Down to 14-year Low but Crosses Official Target

was the lowest GDP print in 14 years. Consumer price

inflation rose by 2.6 per cent in 2013, with the maximum

increase coming from food articles.

In 2013, China tried to maintain strong growth while

rebalancing its economy, by moving away from an

investment-led growth model to one driven by domestic

consumption. Firm recovery in China is very critical for

the global economic prospects. The policy makers in

China would need to adopt unconventional policy

measures to stabilise GDP on higher growth trajectory in

2014, which the country has seen in the last many years.

The rebalancing of economic growth in favor of

domestic consumption will be crucial in order to achieve

this.

China's economy, the world's second-largest, has

shown signs of stabilising, as 2013's growth rate

matched that for 2012. Gross domestic product (GDP)

grew at an annual rate of 7.7 per cent in the October-to-

December period, down from 7.8 per cent in the

previous quarter. With this, the full year GDP growth

came in at 7.7 per cent, higher than the government's

target rate of 7.5 per cent for the year. To be sure, this

Moderate GDP Growth in 2013

8.2

8

7.8

7.6

7.4

7.2

71Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

y-o-y%

8.1

7.6

7.9

7.4

7.7

7.5

7.87.7

Source: National Bureau of Statistics

In 2013, Chinese policymakers took various steps to

open up new avenues of growth. China announced

dramatic new social and economic policies

contemplating much greater reliance on market forces

than it has in the past and inviting private-sector

participation and foreign competition in industries,

previously controlled by the central government. It also

relaxed its one-child policy, opening the country and its

people to vast new opportunities.

Additionally, in order to boost trade, a free trade zone

was launched in Shanghai recently. However,

challenges are galore for the economy as it steps into

2014. One of the several concerns for the economy

currently is the growth of shadow banking - lending by

non-banking companies - in the country. Shadow

banking makes credit less transparent and poses a

major risk to China's economic growth. China is thought

to be drafting rules calling for greater supervision and

monitoring of the shadow banks. Banks have been told

to publish data on 12 key indicators, including off-

balance-sheet assets, to enhance their transparency.

In 2013, the total value added of the industrial

enterprises above designated size was up by 9.7 per

cent at comparable prices. Specifically, the year-on-year

growth of the first quarter was 9.5 per cent, 9.1 per cent

for the second quarter, 10.1 per cent for the third

quarter and 10.0 per cent for the fourth quarter. Coming

to the demand-side, investment in fixed assets

(excluding rural households), a measure of government

spending on infrastructure, grew by 19.6 per cent in

2013. Retail sales, a key indicator of consumer spending,

gained 13.6 per cent on year-on-year basis in December

2013 and rose 13.1 per cent in 2013.

The total value of imports and exports in 2013 came at

US$4,160.3 billion, which translates into an annual

increase of 7.6 per cent. Out of this, the total value of

exports stood at US$2,210.0 billion, up by 7.9 per cent on

y-o-y basis; while the total value of imports was at US$

1,950.3 billion, registering a y-o-y increase of 7.3 per cent

in 2013. Consequently, the trade balance stood at

US$259.75 billion for 2013.

World Bank Upbeat about 2014 Global GrowthUnited States ticked up in response to expectations of

the gradual withdrawal of quantitative easing. Other

major headwinds included declining commodity prices

for commodity exporters. Overall, growth in developing

countries is projected to pick up modestly from 4.8 per

cent in 2013 to 5.3 per cent this year, 5.5 per cent in 2015,

and 5.7 per cent in 2016. However, it is pertinent to note

that the developing-country GDP growth will be about

2.2 percentage points weaker than it was during the pre-

crisis boom period. The developing countries will not

cover the entire lost ground because growth in those

years was unsustainably high, partly because of the

global credit bubble.

As per the report, India will see the strongest economic

recovery among the major developing economies

between 2013 and 2016. Its rate of expansion will go up

by 2.3 percentage points, from 4.8 per cent in 2013 to 7.1

per cent in 2016. Interestingly, World Bank projections

suggest that the gap between economic growth rates

of India and China could narrow sharply by 2016. Chinese

economic growth will remain at current levels while

Indian growth will accelerate. There will be only a 0.4

percentage point gap in 2016 compared with the 3.1

percentage points gap in 2014.

The latest forecasts for the world economy released by

the World Bank recently suggest that after several years

of extreme weakness, high-income economies appear

to be finally turning the corner, contributing to a

projected acceleration in global growth from 2.4 per

cent in 2013 to 3.2 per cent this year, 3.4 per cent in 2015,

and 3.5 per cent in 2016, as the drag on growth from

fiscal consolidation and policy uncertainty eases and

private sector recoveries gain firmer footing. High-

income countries growth is projected to strengthen

from only 1.3 per cent in 2013 to 2.2 per cent this year and

2.4 per cent in each of 2015 and 2016. This strengthening

of output among high-income countries marks a

significant shift from recent years when developing

countries alone pulled the global economy forward.

The latest edition of the Global Economic Prospects

report published by the multilateral lender further adds

that the activity and sentiment in developing countries

have turned up since mid-2013, bolstered by

strengthening high-income demand and a policy-

induced rebound in China. These positive developments

were partly offset by tighter financial conditions and

reduced capital flows as long-term interest rates in the

GLOBAL TRENDS

JANUARY 2014

Page 7: Economy Matters, January 2014

54ECONOMY MATTERS

GLOBAL TRENDS

China GDP Slows Down to 14-year Low but Crosses Official Target

was the lowest GDP print in 14 years. Consumer price

inflation rose by 2.6 per cent in 2013, with the maximum

increase coming from food articles.

In 2013, China tried to maintain strong growth while

rebalancing its economy, by moving away from an

investment-led growth model to one driven by domestic

consumption. Firm recovery in China is very critical for

the global economic prospects. The policy makers in

China would need to adopt unconventional policy

measures to stabilise GDP on higher growth trajectory in

2014, which the country has seen in the last many years.

The rebalancing of economic growth in favor of

domestic consumption will be crucial in order to achieve

this.

China's economy, the world's second-largest, has

shown signs of stabilising, as 2013's growth rate

matched that for 2012. Gross domestic product (GDP)

grew at an annual rate of 7.7 per cent in the October-to-

December period, down from 7.8 per cent in the

previous quarter. With this, the full year GDP growth

came in at 7.7 per cent, higher than the government's

target rate of 7.5 per cent for the year. To be sure, this

Moderate GDP Growth in 2013

8.2

8

7.8

7.6

7.4

7.2

71Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

y-o-y%

8.1

7.6

7.9

7.4

7.7

7.5

7.87.7

Source: National Bureau of Statistics

In 2013, Chinese policymakers took various steps to

open up new avenues of growth. China announced

dramatic new social and economic policies

contemplating much greater reliance on market forces

than it has in the past and inviting private-sector

participation and foreign competition in industries,

previously controlled by the central government. It also

relaxed its one-child policy, opening the country and its

people to vast new opportunities.

Additionally, in order to boost trade, a free trade zone

was launched in Shanghai recently. However,

challenges are galore for the economy as it steps into

2014. One of the several concerns for the economy

currently is the growth of shadow banking - lending by

non-banking companies - in the country. Shadow

banking makes credit less transparent and poses a

major risk to China's economic growth. China is thought

to be drafting rules calling for greater supervision and

monitoring of the shadow banks. Banks have been told

to publish data on 12 key indicators, including off-

balance-sheet assets, to enhance their transparency.

In 2013, the total value added of the industrial

enterprises above designated size was up by 9.7 per

cent at comparable prices. Specifically, the year-on-year

growth of the first quarter was 9.5 per cent, 9.1 per cent

for the second quarter, 10.1 per cent for the third

quarter and 10.0 per cent for the fourth quarter. Coming

to the demand-side, investment in fixed assets

(excluding rural households), a measure of government

spending on infrastructure, grew by 19.6 per cent in

2013. Retail sales, a key indicator of consumer spending,

gained 13.6 per cent on year-on-year basis in December

2013 and rose 13.1 per cent in 2013.

The total value of imports and exports in 2013 came at

US$4,160.3 billion, which translates into an annual

increase of 7.6 per cent. Out of this, the total value of

exports stood at US$2,210.0 billion, up by 7.9 per cent on

y-o-y basis; while the total value of imports was at US$

1,950.3 billion, registering a y-o-y increase of 7.3 per cent

in 2013. Consequently, the trade balance stood at

US$259.75 billion for 2013.

World Bank Upbeat about 2014 Global GrowthUnited States ticked up in response to expectations of

the gradual withdrawal of quantitative easing. Other

major headwinds included declining commodity prices

for commodity exporters. Overall, growth in developing

countries is projected to pick up modestly from 4.8 per

cent in 2013 to 5.3 per cent this year, 5.5 per cent in 2015,

and 5.7 per cent in 2016. However, it is pertinent to note

that the developing-country GDP growth will be about

2.2 percentage points weaker than it was during the pre-

crisis boom period. The developing countries will not

cover the entire lost ground because growth in those

years was unsustainably high, partly because of the

global credit bubble.

As per the report, India will see the strongest economic

recovery among the major developing economies

between 2013 and 2016. Its rate of expansion will go up

by 2.3 percentage points, from 4.8 per cent in 2013 to 7.1

per cent in 2016. Interestingly, World Bank projections

suggest that the gap between economic growth rates

of India and China could narrow sharply by 2016. Chinese

economic growth will remain at current levels while

Indian growth will accelerate. There will be only a 0.4

percentage point gap in 2016 compared with the 3.1

percentage points gap in 2014.

The latest forecasts for the world economy released by

the World Bank recently suggest that after several years

of extreme weakness, high-income economies appear

to be finally turning the corner, contributing to a

projected acceleration in global growth from 2.4 per

cent in 2013 to 3.2 per cent this year, 3.4 per cent in 2015,

and 3.5 per cent in 2016, as the drag on growth from

fiscal consolidation and policy uncertainty eases and

private sector recoveries gain firmer footing. High-

income countries growth is projected to strengthen

from only 1.3 per cent in 2013 to 2.2 per cent this year and

2.4 per cent in each of 2015 and 2016. This strengthening

of output among high-income countries marks a

significant shift from recent years when developing

countries alone pulled the global economy forward.

The latest edition of the Global Economic Prospects

report published by the multilateral lender further adds

that the activity and sentiment in developing countries

have turned up since mid-2013, bolstered by

strengthening high-income demand and a policy-

induced rebound in China. These positive developments

were partly offset by tighter financial conditions and

reduced capital flows as long-term interest rates in the

GLOBAL TRENDS

JANUARY 2014

Page 8: Economy Matters, January 2014

unseasonably severe winter weather last month

probably played a part in the disappointing December

jobs number. November was revised to 241,000 from

203,000, while October's gain was unchanged at

200,000. Of the 74K jobs created in December, 55K were

in retail, above its average of 32K in 2013. Health care

was down 6K, a huge drop from its 2013 average of

adding 17K jobs. Manufacturing added 9K jobs and

construction jobs were down by 16K

The unemployment rate in US declined from 7.0 per cent

to 6.7 per cent in December 2013, the lowest since

October 2008, as more people dropped out of the labor

force. The labor force participation rate, which gauges

the proportion of the working-age population in the

labor force, slipped to 62.8 percent, down 0.8 percent

from a year ago, and the lowest since February 1978.

However, the U.S. economy added only 74K jobs in

December, the smallest increase since January 2011. The

6 7ECONOMY MATTERS

World Bank's GDP Growth Forecast (y-o-y %)

Source: Global Economic Prospects, January 2014- World Bank

3.03.2

2.8 2.8

0.91.1

8.0 7.7

6.5 6.2

Jun'13 Jan'14 Jun'13 Jan'14 Jun'13 Jan'14 Jun'13 Jan'14 Jun'13 Jan'14

World US Euro Area China India

US Unemployment Rate Falls to 6.7 Per cent

US Unemployment Rate Falls Sharply

Source: US Bureau of Labour Statistics

350

300

250

200

150

100

50

8

7

6

148

332

142

199176 172

89

238

175 200

241

74

Jan/

13

Feb

/13

Mar

/13

Apr

/13

May

/13

Jun/

13

Jul/1

3

Aug

/13

Sep

/13

Oct

/13

Nov

/13

Dec

/13

Thousand of Jobs

US NFP Unemployment Rate (RHS)

Other Global Developments During the Month

v

v

v

v

from US$75 billion/month in the month of January to US$ 65 billion month in February. Fed would trim its

purchases of long-term Treasury bonds to US$35 billion/month (from US$40 billion) and mortgage-backed

securities (MBS) to US$30 billion/month (from US$35 billion). This was Ben Bernanke's last policy meeting as

the Fed Chairman. Jenet Yellen takes over as new Fed Chairperson from the next policy.

The Consumer price Index (CPI) in the UK grew 2.0 per cent on y-o-y basis in December 2013, falling to its target

level for the first time since November 2009. The inflation has eased dramatically in the last quarter of 2013,

averaging 2.1 per cent, in Q4, sharply lower from 2.7 per cent in September 2013. The largest negative

contribution came from 'food and non-alcoholic beverages', wherein inflation eased from 2.8 per cent in

November to 1.9 per cent last month, marking its lowest level since February 2010. On the other hand, the

contribution of 'transport' items - especially petrol and diesel - increased in December 2013.

U.K. unemployment fell to 7.1 per cent in the three months through November from 7.4 per cent in the quarter

through October 2013. The data will add pressure on BOE Governor Mark Carney to reassess his guidance policy,

under which the Monetary Policy Committee has said it will consider raising interest rates once joblessness has

fallen to 7 per cent.

In an update to its World Economic Outlook report, IMF predicted the global economy would grow 3.7 per cent

this year, 0.1 percentage point higher than its October 2013 projection. It said it sees growth of 3.9 per cent in

2015. IMF highlighted the basic reason behind the stronger global recovery as the brakes to recovery being

progressively being loosened. As per the Fund, United States is likely to be one of the bright spots, after a

budget deal in Congress reduced some of the government spending cuts that had weighed on domestic

demand.

The US Federal Reserve in its meeting held on January 29th, 2014, reduced its asset purchase program further

GLOBAL TRENDSGLOBAL TRENDS

JANUARY 2014

Page 9: Economy Matters, January 2014

unseasonably severe winter weather last month

probably played a part in the disappointing December

jobs number. November was revised to 241,000 from

203,000, while October's gain was unchanged at

200,000. Of the 74K jobs created in December, 55K were

in retail, above its average of 32K in 2013. Health care

was down 6K, a huge drop from its 2013 average of

adding 17K jobs. Manufacturing added 9K jobs and

construction jobs were down by 16K

The unemployment rate in US declined from 7.0 per cent

to 6.7 per cent in December 2013, the lowest since

October 2008, as more people dropped out of the labor

force. The labor force participation rate, which gauges

the proportion of the working-age population in the

labor force, slipped to 62.8 percent, down 0.8 percent

from a year ago, and the lowest since February 1978.

However, the U.S. economy added only 74K jobs in

December, the smallest increase since January 2011. The

6 7ECONOMY MATTERS

World Bank's GDP Growth Forecast (y-o-y %)

Source: Global Economic Prospects, January 2014- World Bank

3.03.2

2.8 2.8

0.91.1

8.0 7.7

6.5 6.2

Jun'13 Jan'14 Jun'13 Jan'14 Jun'13 Jan'14 Jun'13 Jan'14 Jun'13 Jan'14

World US Euro Area China India

US Unemployment Rate Falls to 6.7 Per cent

US Unemployment Rate Falls Sharply

Source: US Bureau of Labour Statistics

350

300

250

200

150

100

50

8

7

6

148

332

142

199176 172

89

238

175 200

241

74

Jan/

13

Feb

/13

Mar

/13

Apr

/13

May

/13

Jun/

13

Jul/1

3

Aug

/13

Sep

/13

Oct

/13

Nov

/13

Dec

/13

Thousand of Jobs

US NFP Unemployment Rate (RHS)

Other Global Developments During the Month

v

v

v

v

from US$75 billion/month in the month of January to US$ 65 billion month in February. Fed would trim its

purchases of long-term Treasury bonds to US$35 billion/month (from US$40 billion) and mortgage-backed

securities (MBS) to US$30 billion/month (from US$35 billion). This was Ben Bernanke's last policy meeting as

the Fed Chairman. Jenet Yellen takes over as new Fed Chairperson from the next policy.

The Consumer price Index (CPI) in the UK grew 2.0 per cent on y-o-y basis in December 2013, falling to its target

level for the first time since November 2009. The inflation has eased dramatically in the last quarter of 2013,

averaging 2.1 per cent, in Q4, sharply lower from 2.7 per cent in September 2013. The largest negative

contribution came from 'food and non-alcoholic beverages', wherein inflation eased from 2.8 per cent in

November to 1.9 per cent last month, marking its lowest level since February 2010. On the other hand, the

contribution of 'transport' items - especially petrol and diesel - increased in December 2013.

U.K. unemployment fell to 7.1 per cent in the three months through November from 7.4 per cent in the quarter

through October 2013. The data will add pressure on BOE Governor Mark Carney to reassess his guidance policy,

under which the Monetary Policy Committee has said it will consider raising interest rates once joblessness has

fallen to 7 per cent.

In an update to its World Economic Outlook report, IMF predicted the global economy would grow 3.7 per cent

this year, 0.1 percentage point higher than its October 2013 projection. It said it sees growth of 3.9 per cent in

2015. IMF highlighted the basic reason behind the stronger global recovery as the brakes to recovery being

progressively being loosened. As per the Fund, United States is likely to be one of the bright spots, after a

budget deal in Congress reduced some of the government spending cuts that had weighed on domestic

demand.

The US Federal Reserve in its meeting held on January 29th, 2014, reduced its asset purchase program further

GLOBAL TRENDSGLOBAL TRENDS

JANUARY 2014

Page 10: Economy Matters, January 2014

8ECONOMY MATTERS

GDP, IIP, Inflation, Trade, Balance of Payments, Monetary Policy

underpinned by robust performance by exports sector.

Industry growth picked up to 2.4 per cent in Q2FY14 from

a mere 0.2 per cent in the previous quarter. The revival in

industry was led by an improvement in the construction

and utilities sector. Manufacturing growth remained

weak at 1.0 per cent, albeit it moved into the positive

territory from the previous quarter. On the aggregate

demand-side, though high interest rates in the economy

continue to impact private final consumption

expenditure growth, a vibrant rural economy helped to

negate some of the ill-effect, thus pushing its growth to

2.2 per cent from 1.6 per cent in the previous quarter.

Growth in gross fixed capital formation or investment

moved into the positive territory in second quarter,

clocking a growth of 2.6 per cent as compared to decline

to the tune of 1.2 per cent in the previous quarter.

GthDP data released on 29 November, 2013 showed

that growth increased to 4.8 per cent in the

second quarter of the current fiscal (Q2FY14 henceforth)

as compared to 4.4 per cent in the quarter before, mainly

led by healthy performance by the agriculture sector

and mild upturn in industry. With this the first-half

growth stands at 4.6 per cent as compared to 5.3 per

cent in the same period last year. From the demand-side,

GDP picked up to its highest value since March 2012,

9

DOMESTIC TRENDS

Real GDP increases in 2QFY14

4.7 4.84.4

4.8

4.1

3.02.4

5.6

3QFY13 4QFY13 1QFY14 2QFY14

GDP at factor cost GDP at market prices

Source: CSO

CII has been for long highlighting that the heightened

downside risks to growth will become more entrenched

unless bold measures are taken by the policymakers.

Even though GDP growth picked up in the 2QFY14, it

continues to remain the below 5 per cent growth for the

fourth consecutive quarter. We expect growth to pick

up from the 4.6 per cent clocked in the first-half in the

second-half of the current year and consequently expect

GDP to come in a range of 5.3-5.8 per cent in the current

fiscal. The RBI would need to take the lead and should

start the monetary easing cycle at the earliest in order to

ensure that growth picks up in the second-half. GDP for ththe third quarter is due to be released on 28 February,

2014.

The CSO released the revised estimates for 2011-12 and

2012-2013 and final estimates for 2010-11. According to

the revised estimates, the economy had grown by 4.5

per cent in 2012-13, compared with the earlier estimate

of 5 per cent. Similarly, the growth for 2010-11 was

revised downwards to 8.9 per cent from 9.3 per cent

earlier. However, GDP growth in 2011-12 has been revised

upwards to 6.7 per cent from 6.2 per cent. The major

concern emerging from these estimates is the

downward revision of growth in 2012-13, which is the

lowest in a decade. Even more worryingly, the low

growth continues to persist in the current year as well.

The second quarter GDP data has raised hopes that growth has bottomed out. However, although the worst may be

over for the economy, a recovery will not be substantive. The overall growth this fiscal year would remain below 5

per cent. The positive signals from the second quarter data included higher-than-anticipated farm output growth

and robust exports growth. Going forward, real risk to GDP growth will come from stalling consumption and

investment demand which are holding up economic recovery. The prospect of fiscal squeeze by the government, by

restraining capital expenditure, may also impact growth.

industrial output has now contracted by 0.2 per cent.

Dismal performance by industrial output growth was

preceded by muted performance of the eight crucial

sectors of the economy in November 2013, which

expanded by mere 1.7 per cent. The eight core industries-

-coal, crude oil, natural gas, refinery products, fertilisers,

steel, cement and electricity--have a combined weight of

37.9 per cent in IIP. The November core sector data

revealed dismal performance in the natural gas, fertiliser

and petroleum refinery sectors. Natural gas output fell

11.3 per cent on year-on-year basis during the month.

Industrial sector output contracted for the second

consecutive month in November 2013, despite a

supportive base effect. Industrial output declined to 2.1

per cent in November 2013, worsening from the -1.6 per

cent print seen in the previous month. The decline in IIP

during the month was underpinned by contraction in its

sub-sectors such as manufacturing and consumer

goods. The sequential momentum declined too as the

seasonally-adjusted month-on-month series moved into

the negative territory in during the month. On a

cumulative basis, for the first eight months of the fiscal,

The Bad News on the Industrial Growth Front Continues

IIP Contracts for Second Consecutive Month

Source: CSO

10

5

0

-5

-0.1

-2.1

Jul/1

2

Sep

/12

Nov

/12

Jan/

13

Mar

/13

May

/13

Jul/1

3

Sep

/13

Nov

/13

y-o-y% SA m-o-m%

Outlook

DOMESTIC TRENDS

JANUARY 2014

Page 11: Economy Matters, January 2014

8ECONOMY MATTERS

GDP, IIP, Inflation, Trade, Balance of Payments, Monetary Policy

underpinned by robust performance by exports sector.

Industry growth picked up to 2.4 per cent in Q2FY14 from

a mere 0.2 per cent in the previous quarter. The revival in

industry was led by an improvement in the construction

and utilities sector. Manufacturing growth remained

weak at 1.0 per cent, albeit it moved into the positive

territory from the previous quarter. On the aggregate

demand-side, though high interest rates in the economy

continue to impact private final consumption

expenditure growth, a vibrant rural economy helped to

negate some of the ill-effect, thus pushing its growth to

2.2 per cent from 1.6 per cent in the previous quarter.

Growth in gross fixed capital formation or investment

moved into the positive territory in second quarter,

clocking a growth of 2.6 per cent as compared to decline

to the tune of 1.2 per cent in the previous quarter.

GthDP data released on 29 November, 2013 showed

that growth increased to 4.8 per cent in the

second quarter of the current fiscal (Q2FY14 henceforth)

as compared to 4.4 per cent in the quarter before, mainly

led by healthy performance by the agriculture sector

and mild upturn in industry. With this the first-half

growth stands at 4.6 per cent as compared to 5.3 per

cent in the same period last year. From the demand-side,

GDP picked up to its highest value since March 2012,

9

DOMESTIC TRENDS

Real GDP increases in 2QFY14

4.7 4.84.4

4.8

4.1

3.02.4

5.6

3QFY13 4QFY13 1QFY14 2QFY14

GDP at factor cost GDP at market prices

Source: CSO

CII has been for long highlighting that the heightened

downside risks to growth will become more entrenched

unless bold measures are taken by the policymakers.

Even though GDP growth picked up in the 2QFY14, it

continues to remain the below 5 per cent growth for the

fourth consecutive quarter. We expect growth to pick

up from the 4.6 per cent clocked in the first-half in the

second-half of the current year and consequently expect

GDP to come in a range of 5.3-5.8 per cent in the current

fiscal. The RBI would need to take the lead and should

start the monetary easing cycle at the earliest in order to

ensure that growth picks up in the second-half. GDP for ththe third quarter is due to be released on 28 February,

2014.

The CSO released the revised estimates for 2011-12 and

2012-2013 and final estimates for 2010-11. According to

the revised estimates, the economy had grown by 4.5

per cent in 2012-13, compared with the earlier estimate

of 5 per cent. Similarly, the growth for 2010-11 was

revised downwards to 8.9 per cent from 9.3 per cent

earlier. However, GDP growth in 2011-12 has been revised

upwards to 6.7 per cent from 6.2 per cent. The major

concern emerging from these estimates is the

downward revision of growth in 2012-13, which is the

lowest in a decade. Even more worryingly, the low

growth continues to persist in the current year as well.

The second quarter GDP data has raised hopes that growth has bottomed out. However, although the worst may be

over for the economy, a recovery will not be substantive. The overall growth this fiscal year would remain below 5

per cent. The positive signals from the second quarter data included higher-than-anticipated farm output growth

and robust exports growth. Going forward, real risk to GDP growth will come from stalling consumption and

investment demand which are holding up economic recovery. The prospect of fiscal squeeze by the government, by

restraining capital expenditure, may also impact growth.

industrial output has now contracted by 0.2 per cent.

Dismal performance by industrial output growth was

preceded by muted performance of the eight crucial

sectors of the economy in November 2013, which

expanded by mere 1.7 per cent. The eight core industries-

-coal, crude oil, natural gas, refinery products, fertilisers,

steel, cement and electricity--have a combined weight of

37.9 per cent in IIP. The November core sector data

revealed dismal performance in the natural gas, fertiliser

and petroleum refinery sectors. Natural gas output fell

11.3 per cent on year-on-year basis during the month.

Industrial sector output contracted for the second

consecutive month in November 2013, despite a

supportive base effect. Industrial output declined to 2.1

per cent in November 2013, worsening from the -1.6 per

cent print seen in the previous month. The decline in IIP

during the month was underpinned by contraction in its

sub-sectors such as manufacturing and consumer

goods. The sequential momentum declined too as the

seasonally-adjusted month-on-month series moved into

the negative territory in during the month. On a

cumulative basis, for the first eight months of the fiscal,

The Bad News on the Industrial Growth Front Continues

IIP Contracts for Second Consecutive Month

Source: CSO

10

5

0

-5

-0.1

-2.1

Jul/1

2

Sep

/12

Nov

/12

Jan/

13

Mar

/13

May

/13

Jul/1

3

Sep

/13

Nov

/13

y-o-y% SA m-o-m%

Outlook

DOMESTIC TRENDS

JANUARY 2014

Page 12: Economy Matters, January 2014

On the use based front, the consistently volatile capital

goods segment continued to remain in the positive

territory, albeit growing at a lower rate as compared to

October 2013. The sector's growth moderated to 0.3 per

cent in November 2013 from 2.4 per cent in the previous

month. Consumer goods remain a drag on overall IP

growth primarily led by the continuing weakness in the

durables goods sector. During the reporting month,

consumer goods output declined for the second

consecutive month to 8.7 per cent in November 2013 as

compared to -4.9 per cent in the previous month. It's

pertinent to note here that output of consumer

durables, one of the sub-sectors of consumer goods,

has now remained in red since the starting of the current

fiscal. Such a poor performance by the sector is a

matter of concern as it is widely regarded as a proxy for

consumption growth. Non-durables on the other hand

remained in the positive territory, albeit showing a

flattish growth in November 2013 as compared to

October 2013. Going ahead we expect recovery in this

component as good agricultural GDP this year will

support rural demand, which will prop up non-durables

even if urban demand remains weak.

On the sectoral front, manufacturing sector output,

which constitutes over 75 per cent of the index, declined

by 3.5 per cent in November as against a contraction of

0.8 per cent a year ago. This is the fifth negative data

print of manufacturing output so far in this fiscal and has

elevated the upside risks to growth. In terms of

industries, ten (10) out of the twenty two (22) industry

groups (as per 2-digit NIC-2004) in the manufacturing

sector showed negative growth during the month of

November 2013 as compared to the corresponding

month of the previous year of manufacturing sector. The

industry group 'Radio, TV and communication

equipment & apparatus' showed the highest negative

growth of (-) 42.2 per cent, followed by (-) 27.5 per cent

in 'Office, accounting & computing machinery' and (-)

19.5 per cent in 'Furniture; manufacturing'. Mining

sector output which has declined by 2.2 per cent in the

year till date so far, moved into the positive territory,

growing by 1.0 per cent in November 2013 as compared

to contraction of 3.2 per cent in the previous month.

Barring a few intermittent months, electricity sector

growth has remained on a strong footing this fiscal,

growing at an average 5.4 per cent in April-November

2013.

10ECONOMY MATTERS

Fuel inflation remained stable at 11.0 per cent in

December 2013 as compared to the reading in the

previous month. Though on month-on-month basis, it

did show a 0.8 per cent increase, driven by rise in prices

LPG, electricity and high speed diesel. High-speed diesel

inflation rose to 17.0 per cent during the month as

compared to 15.7 per cent in the previous month. Going

forward, we expect fuel inflation to moderate due to

stabilisation witnessed in global crude prices and the

recent strengthening of the Rupee.

Manufacturing inflation remained subdued and broadly

unchanged at 2.6 per cent in December 2013, led by

across the board correction in prices. Non-food

manufacturing or core inflation which is widely

regarded as the proxy for demand-side pressures in the

economy too remained stable at 2.8 per cent during the

Primary inflation decelerated to 5-month low of 10.8 per

cent in December 2013 from 15.9 per cent in the previous

month and average of 14.5 per cent seen in the last 4-

months. This was mainly attributable to the sharp

slowing down of food inflation to 13.1 per cent as

compared to almost 20 per cent a month ago. Amongst

primary food inflation, vegetable prices declined by

nearly 30 per cent on month-on-month basis in

December 2013 led by massive decline in items such as

onions and tomatoes. Encouragingly, the prices of

products other than vegetables also witnessed healthy

decline during the reporting month. Non-food inflation

too moderated to 6.0 per cent as against 7.6 per cent in

the previous month. Inflation in minerals to decelerated

sharply to 2.1 per cent from 6.1 per cent in the previous

month.

11

on-month series slipped into the negative territory

during the reporting month. To be sure, consumer

prices based inflation (CPI) too slowed down, moving

into single digits after a gap of two months. For the

month of December 2013, it came at 9.87 per cent as

compared to 11.2 per cent in the previous month. The

moderation in food inflation in the month of December

2013 was expected due to seasonal factors and off-load

of fresh vegetable supply in the market.

WPI based inflation moderated to 5-month low of 6.2

per cent in December 2013 as compared to 7.5 per cent in

the previous month on the back of cooling of primary

food inflation and subdued manufacturing inflation.

Amongst the primary food prices, vegetable prices

which have been the main driver behind pushing overall

WPI higher in the last few months, moderated to 57.3

per cent in December 2013 from record high of 95 per

cent seen in the previous month. The momentum

indicator indicated by the seasonally-adjusted month-

Sectoral Growth (y-o-y, %)

Source : CSO

General 1000.0 -1.0 2.0 -1.6 -2.1 0.9 -0.2

Manufacturing 755.3 -0.8 0.6 -1.8 -3.5 0.9 -0.6

Mining 141.6 -5.5 3.3 -3.2 1.0 -1.6 -2.2

Electricity 103.2 2.4 12.9 1.3 6.3 4.4 5.4

Use-Based

Basic 456.8 1.1 5.3 -1.4 0.7 2.8 0.7

Capital 88.3 -8.5 -6.7 2.4 0.3 -11.3 -0.1

Intermediates 156.9 -1.4 4.2 2.2 3.3 1.8 2.7

Consumer Goods 298.1 -0.3 0.7 -4.9 -8.7 3.6 -2.6

-Durables 84.6 1.1 -10.8 -12.1 -21.5 5.2 -12.6

-Non durables 213.5 -1.5 11.6 2.2 2.5 2.3 6.3

Apr-Nov

Weight Nov-12 Sept-13 Oct-13 Nov-13 FY13 FY14

OutlookThe two consecutive negative data prints of industrial production is a worrying trend. It clearly conveys the

message that much more needs to be done to revive investment. The government should ensure that projects

getting cleared by the Cabinet Committee on Investment (CCI) are implemented on the ground. Government

policies should be complemented with a shift towards an accommodative policy announcement by the RBI in its

forthcoming monetary policy to revive investment and propel demand.

Inflation Moderates as Food Prices Cool-Off

Both WPI & CPI Inflation Moderate

Source: Office of Economic Advisor

12

10

8

6

4

2

10.3

7.5

6.2

9.9

Apr

/12

Jun/

12

Aug

/12

Oct

/12

Dec

/12

Feb

/13

Jun/

13

Aug

/13

Oct

/13

Dec

/13

Apr

/13

WPI y-o-y% CPI (Combined) y-o-y%

DOMESTIC TRENDSDOMESTIC TRENDS

JANUARY 2014

Page 13: Economy Matters, January 2014

On the use based front, the consistently volatile capital

goods segment continued to remain in the positive

territory, albeit growing at a lower rate as compared to

October 2013. The sector's growth moderated to 0.3 per

cent in November 2013 from 2.4 per cent in the previous

month. Consumer goods remain a drag on overall IP

growth primarily led by the continuing weakness in the

durables goods sector. During the reporting month,

consumer goods output declined for the second

consecutive month to 8.7 per cent in November 2013 as

compared to -4.9 per cent in the previous month. It's

pertinent to note here that output of consumer

durables, one of the sub-sectors of consumer goods,

has now remained in red since the starting of the current

fiscal. Such a poor performance by the sector is a

matter of concern as it is widely regarded as a proxy for

consumption growth. Non-durables on the other hand

remained in the positive territory, albeit showing a

flattish growth in November 2013 as compared to

October 2013. Going ahead we expect recovery in this

component as good agricultural GDP this year will

support rural demand, which will prop up non-durables

even if urban demand remains weak.

On the sectoral front, manufacturing sector output,

which constitutes over 75 per cent of the index, declined

by 3.5 per cent in November as against a contraction of

0.8 per cent a year ago. This is the fifth negative data

print of manufacturing output so far in this fiscal and has

elevated the upside risks to growth. In terms of

industries, ten (10) out of the twenty two (22) industry

groups (as per 2-digit NIC-2004) in the manufacturing

sector showed negative growth during the month of

November 2013 as compared to the corresponding

month of the previous year of manufacturing sector. The

industry group 'Radio, TV and communication

equipment & apparatus' showed the highest negative

growth of (-) 42.2 per cent, followed by (-) 27.5 per cent

in 'Office, accounting & computing machinery' and (-)

19.5 per cent in 'Furniture; manufacturing'. Mining

sector output which has declined by 2.2 per cent in the

year till date so far, moved into the positive territory,

growing by 1.0 per cent in November 2013 as compared

to contraction of 3.2 per cent in the previous month.

Barring a few intermittent months, electricity sector

growth has remained on a strong footing this fiscal,

growing at an average 5.4 per cent in April-November

2013.

10ECONOMY MATTERS

Fuel inflation remained stable at 11.0 per cent in

December 2013 as compared to the reading in the

previous month. Though on month-on-month basis, it

did show a 0.8 per cent increase, driven by rise in prices

LPG, electricity and high speed diesel. High-speed diesel

inflation rose to 17.0 per cent during the month as

compared to 15.7 per cent in the previous month. Going

forward, we expect fuel inflation to moderate due to

stabilisation witnessed in global crude prices and the

recent strengthening of the Rupee.

Manufacturing inflation remained subdued and broadly

unchanged at 2.6 per cent in December 2013, led by

across the board correction in prices. Non-food

manufacturing or core inflation which is widely

regarded as the proxy for demand-side pressures in the

economy too remained stable at 2.8 per cent during the

Primary inflation decelerated to 5-month low of 10.8 per

cent in December 2013 from 15.9 per cent in the previous

month and average of 14.5 per cent seen in the last 4-

months. This was mainly attributable to the sharp

slowing down of food inflation to 13.1 per cent as

compared to almost 20 per cent a month ago. Amongst

primary food inflation, vegetable prices declined by

nearly 30 per cent on month-on-month basis in

December 2013 led by massive decline in items such as

onions and tomatoes. Encouragingly, the prices of

products other than vegetables also witnessed healthy

decline during the reporting month. Non-food inflation

too moderated to 6.0 per cent as against 7.6 per cent in

the previous month. Inflation in minerals to decelerated

sharply to 2.1 per cent from 6.1 per cent in the previous

month.

11

on-month series slipped into the negative territory

during the reporting month. To be sure, consumer

prices based inflation (CPI) too slowed down, moving

into single digits after a gap of two months. For the

month of December 2013, it came at 9.87 per cent as

compared to 11.2 per cent in the previous month. The

moderation in food inflation in the month of December

2013 was expected due to seasonal factors and off-load

of fresh vegetable supply in the market.

WPI based inflation moderated to 5-month low of 6.2

per cent in December 2013 as compared to 7.5 per cent in

the previous month on the back of cooling of primary

food inflation and subdued manufacturing inflation.

Amongst the primary food prices, vegetable prices

which have been the main driver behind pushing overall

WPI higher in the last few months, moderated to 57.3

per cent in December 2013 from record high of 95 per

cent seen in the previous month. The momentum

indicator indicated by the seasonally-adjusted month-

Sectoral Growth (y-o-y, %)

Source : CSO

General 1000.0 -1.0 2.0 -1.6 -2.1 0.9 -0.2

Manufacturing 755.3 -0.8 0.6 -1.8 -3.5 0.9 -0.6

Mining 141.6 -5.5 3.3 -3.2 1.0 -1.6 -2.2

Electricity 103.2 2.4 12.9 1.3 6.3 4.4 5.4

Use-Based

Basic 456.8 1.1 5.3 -1.4 0.7 2.8 0.7

Capital 88.3 -8.5 -6.7 2.4 0.3 -11.3 -0.1

Intermediates 156.9 -1.4 4.2 2.2 3.3 1.8 2.7

Consumer Goods 298.1 -0.3 0.7 -4.9 -8.7 3.6 -2.6

-Durables 84.6 1.1 -10.8 -12.1 -21.5 5.2 -12.6

-Non durables 213.5 -1.5 11.6 2.2 2.5 2.3 6.3

Apr-Nov

Weight Nov-12 Sept-13 Oct-13 Nov-13 FY13 FY14

OutlookThe two consecutive negative data prints of industrial production is a worrying trend. It clearly conveys the

message that much more needs to be done to revive investment. The government should ensure that projects

getting cleared by the Cabinet Committee on Investment (CCI) are implemented on the ground. Government

policies should be complemented with a shift towards an accommodative policy announcement by the RBI in its

forthcoming monetary policy to revive investment and propel demand.

Inflation Moderates as Food Prices Cool-Off

Both WPI & CPI Inflation Moderate

Source: Office of Economic Advisor

12

10

8

6

4

2

10.3

7.5

6.2

9.9

Apr

/12

Jun/

12

Aug

/12

Oct

/12

Dec

/12

Feb

/13

Jun/

13

Aug

/13

Oct

/13

Dec

/13

Apr

/13

WPI y-o-y% CPI (Combined) y-o-y%

DOMESTIC TRENDSDOMESTIC TRENDS

JANUARY 2014

Page 14: Economy Matters, January 2014

inflation measure. Mirroring the sharp deceleration in

primary food inflation, manufactured food products

inflation also slowed down to 1.8 per cent in December

2013 from 2.5 per cent in the previous month.

month as compared to 2.7 per cent in November 2013.

The stability in the core inflation since the last two

quarters is an indication of weak pricing power of the

corporate. In the coming months, we expect core WPI to

remain at sub 3 per cent, RBI's comfort level for this

the hike is also in consonance with upside risks towards

achievement of the 12-month target of 8 per cent for

headline CPI inflation, the new nominal anchor.

In its policy review, RBI mentioned that the GDP growth

is expected to firm up from sub 5 per cent in the current

fiscal to 5-6 per cent in next fiscal with support from

exports, pick up in investment and expected decline in

inflation levels. CPI inflation was expected to decline to

close to 9 per cent by March-2014 and continue to fall in

FY2015, though upside risks remain to the central

forecast of 8 per cent

Reserve Bank of India (RBI) in its third quarter monetary thpolicy review held on 28 January 2014 chose to hike the

repo rate by 25 bps to 8.00 per cent. Citing concerns

regarding the stickiness in core CPI and upward bias in

core WPI inflation, the Central Bank made it aptly clear

that only by bringing down inflation to a low and stable

level that monetary policy can contribute to reviving

consumption and investment in a sustainable way. The

Central Bank also implicitly appears to have accepted Dr.

Urijit Patel Committee's recommendations to

strengthen the monetary policy framework and hence,

12ECONOMY MATTERS 13

investment. This in turn is aggravating the supply

bottlenecks and adding to inflationary pressure,

thereby inducing the RBI to hold on to higher interest

rates. This circularity can be broken only by a change in

the monetary policy stance sooner than later. And this is

an opportune time to accord precedence to growth

over inflation especially as prices are trending

downwards and inflationary expectations are not

unduly high in view of a robust performance by the

agriculture sector.

CII is surprised by the RBI's decision to increase the repo

rate, when all indicators were suggesting maintaining a

'status-quo'. While the overwhelming concern of the

monetary authorities is to keep inflation under check, it

is also expected that the RBI should have taken

cognisance of the faltering investment and

consumption demand which is preventing the economy

from realising its growth potential. India has entered a

cycle where higher interest rates are leading to subdued

demand conditions resulting in lower growth and

Sectoral Components of Inflation

Source: Office of Economic Advisor

General 100.0 7.3 7.2 7.5 6.2 7.6 6.2

Primary 20.1 10.6 14.6 15.9 10.8 9.8 10.9

- Food 14.3 11.2 18.3 19.9 13.1 9.6 14.1

- Non-Food 4.3 13.6 7.1 7.6 6.0 10.4 5.8

- Minerals 1.5 5.6 4.6 6.1 2.1 10.7 0.8

Fuel 14.9 10.2 10.5 11.1 11.0 10.7 10.2

- Petrol 1.1 3.4 5.3 4.4 5.4 7.4 2.3

- High Speed Diesel 4.7 14.6 14.6 15.7 17.0 8.7 20.5

Manufacturing 65.0 5.0 2.8 2.6 2.6 5.7 2.8

- Food 10.0 8.7 2.3 2.5 1.8 8.1 3.9

- Non-food 55.0 4.3 2.9 2.7 2.8 5.2 2.6

April-Dec

Weight Dec-12 Oct-13 Nov-13 Dec-13 FY13 FY14

OutlookDecember month's inflation data print both at retail and wholesale level has been reassuring and conforms to RBI's

expectation of a notable correction on account of decline in vegetable prices. Stability in core inflation is an

indicator of weak demand conditions. Moreover, the lagged effects of effective monetary tightening since

September 2013 would also exert an opposite force on inflation in the coming months. Consequently, we expect the

RBI to cut rates in its forthcoming monetary policy review, in order to provide a fillip to falling growth.

Inflation Control Finds Priority with RBI

RBI Hikes Repo Rate (%)

Source: RBI

Oct

-07

Mar

-08

Aug

-08

Jan-

09

Jun-

09

Nov

-09

Apr

-10

Sep

-10

Feb

-11

Jul-1

1

Dec

-11

May

-12

Oct

-12

Mar

-13

Aug

-13

Jan-

14

10.00

9.00

8.00

7.00

6.00

5.00

4.00

3.00

8.00

7.00

4.00

Repo rate Reverse repo rate CRR

Exports Growth Weakens for the Second Consecutive MonthUS$217.4 billion a year ago, thus registering a year-on-

year growth of 5.9 per cent.

Imports during December 2013 were valued at US$36.5

billion, posting a decline to the tune of 15.3 per cent over

the same month last year, as weak domestic demand

and restrictions on gold imports lowered non-oil

imports by nearly 23 per cent on year-on-year basis.

India imports almost all of the gold it consumes. The

yellow metal is the country's second-biggest import

after oil and was an important reason for driving the

country's current account gap to a record high last year,

pushing the rupee sharply lower. Oil imports rose

slightly by 1.0 per cent reversing the fall seen last month.

Going forward, consumption goods import may pick up

as household consumption improves. A revival in

household demand would be supported by higher farm

incomes due to a good monsoon.

The pace of expansion of exports slackened for the

second consecutive month in December 2013. Exports

growth moderated to 3.5 per cent in December 2013 as

compared to 5.9 per cent in the previous month. The

slowdown was attributable primarily to decline in the

shipments of petroleum products during the month.

Exports of petroleum products fell 16 per cent to US$4.8

billion in December 2013. That was mainly due to an

unexpected maintenance shutdown by energy giant

Reliance Industries, India's biggest exporter of

petroleum products and second-biggest company by

market value. Exports had been growing at a double-

digit rate until October but lost momentum in the last

two months, signalling that the worst might not be all

over as yet for the Indian economy. Cumulative value of

exports for the first nine months of the current fiscal

(Apr-Dec) were valued at US$230.3 billion as against

DOMESTIC TRENDS DOMESTIC TRENDS

JANUARY 2014

Page 15: Economy Matters, January 2014

inflation measure. Mirroring the sharp deceleration in

primary food inflation, manufactured food products

inflation also slowed down to 1.8 per cent in December

2013 from 2.5 per cent in the previous month.

month as compared to 2.7 per cent in November 2013.

The stability in the core inflation since the last two

quarters is an indication of weak pricing power of the

corporate. In the coming months, we expect core WPI to

remain at sub 3 per cent, RBI's comfort level for this

the hike is also in consonance with upside risks towards

achievement of the 12-month target of 8 per cent for

headline CPI inflation, the new nominal anchor.

In its policy review, RBI mentioned that the GDP growth

is expected to firm up from sub 5 per cent in the current

fiscal to 5-6 per cent in next fiscal with support from

exports, pick up in investment and expected decline in

inflation levels. CPI inflation was expected to decline to

close to 9 per cent by March-2014 and continue to fall in

FY2015, though upside risks remain to the central

forecast of 8 per cent

Reserve Bank of India (RBI) in its third quarter monetary thpolicy review held on 28 January 2014 chose to hike the

repo rate by 25 bps to 8.00 per cent. Citing concerns

regarding the stickiness in core CPI and upward bias in

core WPI inflation, the Central Bank made it aptly clear

that only by bringing down inflation to a low and stable

level that monetary policy can contribute to reviving

consumption and investment in a sustainable way. The

Central Bank also implicitly appears to have accepted Dr.

Urijit Patel Committee's recommendations to

strengthen the monetary policy framework and hence,

12ECONOMY MATTERS 13

investment. This in turn is aggravating the supply

bottlenecks and adding to inflationary pressure,

thereby inducing the RBI to hold on to higher interest

rates. This circularity can be broken only by a change in

the monetary policy stance sooner than later. And this is

an opportune time to accord precedence to growth

over inflation especially as prices are trending

downwards and inflationary expectations are not

unduly high in view of a robust performance by the

agriculture sector.

CII is surprised by the RBI's decision to increase the repo

rate, when all indicators were suggesting maintaining a

'status-quo'. While the overwhelming concern of the

monetary authorities is to keep inflation under check, it

is also expected that the RBI should have taken

cognisance of the faltering investment and

consumption demand which is preventing the economy

from realising its growth potential. India has entered a

cycle where higher interest rates are leading to subdued

demand conditions resulting in lower growth and

Sectoral Components of Inflation

Source: Office of Economic Advisor

General 100.0 7.3 7.2 7.5 6.2 7.6 6.2

Primary 20.1 10.6 14.6 15.9 10.8 9.8 10.9

- Food 14.3 11.2 18.3 19.9 13.1 9.6 14.1

- Non-Food 4.3 13.6 7.1 7.6 6.0 10.4 5.8

- Minerals 1.5 5.6 4.6 6.1 2.1 10.7 0.8

Fuel 14.9 10.2 10.5 11.1 11.0 10.7 10.2

- Petrol 1.1 3.4 5.3 4.4 5.4 7.4 2.3

- High Speed Diesel 4.7 14.6 14.6 15.7 17.0 8.7 20.5

Manufacturing 65.0 5.0 2.8 2.6 2.6 5.7 2.8

- Food 10.0 8.7 2.3 2.5 1.8 8.1 3.9

- Non-food 55.0 4.3 2.9 2.7 2.8 5.2 2.6

April-Dec

Weight Dec-12 Oct-13 Nov-13 Dec-13 FY13 FY14

OutlookDecember month's inflation data print both at retail and wholesale level has been reassuring and conforms to RBI's

expectation of a notable correction on account of decline in vegetable prices. Stability in core inflation is an

indicator of weak demand conditions. Moreover, the lagged effects of effective monetary tightening since

September 2013 would also exert an opposite force on inflation in the coming months. Consequently, we expect the

RBI to cut rates in its forthcoming monetary policy review, in order to provide a fillip to falling growth.

Inflation Control Finds Priority with RBI

RBI Hikes Repo Rate (%)

Source: RBI

Oct

-07

Mar

-08

Aug

-08

Jan-

09

Jun-

09

Nov

-09

Apr

-10

Sep

-10

Feb

-11

Jul-1

1

Dec

-11

May

-12

Oct

-12

Mar

-13

Aug

-13

Jan-

14

10.00

9.00

8.00

7.00

6.00

5.00

4.00

3.00

8.00

7.00

4.00

Repo rate Reverse repo rate CRR

Exports Growth Weakens for the Second Consecutive MonthUS$217.4 billion a year ago, thus registering a year-on-

year growth of 5.9 per cent.

Imports during December 2013 were valued at US$36.5

billion, posting a decline to the tune of 15.3 per cent over

the same month last year, as weak domestic demand

and restrictions on gold imports lowered non-oil

imports by nearly 23 per cent on year-on-year basis.

India imports almost all of the gold it consumes. The

yellow metal is the country's second-biggest import

after oil and was an important reason for driving the

country's current account gap to a record high last year,

pushing the rupee sharply lower. Oil imports rose

slightly by 1.0 per cent reversing the fall seen last month.

Going forward, consumption goods import may pick up

as household consumption improves. A revival in

household demand would be supported by higher farm

incomes due to a good monsoon.

The pace of expansion of exports slackened for the

second consecutive month in December 2013. Exports

growth moderated to 3.5 per cent in December 2013 as

compared to 5.9 per cent in the previous month. The

slowdown was attributable primarily to decline in the

shipments of petroleum products during the month.

Exports of petroleum products fell 16 per cent to US$4.8

billion in December 2013. That was mainly due to an

unexpected maintenance shutdown by energy giant

Reliance Industries, India's biggest exporter of

petroleum products and second-biggest company by

market value. Exports had been growing at a double-

digit rate until October but lost momentum in the last

two months, signalling that the worst might not be all

over as yet for the Indian economy. Cumulative value of

exports for the first nine months of the current fiscal

(Apr-Dec) were valued at US$230.3 billion as against

DOMESTIC TRENDS DOMESTIC TRENDS

JANUARY 2014

Page 16: Economy Matters, January 2014

US$9.2 billion in November 2013. On a cumulative basis,

trade deficit came in at US$110.0 billion in April-

December FY14, lower than a deficit of US$146.8 billion

during the same period in FY13.

As the pace of decline of imports waned, without a

commensurate rise in exports growth, trade deficit in

December 2013 widened slightly to US$10.1 billion from

OutlookThe economic conditions in the U.S. and the Euro Zone are not very favorable for exports and we hope the Indian

government will help the exporters by providing help by way of including more products and countries for Focus

Product Scheme and Focus market Scheme, where we have a comparative advantage. Also we need to relook at the

duty drawback rates. These measures, if announced at the earliest will give the necessary push to the industry which

can then benefit the industry and help them reach the export target.

14ECONOMY MATTERS

Know Your Facts: Banking Stability Index*The quality of assets in the Indian banking system has emerged as a cause of concern for the central bank in recent

times. The asset quality has suffered due to a rise in the non-performing loans. It is also worrying for policymakers

that a large portion of distressed assets in the banking system is concentrated in just a few sectors such as

infrastructure, aviation, mining and textile. Concentration of bad assets in a handful of sectors increases the risk for

the banking system as default in one sector can put significant pressure on the balance sheet of several banks.

Further, since the banking and the financial system is highly interconnected, the failure of one bank, or some banks,

is likely to affect the stability of other banks. This interdependence is measured by the Banking Stability Index. The

Reserve Bank of India (RBI) defines Banking Stability Index (BSI) as "the expected number of banks that could

become distressed given that at least one bank has become distressed". The Financial Stability Report (FSR),

released by RBI on the 30 December 2013, highlighted that the BSI has gone up since August 2013. This means that

more banks are expected to become distressed if one bank in the system is distressed.

*Adapted from Mint dated January 02, 2014

15

External Sector Performance (y-o-y %)

Source: Ministry of Commerce

20

10

0

-10

-20

3.5

-15.3

Exports Imports

Apr

/12

Jun/

12

Aug

/12

Oct

/12

Dec

/12

Feb

/13

Jun/

13

Aug

/13

Oct

/13

Dec

/13

Apr

/13

Current Account Deficit Improves Sharply in 2QFY14

billion in Q1FY14. On the capital account, foreign

investment witnessed marginal inflows of US$0.3 billion

as FDI net inflows (i.e. US$6.9billion) in Q2 were negated

by portfolio outflows (US$6.6 billion). While the outflow

on portfolio account was anticipated, sharp decline in

banking capital inflows and other capital outflows

worth US$6.9 billion led to a drawdown of US$10.3

billion on forex reserves. Correspondingly, BoP

witnessed a deficit of US$10.4 billion in Q2 as against a

deficit of US$0.3 billion in Q1.

The latest data released for the second-quarter of 2013-rd14 on December 3 , 2013 shows that the current account

deficit (CAD) narrowed sharply to 1.2 per cent of GDP

from 4.9 per cent in the previous quarter. Narrowing of

CAD was primarily on account of lower trade deficit on

the back of sharp compression in gold imports and

encouraging growth in exports. Merchandise trade

deficit narrowed to US$33.3 billion in Q2 (7.9 per cent of

GDP) due to the turnaround in export growth and

decline in imports. In value terms CAD was recorded at a

16 quarter low of US$5.2 billion as compared to US$21.8

Current Account Deficit Narrows Sharply in 2QFY14

Source: RBI

35

30

25

20

15

10

5

0

8

6

4

2

0

12.6

32.6

18.1

21.8

5.2

5.4

6.7

3.6

4.9

1.2

2QFY13 3QFY13 3QFY13 1QFY14 2QFY14

CAD (US$ billion) CAD (as a % of GDP) RHS

OutlookContinued improvement in export performance and expected traction in invisibles inflows are expected to support

a lower reading on the current account deficit. The reduction in imports would further help ease pressure on CAD.

Consequently, CAD during the current fiscal is expected to come down to 2.6 per cent, as predicted by the

government. On the capital account, improving domestic growth outlook amid receding concerns on CAD are likely

to partially counterbalance the concerns on taper and as such may improve the outlook on equity flows going

forward.

DOMESTIC TRENDSDOMESTIC TRENDS

JANUARY 2014

Page 17: Economy Matters, January 2014

US$9.2 billion in November 2013. On a cumulative basis,

trade deficit came in at US$110.0 billion in April-

December FY14, lower than a deficit of US$146.8 billion

during the same period in FY13.

As the pace of decline of imports waned, without a

commensurate rise in exports growth, trade deficit in

December 2013 widened slightly to US$10.1 billion from

OutlookThe economic conditions in the U.S. and the Euro Zone are not very favorable for exports and we hope the Indian

government will help the exporters by providing help by way of including more products and countries for Focus

Product Scheme and Focus market Scheme, where we have a comparative advantage. Also we need to relook at the

duty drawback rates. These measures, if announced at the earliest will give the necessary push to the industry which

can then benefit the industry and help them reach the export target.

14ECONOMY MATTERS

Know Your Facts: Banking Stability Index*The quality of assets in the Indian banking system has emerged as a cause of concern for the central bank in recent

times. The asset quality has suffered due to a rise in the non-performing loans. It is also worrying for policymakers

that a large portion of distressed assets in the banking system is concentrated in just a few sectors such as

infrastructure, aviation, mining and textile. Concentration of bad assets in a handful of sectors increases the risk for

the banking system as default in one sector can put significant pressure on the balance sheet of several banks.

Further, since the banking and the financial system is highly interconnected, the failure of one bank, or some banks,

is likely to affect the stability of other banks. This interdependence is measured by the Banking Stability Index. The

Reserve Bank of India (RBI) defines Banking Stability Index (BSI) as "the expected number of banks that could

become distressed given that at least one bank has become distressed". The Financial Stability Report (FSR),

released by RBI on the 30 December 2013, highlighted that the BSI has gone up since August 2013. This means that

more banks are expected to become distressed if one bank in the system is distressed.

*Adapted from Mint dated January 02, 2014

15

External Sector Performance (y-o-y %)

Source: Ministry of Commerce

20

10

0

-10

-20

3.5

-15.3

Exports Imports

Apr

/12

Jun/

12

Aug

/12

Oct

/12

Dec

/12

Feb

/13

Jun/

13

Aug

/13

Oct

/13

Dec

/13

Apr

/13

Current Account Deficit Improves Sharply in 2QFY14

billion in Q1FY14. On the capital account, foreign

investment witnessed marginal inflows of US$0.3 billion

as FDI net inflows (i.e. US$6.9billion) in Q2 were negated

by portfolio outflows (US$6.6 billion). While the outflow

on portfolio account was anticipated, sharp decline in

banking capital inflows and other capital outflows

worth US$6.9 billion led to a drawdown of US$10.3

billion on forex reserves. Correspondingly, BoP

witnessed a deficit of US$10.4 billion in Q2 as against a

deficit of US$0.3 billion in Q1.

The latest data released for the second-quarter of 2013-rd14 on December 3 , 2013 shows that the current account

deficit (CAD) narrowed sharply to 1.2 per cent of GDP

from 4.9 per cent in the previous quarter. Narrowing of

CAD was primarily on account of lower trade deficit on

the back of sharp compression in gold imports and

encouraging growth in exports. Merchandise trade

deficit narrowed to US$33.3 billion in Q2 (7.9 per cent of

GDP) due to the turnaround in export growth and

decline in imports. In value terms CAD was recorded at a

16 quarter low of US$5.2 billion as compared to US$21.8

Current Account Deficit Narrows Sharply in 2QFY14

Source: RBI

35

30

25

20

15

10

5

0

8

6

4

2

0

12.6

32.6

18.1

21.8

5.2

5.4

6.7

3.6

4.9

1.2

2QFY13 3QFY13 3QFY13 1QFY14 2QFY14

CAD (US$ billion) CAD (as a % of GDP) RHS

OutlookContinued improvement in export performance and expected traction in invisibles inflows are expected to support

a lower reading on the current account deficit. The reduction in imports would further help ease pressure on CAD.

Consequently, CAD during the current fiscal is expected to come down to 2.6 per cent, as predicted by the

government. On the capital account, improving domestic growth outlook amid receding concerns on CAD are likely

to partially counterbalance the concerns on taper and as such may improve the outlook on equity flows going

forward.

DOMESTIC TRENDSDOMESTIC TRENDS

JANUARY 2014

Page 18: Economy Matters, January 2014

Govt.'s View Point on Some Critical International Taxation Issues

TAXATION

Guest Interview

16ECONOMY MATTERS

Q2: What is the current status of renewed dialogues

with US Competent Authorities? Are you expecting any

major cases to be closed?

Q 3: The APA process has been very smooth so far. Are

you expecting APA closure in the coming weeks? Any

changes to be made in the APA process in coming

months after first year learnings?

Q 4: Is India looking at "Cyprus" like situation with more

treaty partners to enforce effective exchange of

information?

Ans 2: Renewed dialogue with the US is progressing

along planned lines. There may be a meeting very soon

and we sincerely hope that at least a few cases will be

resolved by end-March.

Ans 3: We are happy to note the public response to the

APA process. We are certainly hoping that agreements

will be reached in a few cases perhaps in February itself

but the procedural aspects are likely to take some time

and so the actual APAs may not start rolling out before

March. Government is examining the issue of the

possibility of bilateral APAs even where the relevant

DTAA does not have Article 9(2) in it.

Q1: The response to Transfer pricing safe harbour

filings has not been encouraging. What would be the

main reasons for the same and anything more that

Government is contemplating to make safe harbour

more acceptable?

Ans 1: Response has also not been discouraging. We

gather that it was more of taxpayers not being sure how

everyone else was responding to the rules! Also, there

are probably some definitional issues that are creating

uncertainties and we would shortly be going into them

for the purposes of further clarifying Government

intent.

Mr Akhilesh RanjanJoint Secretary (FT&TR-I)

Department of Revenue, Ministry of FinanceGovernment of India

17

Ans 4: Efforts are being made to resolve issues in this

regard with some countries. We hope there will be no

further occasion to take strong unilateral steps.

Ans 5: The work distribution in FT&TR had become quite

uneven. It is hoped that the redistribution will enable

faster and more focused work in important areas.

Q 5: There has been reorganisation in FT&TR. How will

these changes affect delivery of services to taxpayers?

Q 6: Has the Indian Government provided its comments

and feedback as part of the BEP's consultative process?

What are the important "asks" put forward by India ?

Ans 6: India is engaging quite closely with other G20

member countries in the BEPS process. We are involved

in almost all of the different action points. India is also

part of the BEPS Bureau Plus which is coordinating and

guiding the work being done in all areas. We would

request Indian industry, particularly through the CII, to

carefully examine the BEPS discussion papers that have

now started coming out for public consultation and

forward to us their valued comments. The first paper on

Transfer Pricing Documentation is already out.

ECONOMY MATTERS

n

n

n

Keeps readers abreast of global & domestic

economic developments

Monthly Journal of top management of 8000

companies

Read by CII Members, Thought Leaders,

Diplomats, Policy Makers, MPs and other

decision makers

The Facts

n

n

n

n

n

n

n

Domestic Trends

Corporate Performance

Sector in Focus

Special Article

Special Feature

Economy Monitor

Global Trends

The Coverage

CII invites full-page* Advertisements for this

flagship document at an attractive rate of Rs

60,000 per issue and Rs 6 lakh for 12 issues.

For more details, Please Contact: Confederation of Indian Industry

The Mantosh Sondhi Centre, 23, Institutional Area, Lodi Road, New Delhi- 110003 (INDIA)Tel : +91-011-24629994-7, Fax: +91-011-24626149; Email: [email protected]

Dr. Danish A. Hashim, Director- Economic Research

TAXATION

JANUARY 2014

Page 19: Economy Matters, January 2014

Govt.'s View Point on Some Critical International Taxation Issues

TAXATION

Guest Interview

16ECONOMY MATTERS

Q2: What is the current status of renewed dialogues

with US Competent Authorities? Are you expecting any

major cases to be closed?

Q 3: The APA process has been very smooth so far. Are

you expecting APA closure in the coming weeks? Any

changes to be made in the APA process in coming

months after first year learnings?

Q 4: Is India looking at "Cyprus" like situation with more

treaty partners to enforce effective exchange of

information?

Ans 2: Renewed dialogue with the US is progressing

along planned lines. There may be a meeting very soon

and we sincerely hope that at least a few cases will be

resolved by end-March.

Ans 3: We are happy to note the public response to the

APA process. We are certainly hoping that agreements

will be reached in a few cases perhaps in February itself

but the procedural aspects are likely to take some time

and so the actual APAs may not start rolling out before

March. Government is examining the issue of the

possibility of bilateral APAs even where the relevant

DTAA does not have Article 9(2) in it.

Q1: The response to Transfer pricing safe harbour

filings has not been encouraging. What would be the

main reasons for the same and anything more that

Government is contemplating to make safe harbour

more acceptable?

Ans 1: Response has also not been discouraging. We

gather that it was more of taxpayers not being sure how

everyone else was responding to the rules! Also, there

are probably some definitional issues that are creating

uncertainties and we would shortly be going into them

for the purposes of further clarifying Government

intent.

Mr Akhilesh RanjanJoint Secretary (FT&TR-I)

Department of Revenue, Ministry of FinanceGovernment of India

17

Ans 4: Efforts are being made to resolve issues in this

regard with some countries. We hope there will be no

further occasion to take strong unilateral steps.

Ans 5: The work distribution in FT&TR had become quite

uneven. It is hoped that the redistribution will enable

faster and more focused work in important areas.

Q 5: There has been reorganisation in FT&TR. How will

these changes affect delivery of services to taxpayers?

Q 6: Has the Indian Government provided its comments

and feedback as part of the BEP's consultative process?

What are the important "asks" put forward by India ?

Ans 6: India is engaging quite closely with other G20

member countries in the BEPS process. We are involved

in almost all of the different action points. India is also

part of the BEPS Bureau Plus which is coordinating and

guiding the work being done in all areas. We would

request Indian industry, particularly through the CII, to

carefully examine the BEPS discussion papers that have

now started coming out for public consultation and

forward to us their valued comments. The first paper on

Transfer Pricing Documentation is already out.

ECONOMY MATTERS

n

n

n

Keeps readers abreast of global & domestic

economic developments

Monthly Journal of top management of 8000

companies

Read by CII Members, Thought Leaders,

Diplomats, Policy Makers, MPs and other

decision makers

The Facts

n

n

n

n

n

n

n

Domestic Trends

Corporate Performance

Sector in Focus

Special Article

Special Feature

Economy Monitor

Global Trends

The Coverage

CII invites full-page* Advertisements for this

flagship document at an attractive rate of Rs

60,000 per issue and Rs 6 lakh for 12 issues.

For more details, Please Contact: Confederation of Indian Industry

The Mantosh Sondhi Centre, 23, Institutional Area, Lodi Road, New Delhi- 110003 (INDIA)Tel : +91-011-24629994-7, Fax: +91-011-24626149; Email: [email protected]

Dr. Danish A. Hashim, Director- Economic Research

TAXATION

JANUARY 2014

Page 20: Economy Matters, January 2014

documentation rules, requiring MNEs to provide all

relevant Governments, with needed information on

their global allocation of the income, economic activity

and taxes paid among countries according to a common

template. For me personally, more than defining

specific rules of profit allocation, transparency of

information could be a 'game changer'. This will

certainly provide a "big picture" & held identify value

creation to the revenue authorities. OECD's outcome is

expected to be in the form of recommendations

regarding the design of domestic rules and it has set an

aggressive deadline of September 2014.

As a member of G20, India too has endorsed BEPS Action

Plan. Indian revenue has welcomed BEPS initiative and is

also participating in various working groups set-up

under BEPS. Specifically in the area of Transfer pricing,

India has stated that OECD or United Nations work on

transfer pricing has ignored developing countries'

perspective. India has also specifically expressed its

reservations to UN Transfer Pricing Manual (2012 ) on

areas such as risk allocation, location savings,

intangibles (these issues are also part of BEPS).

Specifically for risk, India has stated that it is unfair to

give undue importance to risk in determination of arm's

length price. India believes the risk is a by?product of

performance of functions and ownership, exploitation

or use of assets. India has also taken aggressive stand on

compensation of market based intangibles. Many

believe that acceptance of these issues by OECD,

vindicates India's stand, particularly with respect to

"source" (or market based) based taxation principles.

OECD's Pascal Saint-Amans during January 2014 update

has said that they are on track on 'ambitious' BEPS

timelines. The next 24 months & BEPS "success" will

shape the future of international taxation and also

hopefully would address Indian revenue's concerns.

Businesses too need to factor 'moral tax' issues on one

hand and balancing compliance costs and business

certainty on the other. It is therefore imperative that all

the stakeholders including from India, actively

participate in BEPS process & proactively get ready to

face this "directional" change in international taxation.

What does it mean for India?

order to achieve this objective, OECD has initiated 3

specific actions, first dealing with intangibles (Action No

8), risk & capital (Action No 9) and high risk transactions

that rarely occur between third parties (Action No 10).

The fourth aspect deals with re-examining TP

documentation (Action No 13).

Action 9 states that OECD will develop special measures

to ensure that inappropriate returns will not accrue to an

entity, solely because it has contractually assumed risks

or has provided capital. Action 10 pertains to providing

circumstances for re-characterisation of high risk

transactions, application of profit split in global value

chains and provide protection against common types of

base eroding payments, such as management fees and

head office expenses.

OECD proposes to develop special rules to prevent BEPS

by moving intangibles within MNC Group members. This

entails identifying and defining intangibles, ensuring

profit allocation in line with (rather than divorced from)

value creation, solutions for hard-to-value intangibles

and cost contribution arrangements (covered under

Action 8).

Even before BEPS, OECD had already started work on TP

aspects of intangibles since 2010 and has issued two

discussion drafts, followed by two public consultations

(last one was held in Paris in November 2013). In the

second discussion draft on intangibles, OECD has

proposed that no separate adjustment for "location

savings" is warranted where reliable local comparables

are available. Another significant proposal includes

eligibility of full returns to legal owner of intangibles,

only when he performs all important functions related

to development, enhancement, maintenance &

protection. The deadline for Phase 1 of this action step is

September 2014 wherein OECD is expected to suggest

changes to the Transfer Pricing Guidelines and possibly

to the Model Tax Convention.

Improving transparency for tax administration is one of

the focus areas under BEPS Action Plan. OECD is

proposing under Action 13 re-examination of TP

Action Plan on Intangibles

Action Plan on TP Documentation

(Views are personal)

19

BEPS Action Plan on Transfer Pricing - Changing Rules of the Game?

18ECONOMY MATTERS

intangibles and TP documentation are some of the

significant action points, which are especially relevant in

the current Indian context.

Tax treaties determine allocation of taxing rights

between countries. Transfer pricing on the other hand

determines quantum of allocation profits (and

therefore the tax base) between countries arising out of

transactions associated entities. OECD has found "arm's

length" as solution to deal with transfer pricing. The

arm's length principle is founded on the basis that profit

allocation will follow "functions, assets and risks (FAR)".

India too has adopted arm's length approach for its

Transfer pricing law and it is a subject matter of great

debate between taxpayers and Revenue authorities in

last 5 years.

However, OECD now believes that arm's length creates

an incentive to shift functions/assets/risks to jurisdiction

where their returns are taxed more favourably. Out of

the three, risk and ownership of assets (especially

intangibles) is easier to shift to low tax jurisdictions.

Thus, shift ing of income using contractual

arrangements has resulted in base erosion and profiting

shifting behaviour. Also, the TP rules on risk and asset

attribution within Group are applied on an entity-by-

entity basis. Thus, it was perceived that current TP

Guidelines are putting too much emphasis on legal

structures rather than on the underlying reality of

economically integrated group. This resulted in BEPS.

OECD has also acknowledged that media attention on

transfer pricing especially intangibles has been one of

the major reasons for its focus under BEPS.

Out of the 15 action points under BEPS, four specifically

deal with transfer pricing. OECD states that the current

transfer pricing system leads to serious BEPS concerns,

but replacing arm's length principle is not the solution.

The thrust of the OECD is now on assuring that transfer

pricing outcomes are in line with "value" creation. In

Why TP in focus under BEPS?

BEPS Action Plan for TP

BEPS in Brief

OECD's ambitious Base Erosion and Profit Shifting

project essentially arises out of concerns on double

"non-taxation". BEPS behaviour arises because under

existing international tax and treaty rules, MNCs are able

to artificially separate allocation of their taxable profits

from jurisdictions in which these profits arise. This has

caused severe strain on Governments' resources in last

few years as well as is harming individual tax payers. The

G20 finance ministers called on the OECD to develop an

action plan to address BEPS issues in a co-ordinated and

comprehensive manner. OECD in July 2013, released a 15

points action plan addressing various issues arising out

of BEPS behaviours.

The approach in BEPS Action Plan involves coherence of

taxation, realigning taxation with substance and

bringing more transparency. The significance of BEPS

project suggests change in the approach by OECD, from

"Bottom Up" to "Top Down". OECD states that it is

developing international policy to tackle BEPS with

commitment first at highest political level within OECD

and G20 Countries. The G20 Leaders endorsed BEPS

Action Plan during their meeting in September 2013 at

the Saint Petersburg Summit. It is relevant note that all

non-OECD G20 countries (Argentina, Brazil, China, India,

Indonesia, Russia, Saudi Arabia and South Africa) are

participating in BPES project on an equal footing with

OECD countries.

Addressing taxation issues from digital economy,

preventing treaty abuse, transfer pricing (TP) aspects of

Mr Ameya Kunte Executive Editor and Co-Founder

Taxsutra.com

TAXATIONTAXATION

JANUARY 2014

Page 21: Economy Matters, January 2014

documentation rules, requiring MNEs to provide all

relevant Governments, with needed information on

their global allocation of the income, economic activity

and taxes paid among countries according to a common

template. For me personally, more than defining

specific rules of profit allocation, transparency of

information could be a 'game changer'. This will

certainly provide a "big picture" & held identify value

creation to the revenue authorities. OECD's outcome is

expected to be in the form of recommendations

regarding the design of domestic rules and it has set an

aggressive deadline of September 2014.

As a member of G20, India too has endorsed BEPS Action

Plan. Indian revenue has welcomed BEPS initiative and is

also participating in various working groups set-up

under BEPS. Specifically in the area of Transfer pricing,

India has stated that OECD or United Nations work on

transfer pricing has ignored developing countries'

perspective. India has also specifically expressed its

reservations to UN Transfer Pricing Manual (2012 ) on

areas such as risk allocation, location savings,

intangibles (these issues are also part of BEPS).

Specifically for risk, India has stated that it is unfair to

give undue importance to risk in determination of arm's

length price. India believes the risk is a by?product of

performance of functions and ownership, exploitation

or use of assets. India has also taken aggressive stand on

compensation of market based intangibles. Many

believe that acceptance of these issues by OECD,

vindicates India's stand, particularly with respect to

"source" (or market based) based taxation principles.

OECD's Pascal Saint-Amans during January 2014 update

has said that they are on track on 'ambitious' BEPS

timelines. The next 24 months & BEPS "success" will

shape the future of international taxation and also

hopefully would address Indian revenue's concerns.

Businesses too need to factor 'moral tax' issues on one

hand and balancing compliance costs and business

certainty on the other. It is therefore imperative that all

the stakeholders including from India, actively

participate in BEPS process & proactively get ready to

face this "directional" change in international taxation.

What does it mean for India?

order to achieve this objective, OECD has initiated 3

specific actions, first dealing with intangibles (Action No

8), risk & capital (Action No 9) and high risk transactions

that rarely occur between third parties (Action No 10).

The fourth aspect deals with re-examining TP

documentation (Action No 13).

Action 9 states that OECD will develop special measures

to ensure that inappropriate returns will not accrue to an

entity, solely because it has contractually assumed risks

or has provided capital. Action 10 pertains to providing

circumstances for re-characterisation of high risk

transactions, application of profit split in global value

chains and provide protection against common types of

base eroding payments, such as management fees and

head office expenses.

OECD proposes to develop special rules to prevent BEPS

by moving intangibles within MNC Group members. This

entails identifying and defining intangibles, ensuring

profit allocation in line with (rather than divorced from)

value creation, solutions for hard-to-value intangibles

and cost contribution arrangements (covered under

Action 8).

Even before BEPS, OECD had already started work on TP

aspects of intangibles since 2010 and has issued two

discussion drafts, followed by two public consultations

(last one was held in Paris in November 2013). In the

second discussion draft on intangibles, OECD has

proposed that no separate adjustment for "location

savings" is warranted where reliable local comparables

are available. Another significant proposal includes

eligibility of full returns to legal owner of intangibles,

only when he performs all important functions related

to development, enhancement, maintenance &

protection. The deadline for Phase 1 of this action step is

September 2014 wherein OECD is expected to suggest

changes to the Transfer Pricing Guidelines and possibly

to the Model Tax Convention.

Improving transparency for tax administration is one of

the focus areas under BEPS Action Plan. OECD is

proposing under Action 13 re-examination of TP

Action Plan on Intangibles

Action Plan on TP Documentation

(Views are personal)

19

BEPS Action Plan on Transfer Pricing - Changing Rules of the Game?

18ECONOMY MATTERS

intangibles and TP documentation are some of the

significant action points, which are especially relevant in

the current Indian context.

Tax treaties determine allocation of taxing rights

between countries. Transfer pricing on the other hand

determines quantum of allocation profits (and

therefore the tax base) between countries arising out of

transactions associated entities. OECD has found "arm's

length" as solution to deal with transfer pricing. The

arm's length principle is founded on the basis that profit

allocation will follow "functions, assets and risks (FAR)".

India too has adopted arm's length approach for its

Transfer pricing law and it is a subject matter of great

debate between taxpayers and Revenue authorities in

last 5 years.

However, OECD now believes that arm's length creates

an incentive to shift functions/assets/risks to jurisdiction

where their returns are taxed more favourably. Out of

the three, risk and ownership of assets (especially

intangibles) is easier to shift to low tax jurisdictions.

Thus, shift ing of income using contractual

arrangements has resulted in base erosion and profiting

shifting behaviour. Also, the TP rules on risk and asset

attribution within Group are applied on an entity-by-

entity basis. Thus, it was perceived that current TP

Guidelines are putting too much emphasis on legal

structures rather than on the underlying reality of

economically integrated group. This resulted in BEPS.

OECD has also acknowledged that media attention on

transfer pricing especially intangibles has been one of

the major reasons for its focus under BEPS.

Out of the 15 action points under BEPS, four specifically

deal with transfer pricing. OECD states that the current

transfer pricing system leads to serious BEPS concerns,

but replacing arm's length principle is not the solution.

The thrust of the OECD is now on assuring that transfer

pricing outcomes are in line with "value" creation. In

Why TP in focus under BEPS?

BEPS Action Plan for TP

BEPS in Brief

OECD's ambitious Base Erosion and Profit Shifting

project essentially arises out of concerns on double

"non-taxation". BEPS behaviour arises because under

existing international tax and treaty rules, MNCs are able

to artificially separate allocation of their taxable profits

from jurisdictions in which these profits arise. This has

caused severe strain on Governments' resources in last

few years as well as is harming individual tax payers. The

G20 finance ministers called on the OECD to develop an

action plan to address BEPS issues in a co-ordinated and

comprehensive manner. OECD in July 2013, released a 15

points action plan addressing various issues arising out

of BEPS behaviours.

The approach in BEPS Action Plan involves coherence of

taxation, realigning taxation with substance and

bringing more transparency. The significance of BEPS

project suggests change in the approach by OECD, from

"Bottom Up" to "Top Down". OECD states that it is

developing international policy to tackle BEPS with

commitment first at highest political level within OECD

and G20 Countries. The G20 Leaders endorsed BEPS

Action Plan during their meeting in September 2013 at

the Saint Petersburg Summit. It is relevant note that all

non-OECD G20 countries (Argentina, Brazil, China, India,

Indonesia, Russia, Saudi Arabia and South Africa) are

participating in BPES project on an equal footing with

OECD countries.

Addressing taxation issues from digital economy,

preventing treaty abuse, transfer pricing (TP) aspects of

Mr Ameya Kunte Executive Editor and Co-Founder

Taxsutra.com

TAXATIONTAXATION

JANUARY 2014

Page 22: Economy Matters, January 2014

2120ECONOMY MATTERS

CORPORATE PERFORMANCE

Profitability Improves Sharply for Services, while for Manufacturing Remains Subdued in Q3

Our analysis of the firms in this section factors in the

financial performance during the third quarter of 2013-

14 using a balanced panel of 300 manufacturing

companies (excluding oil & gas) and 148 services firms

extracted from the Ace Equity database.

Growth in net sales, on an aggregate basis, rose to 15.1

per cent in the third quarter of 2013-14, as compared to

11.1 per cent in the same quarter of the previous fiscal.

This can possibly be attributable to the signs of

bottoming of the domestic economy along with the

recovery in the global economies. While the net sales

growth in services sector recorded a higher jump to 18.6

per cent in the third quarter of the current fiscal, as

compared to a growth of 15.2 per cent in the comparable

quarter last year, the growth in net sales in the

manufacturing sector was relatively subdued at 13.5 per

cent as compared to 9.4 per cent in the comparable

quarter of 2012-13.

The analysis of the results of the firms in India, which

have declared their results so far for the third

quarter (Q3) of current financial year, suggests an

improvement in their financial result at the aggregate

level. It may recalled that the firms had recorded an

improvement in their sales growth in the second quarter

as well after disappointing previous few quarters as per

the RBI analysis of 2,708 listed non-government non-

financial (NGNF) companies. This improvement in

corporate performance for the last two quarters is

encouraging, especially, since it comes at the back of a

lackluster showing in the preceding several quarters.

From the analysis of the results declared so far,

profitability too has shown an uptick, despite an

increase in the overall expenditure costs.

an uptick. Amongst the broad categories, it is notable to

point out that manufacturing firms showed the highest

increase in interest costs in the third quarter at the rate

of 36.3 per cent as compared to 20 per cent in the same

period last year. For services sector, raw material costs

registered the highest increase to the tune of 38.2 per

cent in the reporting quarter as compared to 8.7 per cent

in the comparable period last year.

The expenditure costs of the firms, on an aggregate

basis, witnessed an increase by 14.5 per cent in the

reporting quarter, as compared to 9.9 per cent in the

comparable time period last year. The increase in

growth of expenditure costs was driven largely by an

increase in the growth of raw materials cost , which

stood at 13.1 per cent over 6.1 per cent in the same period

last year. Growth in wages & salaries cost also showed

Growth in Net Sales (y-o-y%)

Source: Ace Equity database & CII calculations

Aggregate

Services

Manufacturing

15.1

11.1

18.6

15.2

13.5

9.4

Q3FY14

Q3FY13

Growth in Expenditure on an Aggregate Basis (y-o-y%)

Raw Materials Wages & Salaries Interest cost

Q3FY13 Q3FY14 Q3FY13 Q3FY14Q3FY13 Q3FY14

6.1

13.1

18.319.7 19.9

16.0

Source: Ace Equity database & CII calculations

digit growth in the same quarter of the previous fiscal.

However, across the manufacturing sector firms, PAT

growth moderated to 10.4 per cent as compared to a

growth of 24.5 per cent in the third quarter of previous

year. Manufacturing sector has contracted by 0.1 per

On an aggregate basis, growth in Profit after Tax (PAT)

increased to 20.8 per cent in the third quarter as

compared to 15.0 per cent growth in the same quarter of

last year. This was driven by a sharp rise in PAT growth of

services sector to 34.3 per cent as compared to single-

CORPORATE PERFORMANCE

JANUARY 2014

Page 23: Economy Matters, January 2014

2120ECONOMY MATTERS

CORPORATE PERFORMANCE

Profitability Improves Sharply for Services, while for Manufacturing Remains Subdued in Q3

Our analysis of the firms in this section factors in the

financial performance during the third quarter of 2013-

14 using a balanced panel of 300 manufacturing

companies (excluding oil & gas) and 148 services firms

extracted from the Ace Equity database.

Growth in net sales, on an aggregate basis, rose to 15.1

per cent in the third quarter of 2013-14, as compared to

11.1 per cent in the same quarter of the previous fiscal.

This can possibly be attributable to the signs of

bottoming of the domestic economy along with the

recovery in the global economies. While the net sales

growth in services sector recorded a higher jump to 18.6

per cent in the third quarter of the current fiscal, as

compared to a growth of 15.2 per cent in the comparable

quarter last year, the growth in net sales in the

manufacturing sector was relatively subdued at 13.5 per

cent as compared to 9.4 per cent in the comparable

quarter of 2012-13.

The analysis of the results of the firms in India, which

have declared their results so far for the third

quarter (Q3) of current financial year, suggests an

improvement in their financial result at the aggregate

level. It may recalled that the firms had recorded an

improvement in their sales growth in the second quarter

as well after disappointing previous few quarters as per

the RBI analysis of 2,708 listed non-government non-

financial (NGNF) companies. This improvement in

corporate performance for the last two quarters is

encouraging, especially, since it comes at the back of a

lackluster showing in the preceding several quarters.

From the analysis of the results declared so far,

profitability too has shown an uptick, despite an

increase in the overall expenditure costs.

an uptick. Amongst the broad categories, it is notable to

point out that manufacturing firms showed the highest

increase in interest costs in the third quarter at the rate

of 36.3 per cent as compared to 20 per cent in the same

period last year. For services sector, raw material costs

registered the highest increase to the tune of 38.2 per

cent in the reporting quarter as compared to 8.7 per cent

in the comparable period last year.

The expenditure costs of the firms, on an aggregate

basis, witnessed an increase by 14.5 per cent in the

reporting quarter, as compared to 9.9 per cent in the

comparable time period last year. The increase in

growth of expenditure costs was driven largely by an

increase in the growth of raw materials cost , which

stood at 13.1 per cent over 6.1 per cent in the same period

last year. Growth in wages & salaries cost also showed

Growth in Net Sales (y-o-y%)

Source: Ace Equity database & CII calculations

Aggregate

Services

Manufacturing

15.1

11.1

18.6

15.2

13.5

9.4

Q3FY14

Q3FY13

Growth in Expenditure on an Aggregate Basis (y-o-y%)

Raw Materials Wages & Salaries Interest cost

Q3FY13 Q3FY14 Q3FY13 Q3FY14Q3FY13 Q3FY14

6.1

13.1

18.319.7 19.9

16.0

Source: Ace Equity database & CII calculations

digit growth in the same quarter of the previous fiscal.

However, across the manufacturing sector firms, PAT

growth moderated to 10.4 per cent as compared to a

growth of 24.5 per cent in the third quarter of previous

year. Manufacturing sector has contracted by 0.1 per

On an aggregate basis, growth in Profit after Tax (PAT)

increased to 20.8 per cent in the third quarter as

compared to 15.0 per cent growth in the same quarter of

last year. This was driven by a sharp rise in PAT growth of

services sector to 34.3 per cent as compared to single-

CORPORATE PERFORMANCE

JANUARY 2014

Page 24: Economy Matters, January 2014

2322ECONOMY MATTERS

investments and the effects of depreciation, interest

and taxes) on an aggregate basis too saw an increase to

19.6 per cent in the October-December, 2013 quarter as

compared to a growth 14.0 per cent in the third quarter

of last year.

cent in the first-half of the fiscal so far and hence reflects

in the poor performance of the PAT growth of the

sector. Further, growth in operating profits (profits

earned from a firm's core business operations excluding

Growth in PAT (y-o-y%) Growth in PBDIT (y-o-y%)

Source: Ace Equity database & CII calculations

Aggregate

Services

Manufacturing

20.8

15.0

34.3

4.7

10.4

24.5

FY14Q3

FY13Q3

Aggregate

Services

Manufacturing

19.6

14.0

26.9

11.5

12.8

16.5

FY14Q3

FY13Q3

will remain to be watched, given the fragile nature of the

same. The political uncertainty before the next General

Elections due in April 2014 along with high interest rates

prevailing in the economy currently could also play

spoilsport in the scheme of things.

The corporate performance of the firms at aggregate

level has been encouraging for the last two quarters.

However, manufacturing firms have displayed a

subdued performance so far in contrast to the sharp

improvement in service sector firms' performance.

Going forward, how far, this recovery will be sustained

Manufacturing

in recent years, the manufacturing sector growth

slumped to around 3 per cent in 2011-12 and mere 1 per

cent in 2012-13. This is in sharp contrast to 10-12 per cent

average annual growth that the sector needs to clock in

order to reach the aspirational 25 per cent share in

national GDP by 2022, as envisaged by the National

Manufacturing Policy (NMP). At 15 per cent currently,

the share of manufacturing sector in India's GDP

indicates significant potential, compared to

corresponding figures of over 30 per cent share in China

and 25-30 per cent share in many other emerging

economies.

Manufacturing sector has played a robust role in

driving the GDP growth in the 2005-11 period,

when the Indian economy registered an impressive

average growth of around 9 per cent per annum.

However, in the milieu of global and domestic slowdown

Manufacturing Value Added as % of GDP in Select Economies (2012)

SECTOR IN FOCUS

Source: World Bank Note: * Data is for 2010

China*

Indonesia

Philisppines

Japan

Sri Lanka

India

Brazil

24

21

19

18

14

13

32

CORPORATE PERFORMANCE

JANUARY 2014

Page 25: Economy Matters, January 2014

2322ECONOMY MATTERS

investments and the effects of depreciation, interest

and taxes) on an aggregate basis too saw an increase to

19.6 per cent in the October-December, 2013 quarter as

compared to a growth 14.0 per cent in the third quarter

of last year.

cent in the first-half of the fiscal so far and hence reflects

in the poor performance of the PAT growth of the

sector. Further, growth in operating profits (profits

earned from a firm's core business operations excluding

Growth in PAT (y-o-y%) Growth in PBDIT (y-o-y%)

Source: Ace Equity database & CII calculations

Aggregate

Services

Manufacturing

20.8

15.0

34.3

4.7

10.4

24.5

FY14Q3

FY13Q3

Aggregate

Services

Manufacturing

19.6

14.0

26.9

11.5

12.8

16.5

FY14Q3

FY13Q3

will remain to be watched, given the fragile nature of the

same. The political uncertainty before the next General

Elections due in April 2014 along with high interest rates

prevailing in the economy currently could also play

spoilsport in the scheme of things.

The corporate performance of the firms at aggregate

level has been encouraging for the last two quarters.

However, manufacturing firms have displayed a

subdued performance so far in contrast to the sharp

improvement in service sector firms' performance.

Going forward, how far, this recovery will be sustained

Manufacturing

in recent years, the manufacturing sector growth

slumped to around 3 per cent in 2011-12 and mere 1 per

cent in 2012-13. This is in sharp contrast to 10-12 per cent

average annual growth that the sector needs to clock in

order to reach the aspirational 25 per cent share in

national GDP by 2022, as envisaged by the National

Manufacturing Policy (NMP). At 15 per cent currently,

the share of manufacturing sector in India's GDP

indicates significant potential, compared to

corresponding figures of over 30 per cent share in China

and 25-30 per cent share in many other emerging

economies.

Manufacturing sector has played a robust role in

driving the GDP growth in the 2005-11 period,

when the Indian economy registered an impressive

average growth of around 9 per cent per annum.

However, in the milieu of global and domestic slowdown

Manufacturing Value Added as % of GDP in Select Economies (2012)

SECTOR IN FOCUS

Source: World Bank Note: * Data is for 2010

China*

Indonesia

Philisppines

Japan

Sri Lanka

India

Brazil

24

21

19

18

14

13

32

CORPORATE PERFORMANCE

JANUARY 2014

Page 26: Economy Matters, January 2014

2524ECONOMY MATTERS

chemicals, and coke/refined petroleum products - have

maintained a robust growth over the past two years.

The sustained slowdown and lack of desired policy

initiatives to counter it have derailed the growth

momentum of the sector in the last few years. In the

subsequent sections, we discuss, the drivers for

manufacturing growth along with the challenges faced

by the sector at present.

The monthly IIP figures for manufacturing sector

reflects the consistent downward trend in the last

several quarters. In the current financial year, it has

stayed sluggish so far (April- Nov). A sub-sectoral look at

the manufacturing GDP shows modest growth in just a

few sectors, only to be offset by contraction in others.

However, three sub-sectors - textiles/apparels,

consecutive months of decline, Indian exports posted

double-digit growth in the next four months, growing at

an average 12.6 per cent. The growth was driven

primarily by textiles, chemicals and petroleum exports.

For instance, textile exports have maintained a strong

growth trajectory in the current financial year. While a

depreciated Rupee has helped, resurgence in demand

from key developed markets has also been instrumental

in driving exports growth for textiles. The recent

increase in the rate of interest subvention from 2 per

cent to 3 per cent is expected to further boost exports

across several sectors, including textiles.

Rural Growth: This year, India has experienced one of

the best monsoon seasons in recent history, with the

southwest monsoon rainfall averaging at 106 per cent of

normal. As observed in the past, favourable monsoons

have a positive impact on agricultural as well as overall

GDP growth in the same and the subsequent year.

Hence, favourable monsoon this year is expected to

spur rural demand. This is already evident in the robust

growth of several industries in last few months, driven

primarily by rural demand. For example, domestic

tractor sales of Mahindra & Mahindra grew by 37 per

cent in September 2013 over previous year. Similarly,

Drivers of Manufacturing Growth

Notwithstanding the continuing slowdown in domestic

and global economies, ample scope exists for the

manufacturing sector to return to high growth

trajectory at the earliest. The sharp depreciation of the

currency coupled with pick in growth revival of global

economies in recent months has lent optimism to Indian

manufacturing exporters. Some sectors like textiles and

petrochemicals are already doing well. International

markets are seen as essential components of Indian

companies' business aspirations. The speedy clearances

of some mega projects by the Cabinet Committee on

Investments (CCI) in recent months lends further

support to early revival of the sector. A good monsoon

has raised hopes of strong demand for the sector from

rural India. Overall, industry is more confident of

achieving a higher growth going forward as compared

to previous years. In this section, we touch upon some

of the main opportunities to be tapped by the

manufacturing sector.

Export Growth: Manufacturing companies have

increased focus on exports, in comparison to previous

year. After modest growth in April 2013 followed by two

Manufacturing Growth (y-o-y %)

Source: CSO

20

15

10

5

0

-5

-10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

14.5

-3.5

The Committee is tasked with monitoring large as well

as critical investment projects facing issues like lack of

capital etc., in order to expedite resolution of any

implementation bottlenecks and ensure timely

completion. The initiative has started yielding results,

having initiated the resolution of bureaucratic hurdles

for nearly 125 stalled projects, accounting for Rs 4 lakh

crore of investments as of December 2013.

FMCG companies like Dabur and ITC have posted strong

growth in sales and profit margins, driven by rural

demand.

Investment Boost: The Cabinet Committee on

Investments, constituted in January 2013, is an

important step by the government towards restoring

confidence in the country's investment environment.

Given the current context of slowing manufacturing growth and its consequent operational stresses, it is critical for

industry to step back and ensure that the sweeping structural trends that it is witnessing are not dismissed as 'short

term blips'. Most likely, these trends will be the driving factors that will determine the operating environment in the

days to come.

Indian manufacturing companies need to take into account the following two key challenges which distinguish

current operating environment from the yesteryears, particularly considering that these are expected to continue

going forward:

I. Increased Volatility: We have entered what seems to be a prolonged period of unprecedented volatility and

rapid change, both globally and in India. Volatility is fundamentally at two levels: firm's performance (for

example, revenues, margins, market positions), and firm's input prices (for example, commodities, interest

rates). Firm performance volatility has been on the increase globally over the last few decades, and continues to

be a strong trend. In India too, the composition of the BSE reflects this volatility. Every four years; about half the

top 30 companies in the BSE are replaced by new firms. Firm input volatility has also risen over the years.

Volatility peaked in the years immediately following the crisis, and seems to be abating mildly in the last two

years. Nevertheless, current volatility across inputs is at a higher level than seen historically. The new era of

volatility will require manu-facturers to be far more nimble and resilient in the way they operate.

II. Currency Shock: The Indian Rupee was largely stable for most part of the 2000s, ranging between 44 and 49 per

USD during 2000-2007. However, the 2008 financial crisis saw a reversal in this trend, triggering a steady

depreciation in the Rupee, reaching about 50-55 per USD by 2012. Additionally in 2013, the Rupee has seen

sharper fluctuations and devaluation compared to most developing economies. The high recent volatility and

depreciation of the Rupee has been driven by a weak do-mestic demand outlook coupled with a widening

current account deficit, and several international concerns related to the U.S.'s 'tapering' and political tensions

in Syria. While RBI's interventions like opening of a swap window to attract NRI funds have been welcomed,

speculations around the imminent tapering by the U.S. and withdrawal of specific moves by the RBI - for

instance, the oil swap window - will continue to test the Rupee in the near term. The Rupee is, therefore,

expected to remain volatile as some of these global and local cues unfold.

The implications of the depreciated and more volatile Rupee for Indian manufacturing companies are three-fold:

1. Exports will become increasingly attractive for sectors that have a high local value-added component, for

example, textiles.

2. For sectors with a high proportion of dollar linked input costs, localization and alternate material development

will be the key to enhance competitive advantage.

3. Contracting philosophies need to change. Wherever possible, firms may need to enter into back-to-back

currency based contracts with suppliers and customers, to shield themselves against the adverse impact of the

fluctuations. If such contracts are not possible, shorter contracting windows and price adjustments, for

example, monthly instead of quarterly contracts, could help minimize exposure and should be explored.

Shocks are Here to Stay

Source: Report on Powering Past Headwinds. Indian Manufacturing: Winning in an Era of Shocks, Swings & Shortages, CII & BCG, November 2013

SECTOR IN FOCUS SECTOR IN FOCUS

JANUARY 2014

Page 27: Economy Matters, January 2014

2524ECONOMY MATTERS

chemicals, and coke/refined petroleum products - have

maintained a robust growth over the past two years.

The sustained slowdown and lack of desired policy

initiatives to counter it have derailed the growth

momentum of the sector in the last few years. In the

subsequent sections, we discuss, the drivers for

manufacturing growth along with the challenges faced

by the sector at present.

The monthly IIP figures for manufacturing sector

reflects the consistent downward trend in the last

several quarters. In the current financial year, it has

stayed sluggish so far (April- Nov). A sub-sectoral look at

the manufacturing GDP shows modest growth in just a

few sectors, only to be offset by contraction in others.

However, three sub-sectors - textiles/apparels,

consecutive months of decline, Indian exports posted

double-digit growth in the next four months, growing at

an average 12.6 per cent. The growth was driven

primarily by textiles, chemicals and petroleum exports.

For instance, textile exports have maintained a strong

growth trajectory in the current financial year. While a

depreciated Rupee has helped, resurgence in demand

from key developed markets has also been instrumental

in driving exports growth for textiles. The recent

increase in the rate of interest subvention from 2 per

cent to 3 per cent is expected to further boost exports

across several sectors, including textiles.

Rural Growth: This year, India has experienced one of

the best monsoon seasons in recent history, with the

southwest monsoon rainfall averaging at 106 per cent of

normal. As observed in the past, favourable monsoons

have a positive impact on agricultural as well as overall

GDP growth in the same and the subsequent year.

Hence, favourable monsoon this year is expected to

spur rural demand. This is already evident in the robust

growth of several industries in last few months, driven

primarily by rural demand. For example, domestic

tractor sales of Mahindra & Mahindra grew by 37 per

cent in September 2013 over previous year. Similarly,

Drivers of Manufacturing Growth

Notwithstanding the continuing slowdown in domestic

and global economies, ample scope exists for the

manufacturing sector to return to high growth

trajectory at the earliest. The sharp depreciation of the

currency coupled with pick in growth revival of global

economies in recent months has lent optimism to Indian

manufacturing exporters. Some sectors like textiles and

petrochemicals are already doing well. International

markets are seen as essential components of Indian

companies' business aspirations. The speedy clearances

of some mega projects by the Cabinet Committee on

Investments (CCI) in recent months lends further

support to early revival of the sector. A good monsoon

has raised hopes of strong demand for the sector from

rural India. Overall, industry is more confident of

achieving a higher growth going forward as compared

to previous years. In this section, we touch upon some

of the main opportunities to be tapped by the

manufacturing sector.

Export Growth: Manufacturing companies have

increased focus on exports, in comparison to previous

year. After modest growth in April 2013 followed by two

Manufacturing Growth (y-o-y %)

Source: CSO

20

15

10

5

0

-5

-10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

14.5

-3.5

The Committee is tasked with monitoring large as well

as critical investment projects facing issues like lack of

capital etc., in order to expedite resolution of any

implementation bottlenecks and ensure timely

completion. The initiative has started yielding results,

having initiated the resolution of bureaucratic hurdles

for nearly 125 stalled projects, accounting for Rs 4 lakh

crore of investments as of December 2013.

FMCG companies like Dabur and ITC have posted strong

growth in sales and profit margins, driven by rural

demand.

Investment Boost: The Cabinet Committee on

Investments, constituted in January 2013, is an

important step by the government towards restoring

confidence in the country's investment environment.

Given the current context of slowing manufacturing growth and its consequent operational stresses, it is critical for

industry to step back and ensure that the sweeping structural trends that it is witnessing are not dismissed as 'short

term blips'. Most likely, these trends will be the driving factors that will determine the operating environment in the

days to come.

Indian manufacturing companies need to take into account the following two key challenges which distinguish

current operating environment from the yesteryears, particularly considering that these are expected to continue

going forward:

I. Increased Volatility: We have entered what seems to be a prolonged period of unprecedented volatility and

rapid change, both globally and in India. Volatility is fundamentally at two levels: firm's performance (for

example, revenues, margins, market positions), and firm's input prices (for example, commodities, interest

rates). Firm performance volatility has been on the increase globally over the last few decades, and continues to

be a strong trend. In India too, the composition of the BSE reflects this volatility. Every four years; about half the

top 30 companies in the BSE are replaced by new firms. Firm input volatility has also risen over the years.

Volatility peaked in the years immediately following the crisis, and seems to be abating mildly in the last two

years. Nevertheless, current volatility across inputs is at a higher level than seen historically. The new era of

volatility will require manu-facturers to be far more nimble and resilient in the way they operate.

II. Currency Shock: The Indian Rupee was largely stable for most part of the 2000s, ranging between 44 and 49 per

USD during 2000-2007. However, the 2008 financial crisis saw a reversal in this trend, triggering a steady

depreciation in the Rupee, reaching about 50-55 per USD by 2012. Additionally in 2013, the Rupee has seen

sharper fluctuations and devaluation compared to most developing economies. The high recent volatility and

depreciation of the Rupee has been driven by a weak do-mestic demand outlook coupled with a widening

current account deficit, and several international concerns related to the U.S.'s 'tapering' and political tensions

in Syria. While RBI's interventions like opening of a swap window to attract NRI funds have been welcomed,

speculations around the imminent tapering by the U.S. and withdrawal of specific moves by the RBI - for

instance, the oil swap window - will continue to test the Rupee in the near term. The Rupee is, therefore,

expected to remain volatile as some of these global and local cues unfold.

The implications of the depreciated and more volatile Rupee for Indian manufacturing companies are three-fold:

1. Exports will become increasingly attractive for sectors that have a high local value-added component, for

example, textiles.

2. For sectors with a high proportion of dollar linked input costs, localization and alternate material development

will be the key to enhance competitive advantage.

3. Contracting philosophies need to change. Wherever possible, firms may need to enter into back-to-back

currency based contracts with suppliers and customers, to shield themselves against the adverse impact of the

fluctuations. If such contracts are not possible, shorter contracting windows and price adjustments, for

example, monthly instead of quarterly contracts, could help minimize exposure and should be explored.

Shocks are Here to Stay

Source: Report on Powering Past Headwinds. Indian Manufacturing: Winning in an Era of Shocks, Swings & Shortages, CII & BCG, November 2013

SECTOR IN FOCUS SECTOR IN FOCUS

JANUARY 2014

Page 28: Economy Matters, January 2014

2726ECONOMY MATTERS

also the most vulnerable to the current trends of

sustained volatility and growth slowdown. Overall,

MSME health has declined in the last two to three years.

Credit defaults are the highest for MSMEs amongst all

credit classes, standing at around 5.3 per cent of

advances as of 2012-13. NPA rates have grown by over 1

percentage point in the last two years. This creates a

vicious cycle: on one hand, MSMEs need access to

finance to overcome the slowdown; on the other, banks

/ financial institutions become wary of extending loans

to this sector. This, in turn, creates significant supply

challenges for larger manufacturers. A dipstick survey

of the risk arising due to exposure of a large automotive

manufacturer to MSMEs for supplies revealed that over

30 per cent of its MSME suppliers are exposed to

significant financial or performance risks, largely due to

their inability to handle the current volatility and growth

slowdown.

Challenges Facing the

Manufacturing Sector

The importance of a robust support system to aid strong

manufacturing growth has been emphasized time and

again. However, several fundamental challenges in the

manufacturing support system for India still threaten to

inhibit the country's manufacturing growth. We

highlight two key shortages in this section.

(1) Supply Chain Fragility

Indian manufacturing continues to rely heavily on

Micro, Small and Medium Enterprises (MSMEs). The

MSME sector employs over 100 million people in around

45 million units across the country, contributes 45 per

cent to the manufacturing output, and accounts for 40

per cent of the country's exports. However, MSMEs are

MSME Gross NPA's Rise over the Past Two Years

Source: FIBAC Productivity Survey 2011, 2013

6

4

2

0

FY 2011 FY2013

MSME Gross NPA (%)

4.35.3

100 bps

The implications of this situation on Indian companies

are two-fold:

1. Manufacturers need to be proactive in identifying

areas of fragility in their supply chain - especially

fragility arising out of MSMEs being exposed to

volatility.

2. Supplier capability development activities need to

shift from mere technical support to commercial /

management skills infusion.

(2) Infrastructure and Regulatory Challenges

Indian infrastructure continues to trail global standards

in terms of both soft (policy action) as well as hard

(physical) infrastructure. For example, power deficits in

India are as high as 25 per cent in states like Jammu and

Kashmir and 21 per cent in even relatively more

industrialized states like Himachal Pradesh.

The proportion of delayed projects has been on an

upward trend owing to policy bottlenecks. Two global

steel makers recently shelved plans for setting up plants

in India, chiefly due to delays arising out of regulatory

hurdles. Delays in getting regulatory approvals and the

years shows that out of leading Indian value creators, 49

per cent had diversified geographically with CAGR of

over 15 per cent for revenues coming from overseas

during 2008 to 2013. Further, companies having greater

than 25 per cent of their revenues from international

business delivered two to four per cent higher TSR per

annum than peer companies having less than 25 per

cent of their revenues from international business.

In tune with global swings, Indian manufacturers are

also rebalancing their overseas revenue portfolios. As a

result, the share of India's exports to non-U.S., non-EU

companies over the last 10 years has increased from 57

per cent to 70 per cent. This trend is likely to continue as

companies work towards exploring the rise of Africa

and the shifting economic balance towards South East

Asia and Latin America.

Diversification of Manufacturing Centres

Historically, Indian companies have been wary of using a

large labour force within the same plant, for fear of

handling large unions. They have more often than not

gone for a distribut-ed manufacturing setup within the

same region for this precise reason. However, of late,

companies have also consciously started creating a

diversified base from the perspective of de-risking their

supply chain.

Setting up capacity additions or new units in new

geographies enables or even forces com-panies to focus

on newer markets adjacent to the new unit. This

improves their competitive-ness in the new markets,

gives them a logistical cost advantage and reduces

response time. Several players with lower market share

or penetration in specific geographies, or those with

stagnant growth rates have used this strategy to

diversify and grow.

Diversification of Supply Sources

Traditionally, manufacturing companies have focused

on creating leaner supply chains. The key objective has

been to create scale, efficiency and thereby reduce cost

and complexity. However, with the increasing shocks

and swings, companies have started diversifying their

suppliers and prefer not to be dependent on a single

supplier for one type of raw material or component. This

diversification is by way of adding a new supplier or

dispersing input requirements across multiple locations

of the same supplier, thereby creating a natural hedge.

This strategy may or may not improve bargaining power

and has cost implications due to additional complexity;

larger issue of project delays have also impacted cash

flows for Indian infrastructure companies, leading to

mounting debt burdens for these companies. This is an

inherent structural flaw that needs to be addressed.

Implications of this situation on companies are two-

fold:

1. Companies need to factor in higher costs due to

infrastructure constraints.

2. Companies may need to invest in captive

infrastructure in the short to medium-term,

especially in areas such as power generation.

One of the key imperatives for Indian manufacturing

enterprises in this era of shocks, swings and shortages is

to build resilient business models. In other words,

business models that will not cave in to the pressures of

volatility/turbulence, will have in built mechanisms for

recovery and will be able to take advantage of the shift

in demand and supply patterns.

Companies typically adopt two approaches to ensure

resilience:

1 Diversification

Companies have adopted different approaches for

diversification. Many companies diversify at their

'front ends' (markets/customers/geographies).

Other successful companies diversify at their 'back

ends' (supply sources/manufacturing centers).

Below we discuss both these levers in detail.

Diversification of Markets/Customers

Diversifying into export markets is one of the key ways

to gain resilience. It's a well known fact that not all

markets are facing a downturn. Whilst U.S.

manufacturing is reviving and posing a threat, eastern

markets are maturing. The Africa potential is becoming

a reality. Hence, exposure to international markets

helps create resilient business models.

Historically, geographically diversified companies have

performed better than their peers have. According to

BCG's Value Creators Report, 58 per cent of global value

creating companies (the top one-third as measured in

terms of Total Shareholder Return (TSR) - from 1995 to

2008) had diversified geographically. A similar analysis

of Indian manufacturing companies over the last five

Looking Forward

SECTOR IN FOCUS SECTOR IN FOCUS

JANUARY 2014

Page 29: Economy Matters, January 2014

2726ECONOMY MATTERS

also the most vulnerable to the current trends of

sustained volatility and growth slowdown. Overall,

MSME health has declined in the last two to three years.

Credit defaults are the highest for MSMEs amongst all

credit classes, standing at around 5.3 per cent of

advances as of 2012-13. NPA rates have grown by over 1

percentage point in the last two years. This creates a

vicious cycle: on one hand, MSMEs need access to

finance to overcome the slowdown; on the other, banks

/ financial institutions become wary of extending loans

to this sector. This, in turn, creates significant supply

challenges for larger manufacturers. A dipstick survey

of the risk arising due to exposure of a large automotive

manufacturer to MSMEs for supplies revealed that over

30 per cent of its MSME suppliers are exposed to

significant financial or performance risks, largely due to

their inability to handle the current volatility and growth

slowdown.

Challenges Facing the

Manufacturing Sector

The importance of a robust support system to aid strong

manufacturing growth has been emphasized time and

again. However, several fundamental challenges in the

manufacturing support system for India still threaten to

inhibit the country's manufacturing growth. We

highlight two key shortages in this section.

(1) Supply Chain Fragility

Indian manufacturing continues to rely heavily on

Micro, Small and Medium Enterprises (MSMEs). The

MSME sector employs over 100 million people in around

45 million units across the country, contributes 45 per

cent to the manufacturing output, and accounts for 40

per cent of the country's exports. However, MSMEs are

MSME Gross NPA's Rise over the Past Two Years

Source: FIBAC Productivity Survey 2011, 2013

6

4

2

0

FY 2011 FY2013

MSME Gross NPA (%)

4.35.3

100 bps

The implications of this situation on Indian companies

are two-fold:

1. Manufacturers need to be proactive in identifying

areas of fragility in their supply chain - especially

fragility arising out of MSMEs being exposed to

volatility.

2. Supplier capability development activities need to

shift from mere technical support to commercial /

management skills infusion.

(2) Infrastructure and Regulatory Challenges

Indian infrastructure continues to trail global standards

in terms of both soft (policy action) as well as hard

(physical) infrastructure. For example, power deficits in

India are as high as 25 per cent in states like Jammu and

Kashmir and 21 per cent in even relatively more

industrialized states like Himachal Pradesh.

The proportion of delayed projects has been on an

upward trend owing to policy bottlenecks. Two global

steel makers recently shelved plans for setting up plants

in India, chiefly due to delays arising out of regulatory

hurdles. Delays in getting regulatory approvals and the

years shows that out of leading Indian value creators, 49

per cent had diversified geographically with CAGR of

over 15 per cent for revenues coming from overseas

during 2008 to 2013. Further, companies having greater

than 25 per cent of their revenues from international

business delivered two to four per cent higher TSR per

annum than peer companies having less than 25 per

cent of their revenues from international business.

In tune with global swings, Indian manufacturers are

also rebalancing their overseas revenue portfolios. As a

result, the share of India's exports to non-U.S., non-EU

companies over the last 10 years has increased from 57

per cent to 70 per cent. This trend is likely to continue as

companies work towards exploring the rise of Africa

and the shifting economic balance towards South East

Asia and Latin America.

Diversification of Manufacturing Centres

Historically, Indian companies have been wary of using a

large labour force within the same plant, for fear of

handling large unions. They have more often than not

gone for a distribut-ed manufacturing setup within the

same region for this precise reason. However, of late,

companies have also consciously started creating a

diversified base from the perspective of de-risking their

supply chain.

Setting up capacity additions or new units in new

geographies enables or even forces com-panies to focus

on newer markets adjacent to the new unit. This

improves their competitive-ness in the new markets,

gives them a logistical cost advantage and reduces

response time. Several players with lower market share

or penetration in specific geographies, or those with

stagnant growth rates have used this strategy to

diversify and grow.

Diversification of Supply Sources

Traditionally, manufacturing companies have focused

on creating leaner supply chains. The key objective has

been to create scale, efficiency and thereby reduce cost

and complexity. However, with the increasing shocks

and swings, companies have started diversifying their

suppliers and prefer not to be dependent on a single

supplier for one type of raw material or component. This

diversification is by way of adding a new supplier or

dispersing input requirements across multiple locations

of the same supplier, thereby creating a natural hedge.

This strategy may or may not improve bargaining power

and has cost implications due to additional complexity;

larger issue of project delays have also impacted cash

flows for Indian infrastructure companies, leading to

mounting debt burdens for these companies. This is an

inherent structural flaw that needs to be addressed.

Implications of this situation on companies are two-

fold:

1. Companies need to factor in higher costs due to

infrastructure constraints.

2. Companies may need to invest in captive

infrastructure in the short to medium-term,

especially in areas such as power generation.

One of the key imperatives for Indian manufacturing

enterprises in this era of shocks, swings and shortages is

to build resilient business models. In other words,

business models that will not cave in to the pressures of

volatility/turbulence, will have in built mechanisms for

recovery and will be able to take advantage of the shift

in demand and supply patterns.

Companies typically adopt two approaches to ensure

resilience:

1 Diversification

Companies have adopted different approaches for

diversification. Many companies diversify at their

'front ends' (markets/customers/geographies).

Other successful companies diversify at their 'back

ends' (supply sources/manufacturing centers).

Below we discuss both these levers in detail.

Diversification of Markets/Customers

Diversifying into export markets is one of the key ways

to gain resilience. It's a well known fact that not all

markets are facing a downturn. Whilst U.S.

manufacturing is reviving and posing a threat, eastern

markets are maturing. The Africa potential is becoming

a reality. Hence, exposure to international markets

helps create resilient business models.

Historically, geographically diversified companies have

performed better than their peers have. According to

BCG's Value Creators Report, 58 per cent of global value

creating companies (the top one-third as measured in

terms of Total Shareholder Return (TSR) - from 1995 to

2008) had diversified geographically. A similar analysis

of Indian manufacturing companies over the last five

Looking Forward

SECTOR IN FOCUS SECTOR IN FOCUS

JANUARY 2014

Page 30: Economy Matters, January 2014

2928ECONOMY MATTERS

insights than ideating within the organization. Take the

example of a manufacturer of consumer appliances that

was trying to increase share in the North Indian rural

market. Perennial low voltage in the North Indian

villages was causing the company's refrigerators to

malfunction. When this problem was shared with the

supplier of compressor motors, they came up with a

modified motor design that could continuously operate

at lower voltages. This collaboration not only provided

excellent consumer value, but boosted sales in North

India as well.

Collaboration to reduce conversion costs due to better

planning process. Collaboration across suppliers can

not only increase customer value, it can also

substantially reduce conversion costs.

Collaboration to reduce raw material and inventory

costs due to better planning and visibility. Collaboration

across the value chain can generate significant

advantage in terms of inventory and raw material costs,

both upstream and downstream. For example, a

manufacturer of consumer appliances successfully

collaborated across three different groups of suppliers

to develop 'composite' printed doors instead of steel

doors for its refrigerators and successfully managed to

combat the inflation in steel prices.

Collaboration with Non-traditional Partners

In addition to collaborating with suppliers, companies

are also exploring several innovative non-traditional

collaborations, even with competitors, so as to leverage

their individual strength, manage risks and explore new

avenues of growth at the same time. Some of the non-

traditional collaborations that companies are exploring

are as follows:

Collaborating to share supply chain This type of

collaboration focuses on leveraging economies of scale

by sharing logistics, components and suppliers. For

example, Mars and Nestle combine deliveries to TESCO,

potentially saving over 100,000 kilometres of duplicate

truck journeys every year.

Collaboration to explore new markets. In this type of

collaboration, companies come together to share the

risks and rewards of entering new markets. The

objective is to complement each others' strengths while

charting new territory. For instance, Bajaj and Kawasaki

have entered into a global alliance to market and brand

their products jointly across developing countries,

starting with Philippines and Indonesia.

.

but it manages the risk of disruptions better. Hence,

such diversification is applied selectively to critical

inputs which have substantially high lead time for

capacity creation in times of crisis.

2 Collaboration

Collaboration with an external entity to tide over

external challenges is a key driver of resilience, not just

within the company, but also beyond. There are a

couple of fundamental reasons why collaboration is an

effective tool to combat external challenges. The first

reason is that there is higher willingness to cooperate

and explore new ideas during a downturn or an external

challenge. Companies are typically more open to new

ideas, including re-considering those that may have

been shelved in the past, when they realize that their

current plans alone will not be sufficient to reach their

goals. The second is that resource allocation

throughout the value-chain is more conducive for

optimal results than that only within the company.

There are two types of collaboration that have proven

effective in the past:

Collaboration within the value chain (with suppliers

or customers).

Collaboration with a non-traditional partner (for

instance, often with competitors).

Collaboration within the Value Chain

Collaboration within the value chain typically occurs

with suppliers and/or customers. While collaboration

within the supply chain is an ongoing process in many

companies, the winners see collaboration not as a one-

off initiative, but as an ongoing program with their core

suppliers. They allocate specific resources in their

procurement department towards suppl ier

collaboration, devote senior management time, and

ensure that promises about sharing of benefits arising

out of a collaboration program are followed in letter

and spirit.

Though collaboration in various forms has been existing

formally across businesses globally for a few decades

now, the current Indian context is forcing companies to

take up col-laboration initiatives more intensively than

ever before. Collaboration today is being seen across

three key dimensions:

Collaboration to increase customer value through

better design and/or delivery. Often, sharing a

customer challenge with suppliers can provide greater

v

v

productivity of manufacturing is higher than in

agriculture, facilitating the shift of workers to the sector

will result in better use of resources.

To be sure, a lot has changed in the Indian

manufacturing sector. Turbulence has increased

considerably. Product life cycle is shrinking as

customers demand more. Shortages in terms of

infrastructure have started to become a norm in some

of the sectors. Exports have become radically more

attractive for some sectors, marginally more in many

others. Our approach in this era of turbulence needs to

change. Companies need to be more adaptive and build

their strategy and operations around three pillars of

a d a p t i v e n e s s - R e s i l i e n c e , R e a d i n e s s a n d

Responsiveness. Resilience to make their businesses

withstand shocks, Readiness to ensure their companies

know how to react to changes, and Responsiveness to

ensure speed. The adaptive companies have already

started powering past the headwinds. Waiting in the

hope that the sector will get back to the days of lesser

turbulence and higher predictability may not be

prudent. The time to change is now.

(This article is based on the Report Powering Past Headwinds. Indian Manufacturing: Winning in an Era of Shocks, Swings & Shortages, published by CII & BCG in November 2013)

Conclusion

India's strong economic growth since 1990s has

primarily been driven by the services sector,

manufacturing at best has kept pace with the expansion

of overall economy. Share of manufacturing in GDP has

stagnated at around 16 per cent for the last two

decades, greatly limiting the employment creation. This

is undoubtedly a matter of great concern for India with

its huge population size. According to an estimate, 650

million people in the country constituting around 61 per

cent of the population are in the working age group of

15-59 years. It is estimated that an additional about 200

million Indians will enter the job market in next 15 years.

Inclusive growth will be possible only if all workers have

access to opportunities for employment and

entrepreneurship.

As the share of agriculture shrinks, it is incumbent on the

manufacturing sector to open up job opportunities for

less skilled workers who cannot be easily absorbed in

the services sector. Secondly, a healthy growth of

manufacturing is critical for creating a large production

and consumption base within the economy. Further, as

SECTOR IN FOCUS SECTOR IN FOCUS

JANUARY 2014

Page 31: Economy Matters, January 2014

2928ECONOMY MATTERS

insights than ideating within the organization. Take the

example of a manufacturer of consumer appliances that

was trying to increase share in the North Indian rural

market. Perennial low voltage in the North Indian

villages was causing the company's refrigerators to

malfunction. When this problem was shared with the

supplier of compressor motors, they came up with a

modified motor design that could continuously operate

at lower voltages. This collaboration not only provided

excellent consumer value, but boosted sales in North

India as well.

Collaboration to reduce conversion costs due to better

planning process. Collaboration across suppliers can

not only increase customer value, it can also

substantially reduce conversion costs.

Collaboration to reduce raw material and inventory

costs due to better planning and visibility. Collaboration

across the value chain can generate significant

advantage in terms of inventory and raw material costs,

both upstream and downstream. For example, a

manufacturer of consumer appliances successfully

collaborated across three different groups of suppliers

to develop 'composite' printed doors instead of steel

doors for its refrigerators and successfully managed to

combat the inflation in steel prices.

Collaboration with Non-traditional Partners

In addition to collaborating with suppliers, companies

are also exploring several innovative non-traditional

collaborations, even with competitors, so as to leverage

their individual strength, manage risks and explore new

avenues of growth at the same time. Some of the non-

traditional collaborations that companies are exploring

are as follows:

Collaborating to share supply chain This type of

collaboration focuses on leveraging economies of scale

by sharing logistics, components and suppliers. For

example, Mars and Nestle combine deliveries to TESCO,

potentially saving over 100,000 kilometres of duplicate

truck journeys every year.

Collaboration to explore new markets. In this type of

collaboration, companies come together to share the

risks and rewards of entering new markets. The

objective is to complement each others' strengths while

charting new territory. For instance, Bajaj and Kawasaki

have entered into a global alliance to market and brand

their products jointly across developing countries,

starting with Philippines and Indonesia.

.

but it manages the risk of disruptions better. Hence,

such diversification is applied selectively to critical

inputs which have substantially high lead time for

capacity creation in times of crisis.

2 Collaboration

Collaboration with an external entity to tide over

external challenges is a key driver of resilience, not just

within the company, but also beyond. There are a

couple of fundamental reasons why collaboration is an

effective tool to combat external challenges. The first

reason is that there is higher willingness to cooperate

and explore new ideas during a downturn or an external

challenge. Companies are typically more open to new

ideas, including re-considering those that may have

been shelved in the past, when they realize that their

current plans alone will not be sufficient to reach their

goals. The second is that resource allocation

throughout the value-chain is more conducive for

optimal results than that only within the company.

There are two types of collaboration that have proven

effective in the past:

Collaboration within the value chain (with suppliers

or customers).

Collaboration with a non-traditional partner (for

instance, often with competitors).

Collaboration within the Value Chain

Collaboration within the value chain typically occurs

with suppliers and/or customers. While collaboration

within the supply chain is an ongoing process in many

companies, the winners see collaboration not as a one-

off initiative, but as an ongoing program with their core

suppliers. They allocate specific resources in their

procurement department towards suppl ier

collaboration, devote senior management time, and

ensure that promises about sharing of benefits arising

out of a collaboration program are followed in letter

and spirit.

Though collaboration in various forms has been existing

formally across businesses globally for a few decades

now, the current Indian context is forcing companies to

take up col-laboration initiatives more intensively than

ever before. Collaboration today is being seen across

three key dimensions:

Collaboration to increase customer value through

better design and/or delivery. Often, sharing a

customer challenge with suppliers can provide greater

v

v

productivity of manufacturing is higher than in

agriculture, facilitating the shift of workers to the sector

will result in better use of resources.

To be sure, a lot has changed in the Indian

manufacturing sector. Turbulence has increased

considerably. Product life cycle is shrinking as

customers demand more. Shortages in terms of

infrastructure have started to become a norm in some

of the sectors. Exports have become radically more

attractive for some sectors, marginally more in many

others. Our approach in this era of turbulence needs to

change. Companies need to be more adaptive and build

their strategy and operations around three pillars of

a d a p t i v e n e s s - R e s i l i e n c e , R e a d i n e s s a n d

Responsiveness. Resilience to make their businesses

withstand shocks, Readiness to ensure their companies

know how to react to changes, and Responsiveness to

ensure speed. The adaptive companies have already

started powering past the headwinds. Waiting in the

hope that the sector will get back to the days of lesser

turbulence and higher predictability may not be

prudent. The time to change is now.

(This article is based on the Report Powering Past Headwinds. Indian Manufacturing: Winning in an Era of Shocks, Swings & Shortages, published by CII & BCG in November 2013)

Conclusion

India's strong economic growth since 1990s has

primarily been driven by the services sector,

manufacturing at best has kept pace with the expansion

of overall economy. Share of manufacturing in GDP has

stagnated at around 16 per cent for the last two

decades, greatly limiting the employment creation. This

is undoubtedly a matter of great concern for India with

its huge population size. According to an estimate, 650

million people in the country constituting around 61 per

cent of the population are in the working age group of

15-59 years. It is estimated that an additional about 200

million Indians will enter the job market in next 15 years.

Inclusive growth will be possible only if all workers have

access to opportunities for employment and

entrepreneurship.

As the share of agriculture shrinks, it is incumbent on the

manufacturing sector to open up job opportunities for

less skilled workers who cannot be easily absorbed in

the services sector. Secondly, a healthy growth of

manufacturing is critical for creating a large production

and consumption base within the economy. Further, as

SECTOR IN FOCUS SECTOR IN FOCUS

JANUARY 2014

Page 32: Economy Matters, January 2014

3130ECONOMY MATTERS

Fiscal Situation

With the fiscal deficit having reached 95 per cent

of the budgeted estimates for the entire year in

the first nine (April-December) months already, the

Finance Minister's clarion call of not breaching the red-

line of fiscal target of 4.8 per cent this year looks

increasingly difficult. A challenging domestic and

external economic environment has kept the revenue

growth low, while expenditures have so far not shown

any signs of abatement. So what are the options

available in front of the government to stick to its fiscal

deficit target. Well, the first option could be to ask

corporates to cough up higher advance payments, with

a promise of a refund later, in order to boost the muted

tax collections. Second option could be asking the PSU's

to make interim payment of dividends for the year

ending March 31, 2014, this year itself based on the

projections for the entire year's profits. Dividend

payment for a financial year is otherwise usually made in

the first quarter of the following fiscal, after the

declaration of profits. Recently, Coal India announced a

special dividend which will fetch the government

around Rs 18,000 crore. Thirdly, government could also

cut the expenditures of many ministries in order to

constrain fiscal deficit within the target, as it did in the

last fiscal. Whichever of these options the government

resorts to, however, one thing is certain, that it will be a

tough balancing act for the Finance Minister. In this

section, we provide an analysis of the fiscal situation so

far and its impact on the overall growth prospects.

SPECIAL ARTICLE

during April-December 2013, the same pace at which

they were targeted to grow during the entire year.

The bright spot happens to be the non-tax revenue,

which has remained relatively robust so far this fiscal at

67.5 per cent of the budgeted target as compared to

52.5 per cent in the comparable period last year. The

robust non tax revenue collection is attributable to

higher PSU dividends and receipts of user charges and

licence fees from telecom companies. In contrast, due

to the dismal PSU disinvestment scenario, non-debt

capital receipts in April-December 2013 have remained

lacklustre at only 20.3 per cent of the target. Proceeds

from disinvestment have only reached Rs 5093 crore so

far as compared to the target of Rs 40,000 crore for the

year. Apart from the expected shortfall in tax revenue

collections, the Union government may not be able to

meet its disinvestment target, which in turn is going to

result in overshooting of the fiscal deficit target for this

year.

Ans: Given that the general elections are due soon, the

options available to the government to restrict the fiscal

deficit within the budgeted levels of 4.8 per cent are

clearly limited. The urgent task, therefore, is to prune

expenditure while trying to boost government

revenues, especially tax revenues. The axe is bound to

fall on plan expenditure and that in turn will have a

negative impact on the growth momentum. Between

October and March last fiscal year, the Centre had

forced massive contraction in expenditure to rein in the

Q3: Given that our fiscal deficit has already touched 95

per cent of the year's target in the first nine months,

according to you what options exist in front of the

government in order to adhere to the fiscal target for

the year?

Q1: How important, in your opinion, is it to consolidate

our fiscal positio

Q2: What do you make of the latest fiscal numbers for

the month of December 2013?

n?

Ans: Containing the fiscal deficit is extremely important

for India, as it will lead to higher credit rating and lower

cost of borrowings not only for the government but also

for the private sector. The challenge of containing the

fiscal deficit has persisted with successive governments.

The Finance Minister has articulated the problem arising

out of the runaway fiscal deficit commendably. He has

often said that the 'red line' for the fiscal deficit, which

he set at 4.8 per cent of GDP, will not be breached.

However, that may prove to be a daunting task in the

light of the latest fiscal numbers released by the

Controller General of Accounts (CGA), according to

which the fiscal deficit in the first nine months (April-

December 2013) of the current fiscal had already

reached 95 per cent of the budgeted estimates for the

full year.

Ans: It appears that the revenue collection has been

sluggish given the growth slump. Net tax revenue stood

at 58.6 per cent of the full year target as compared to

62.8 per cent a year ago. Amongst the various heads of

tax revenue, on a gross basis, excise duty collections

dropped by 6.9 per cent during April-December 2013.

Custom duty and corporate tax collections did grow, but

the growth was weak at 4.3 per cent and 9.6 per cent,

respectively. The growth in services tax collection, too,

appears weak at 19.8 per cent when compared to the

robust 35.8 per cent growth budgeted for the year. It is

only the income tax collections that are showing a

growth trend as scheduled. These grew by 19.8 per cent

Mr R Seshasayee Past President, CII, Chairman, CII Economic Policy Council and

Vice Chairman, Hinduja Group

Reining in the Fiscal Deficit

SPECIAL ARTICLE

Guest Interview

JANUARY 2014

Page 33: Economy Matters, January 2014

3130ECONOMY MATTERS

Fiscal Situation

With the fiscal deficit having reached 95 per cent

of the budgeted estimates for the entire year in

the first nine (April-December) months already, the

Finance Minister's clarion call of not breaching the red-

line of fiscal target of 4.8 per cent this year looks

increasingly difficult. A challenging domestic and

external economic environment has kept the revenue

growth low, while expenditures have so far not shown

any signs of abatement. So what are the options

available in front of the government to stick to its fiscal

deficit target. Well, the first option could be to ask

corporates to cough up higher advance payments, with

a promise of a refund later, in order to boost the muted

tax collections. Second option could be asking the PSU's

to make interim payment of dividends for the year

ending March 31, 2014, this year itself based on the

projections for the entire year's profits. Dividend

payment for a financial year is otherwise usually made in

the first quarter of the following fiscal, after the

declaration of profits. Recently, Coal India announced a

special dividend which will fetch the government

around Rs 18,000 crore. Thirdly, government could also

cut the expenditures of many ministries in order to

constrain fiscal deficit within the target, as it did in the

last fiscal. Whichever of these options the government

resorts to, however, one thing is certain, that it will be a

tough balancing act for the Finance Minister. In this

section, we provide an analysis of the fiscal situation so

far and its impact on the overall growth prospects.

SPECIAL ARTICLE

during April-December 2013, the same pace at which

they were targeted to grow during the entire year.

The bright spot happens to be the non-tax revenue,

which has remained relatively robust so far this fiscal at

67.5 per cent of the budgeted target as compared to

52.5 per cent in the comparable period last year. The

robust non tax revenue collection is attributable to

higher PSU dividends and receipts of user charges and

licence fees from telecom companies. In contrast, due

to the dismal PSU disinvestment scenario, non-debt

capital receipts in April-December 2013 have remained

lacklustre at only 20.3 per cent of the target. Proceeds

from disinvestment have only reached Rs 5093 crore so

far as compared to the target of Rs 40,000 crore for the

year. Apart from the expected shortfall in tax revenue

collections, the Union government may not be able to

meet its disinvestment target, which in turn is going to

result in overshooting of the fiscal deficit target for this

year.

Ans: Given that the general elections are due soon, the

options available to the government to restrict the fiscal

deficit within the budgeted levels of 4.8 per cent are

clearly limited. The urgent task, therefore, is to prune

expenditure while trying to boost government

revenues, especially tax revenues. The axe is bound to

fall on plan expenditure and that in turn will have a

negative impact on the growth momentum. Between

October and March last fiscal year, the Centre had

forced massive contraction in expenditure to rein in the

Q3: Given that our fiscal deficit has already touched 95

per cent of the year's target in the first nine months,

according to you what options exist in front of the

government in order to adhere to the fiscal target for

the year?

Q1: How important, in your opinion, is it to consolidate

our fiscal positio

Q2: What do you make of the latest fiscal numbers for

the month of December 2013?

n?

Ans: Containing the fiscal deficit is extremely important

for India, as it will lead to higher credit rating and lower

cost of borrowings not only for the government but also

for the private sector. The challenge of containing the

fiscal deficit has persisted with successive governments.

The Finance Minister has articulated the problem arising

out of the runaway fiscal deficit commendably. He has

often said that the 'red line' for the fiscal deficit, which

he set at 4.8 per cent of GDP, will not be breached.

However, that may prove to be a daunting task in the

light of the latest fiscal numbers released by the

Controller General of Accounts (CGA), according to

which the fiscal deficit in the first nine months (April-

December 2013) of the current fiscal had already

reached 95 per cent of the budgeted estimates for the

full year.

Ans: It appears that the revenue collection has been

sluggish given the growth slump. Net tax revenue stood

at 58.6 per cent of the full year target as compared to

62.8 per cent a year ago. Amongst the various heads of

tax revenue, on a gross basis, excise duty collections

dropped by 6.9 per cent during April-December 2013.

Custom duty and corporate tax collections did grow, but

the growth was weak at 4.3 per cent and 9.6 per cent,

respectively. The growth in services tax collection, too,

appears weak at 19.8 per cent when compared to the

robust 35.8 per cent growth budgeted for the year. It is

only the income tax collections that are showing a

growth trend as scheduled. These grew by 19.8 per cent

Mr R Seshasayee Past President, CII, Chairman, CII Economic Policy Council and

Vice Chairman, Hinduja Group

Reining in the Fiscal Deficit

SPECIAL ARTICLE

Guest Interview

JANUARY 2014

Page 34: Economy Matters, January 2014

3332ECONOMY MATTERS

FY13 fiscal deficit to a creditable 4.9 per cent of the GDP.

A similar policy prescription looks little difficult this year,

since populist measures are expected to rule the roost,

given that elections are due soon. Tax revenues are

directly dependent on GDP growth. There again, with

the economy unlikely to grow much above 5 per cent

during the current year, the outlook for higher tax

collections and hence a lower deficit is by no means

positive.

Under this scenario, it is best for the government to opt

for getting revenue from unconventional sources. CII

has suggested several innovative measures to prop up

the government's revenue stream. Some of the

measures like utilizing the cash-pile of PSUs, monetising

the surplus land lying with them, clearing up the funds

held up in disputes and litigations are needed to be

pursued aggressively.

Further, as I have discussed earlier too, the

disinvestment target of Rs 40,000 crore will be difficult

to achieve unless in the remaining months of the current

fiscal, government makes a concerted effort to clear the

backlog, especially since it had to postpone large stake

sales like Indian Oil Corporation and Coal India due to

poor market conditions and labour unrest earlier in the

year. Spelling out strict timelines for carrying out

disinvestment in the remaining period of current fiscal

will be helpful.

Ans: It is imperative that both fiscal and monetary policy

complement each other to spur growth in India.

However, under a case of excessive government

borrowings, fiscal policy dominance over the monetary

policy can lead to a situation in which a Central Bank is no

longer able to use its instruments effectively for

achieving the desired objectives. In India, even though

the fiscal policy dominance through the automatic

monetisation of fiscal deficit has been done away with

over the years, the influence of fiscal deficit on the

outcome of the monetary policy has continued to

remain significant given its high level. High fiscal deficit,

even if it's not monetised, can interfere with the

monetary policy objective of price stability through its

impact on aggregate demand and inflationary

expectations. This is particularly true, given the fact that

in India, the banks are captive holders of government

securities due to their adherence to the Statutory

Q4: Fiscal policy is said to be dominant over monetary

policy in India. The efficacy of monetary policy is

reduced under the backdrop of a large fiscal largesse.

What are your views on this pervasive issue?

Liquidity Ratio (SLR) norms, hence they end up in

monetising part of the deficit even though the

automatic monetisation has been done away with.

The effective monetary transmission mechanism of the

Central Bank has been diluted due to the existence of

high fiscal deficit in the economy, as evidenced by the

fact that despite the cumulative 125 bps increase in the

repo rate since March 2012 till April 2013, headline

inflation (wholesale price index, WPI) had refused to

abate and remained persistently high at an average of

7.5 per cent during the said period. To be sure, other

supply-side factors also played a role in stepping up

inflation, but expansionary fiscal policies too played a

pivotal role - a fact which has been acknowledged by the

Reserve Bank of India (RBI) in i ts var ious

communications. Thus, inflation at times may become

effectively a fiscal phenomenon, since the fiscal stance

could influence significantly the overall monetary

conditions in the economy. Hence, it's important to

contain the fiscal deficit within sustainable limits every

year, given the perverse consequences of high fiscal

deficit on the efficacy of monetary policy.

Ans: There are mixed signals coming out of the economy

at present. While one set of indicators, such as GDP for

the second quarter, exports growth, current account

deficit suggest that the worst might be over for the

economy, there is another group like the monthly

industrial production numbers, non-oil imports which

continue to paint a dismal picture. The latest industrial

output numbers have, in fact, raised the red flags in the

economy once again as the output has now contracted

for two consecutive months. But I must also point out

that the industrial production numbers have been very

volatile, which makes the task of drawing any decisive

inferences from the data difficult. This hypothesis gains

currency particularly in view of the fact that the latest

85th round of CII Business Confidence Index rose sharply

to 54.9 in the third quarter from 45.7 for the July-

September 2013 quarter. This has been the swiftest

rebound ever seen in the index. But in the same vein, I

must also add that there is still a case for cautious

optimism, as recovery remains fragile. Hence, we at CII

continue to remain guarded to any signs of distress or

positive signal for the economy in the months to come.

Q5: There have been talks of economy bottoming out,

but the recent weak IIP data has raised serious doubts

regarding that prognosis. What is CII's stand on the

same?

successful in trimming the subsidy bill. This is because

the rupee has depreciated by about 15 per cent against

the dollar during the current year, making it necessary to

raise the rupee price of fuels by higher amounts.

Another practice that needs to be discontinued is

carrying over subsidy payments from one financial year

to the next. This is done in the hope of being able to

control subsidies in the coming year so that actual

payments can be smoothed.

The Indian central government's rising subsidy bill has

been a cause for concern. Despite many attempts to

control the situation, the expenditure on subsidies has

been rising steadily. Although the 2013 Budget has set a

target of reducing the expenditure from 2.6 per cent of

GDP in 2012-13 to 2.0 per cent in 2013-14, it may not be

met. In particular, there is concern that the plan to

reduce the fuel subsidy by allowing higher prices of fuels

such as petrol, diesel and LPG has not yet been

Bidisha GangulyPrincipal Economist, CII

Subsidy Bill: Reaching Dangerous Levels

Expenditure on Subsidies (% of GDP)

Source: Budget documents

1.41.3 1.3 1.4

2.3 2.2 2.22.4

2.6

2.0

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2004-05

2005-06

2004-05

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13RE

2013-14BE

targeted and phasing out the fuel and fertiliser

subsidies. Given below is the amount spent on the three

major subsidies - it is apparent that in the last five years

the food and fuel subsidies have increased substantially.

Over the medium-term, there needs to be a debate on

which subsidies can be done away with and which ones

need to continue. Currently, economists favour

continuing with the food subsidy while making it better

SPECIAL ARTICLESPECIAL ARTICLE

JANUARY 2014

Page 35: Economy Matters, January 2014

3332ECONOMY MATTERS

FY13 fiscal deficit to a creditable 4.9 per cent of the GDP.

A similar policy prescription looks little difficult this year,

since populist measures are expected to rule the roost,

given that elections are due soon. Tax revenues are

directly dependent on GDP growth. There again, with

the economy unlikely to grow much above 5 per cent

during the current year, the outlook for higher tax

collections and hence a lower deficit is by no means

positive.

Under this scenario, it is best for the government to opt

for getting revenue from unconventional sources. CII

has suggested several innovative measures to prop up

the government's revenue stream. Some of the

measures like utilizing the cash-pile of PSUs, monetising

the surplus land lying with them, clearing up the funds

held up in disputes and litigations are needed to be

pursued aggressively.

Further, as I have discussed earlier too, the

disinvestment target of Rs 40,000 crore will be difficult

to achieve unless in the remaining months of the current

fiscal, government makes a concerted effort to clear the

backlog, especially since it had to postpone large stake

sales like Indian Oil Corporation and Coal India due to

poor market conditions and labour unrest earlier in the

year. Spelling out strict timelines for carrying out

disinvestment in the remaining period of current fiscal

will be helpful.

Ans: It is imperative that both fiscal and monetary policy

complement each other to spur growth in India.

However, under a case of excessive government

borrowings, fiscal policy dominance over the monetary

policy can lead to a situation in which a Central Bank is no

longer able to use its instruments effectively for

achieving the desired objectives. In India, even though

the fiscal policy dominance through the automatic

monetisation of fiscal deficit has been done away with

over the years, the influence of fiscal deficit on the

outcome of the monetary policy has continued to

remain significant given its high level. High fiscal deficit,

even if it's not monetised, can interfere with the

monetary policy objective of price stability through its

impact on aggregate demand and inflationary

expectations. This is particularly true, given the fact that

in India, the banks are captive holders of government

securities due to their adherence to the Statutory

Q4: Fiscal policy is said to be dominant over monetary

policy in India. The efficacy of monetary policy is

reduced under the backdrop of a large fiscal largesse.

What are your views on this pervasive issue?

Liquidity Ratio (SLR) norms, hence they end up in

monetising part of the deficit even though the

automatic monetisation has been done away with.

The effective monetary transmission mechanism of the

Central Bank has been diluted due to the existence of

high fiscal deficit in the economy, as evidenced by the

fact that despite the cumulative 125 bps increase in the

repo rate since March 2012 till April 2013, headline

inflation (wholesale price index, WPI) had refused to

abate and remained persistently high at an average of

7.5 per cent during the said period. To be sure, other

supply-side factors also played a role in stepping up

inflation, but expansionary fiscal policies too played a

pivotal role - a fact which has been acknowledged by the

Reserve Bank of India (RBI) in i ts var ious

communications. Thus, inflation at times may become

effectively a fiscal phenomenon, since the fiscal stance

could influence significantly the overall monetary

conditions in the economy. Hence, it's important to

contain the fiscal deficit within sustainable limits every

year, given the perverse consequences of high fiscal

deficit on the efficacy of monetary policy.

Ans: There are mixed signals coming out of the economy

at present. While one set of indicators, such as GDP for

the second quarter, exports growth, current account

deficit suggest that the worst might be over for the

economy, there is another group like the monthly

industrial production numbers, non-oil imports which

continue to paint a dismal picture. The latest industrial

output numbers have, in fact, raised the red flags in the

economy once again as the output has now contracted

for two consecutive months. But I must also point out

that the industrial production numbers have been very

volatile, which makes the task of drawing any decisive

inferences from the data difficult. This hypothesis gains

currency particularly in view of the fact that the latest

85th round of CII Business Confidence Index rose sharply

to 54.9 in the third quarter from 45.7 for the July-

September 2013 quarter. This has been the swiftest

rebound ever seen in the index. But in the same vein, I

must also add that there is still a case for cautious

optimism, as recovery remains fragile. Hence, we at CII

continue to remain guarded to any signs of distress or

positive signal for the economy in the months to come.

Q5: There have been talks of economy bottoming out,

but the recent weak IIP data has raised serious doubts

regarding that prognosis. What is CII's stand on the

same?

successful in trimming the subsidy bill. This is because

the rupee has depreciated by about 15 per cent against

the dollar during the current year, making it necessary to

raise the rupee price of fuels by higher amounts.

Another practice that needs to be discontinued is

carrying over subsidy payments from one financial year

to the next. This is done in the hope of being able to

control subsidies in the coming year so that actual

payments can be smoothed.

The Indian central government's rising subsidy bill has

been a cause for concern. Despite many attempts to

control the situation, the expenditure on subsidies has

been rising steadily. Although the 2013 Budget has set a

target of reducing the expenditure from 2.6 per cent of

GDP in 2012-13 to 2.0 per cent in 2013-14, it may not be

met. In particular, there is concern that the plan to

reduce the fuel subsidy by allowing higher prices of fuels

such as petrol, diesel and LPG has not yet been

Bidisha GangulyPrincipal Economist, CII

Subsidy Bill: Reaching Dangerous Levels

Expenditure on Subsidies (% of GDP)

Source: Budget documents

1.41.3 1.3 1.4

2.3 2.2 2.22.4

2.6

2.0

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2004-05

2005-06

2004-05

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13RE

2013-14BE

targeted and phasing out the fuel and fertiliser

subsidies. Given below is the amount spent on the three

major subsidies - it is apparent that in the last five years

the food and fuel subsidies have increased substantially.

Over the medium-term, there needs to be a debate on

which subsidies can be done away with and which ones

need to continue. Currently, economists favour

continuing with the food subsidy while making it better

SPECIAL ARTICLESPECIAL ARTICLE

JANUARY 2014

Page 36: Economy Matters, January 2014

3534ECONOMY MATTERS

petrol, diesel, kerosene and LPG has been inadequate.

According to the Expert Group Report formed by the

Government under Dr. Kirit Parikh, the actual under-

recovery by oil marketing companies in 2013-14 are not

likely to be much lower than last year. As a result, the fuel

subsidy is likely to exceed Rs 65,000 crore budgeted for

2013-14 unless the government makes the upstream oil

companies bear a larger share of the under-recovery or

carries over the subsidy payment to the coming year.

Any new government that comes to power in 2014 will

have to deal with this issue on a priority basis. In fact, the

government may consider a cap on the total

expenditure on fuel subsidies on an annual basis.

Fuel

Fuel subsidies have become the major component of

government expenditure on subsidies. The level of

under-recovery has ballooned over the last few years on

account of high crude oil prices prevailing in the

international market and depreciation in the Indian

rupee. Recently, the Government had taken several

measures to contain the level of subsidies such as

limiting the number of subsidized LPG cylinders to 9 per

annum per household, deregulation of diesel price for

bulk consumers and small monthly increases in retail

prices. However, the level of under-recoveries continues

to remain high as the increase in domestic prices of

Expenditure on Subsidies (Rs crore)

Source: Budget documents

Food 43,751 58,443 63,844 72,823 85,000 90,000

Fertilisers 76,602 61,264 62,301 67,199 65,974 65,972

Fuel 2,852 14,951 38,371 68,484 96,880 65,000

2008-09 2009-10 2010-11 2011-12 2012-13 RE 2013-14 BE

Under-Recoveries Reported by OMCs

Source: PPAC website

Rs crore 2012-13 2013-14 (April - December)

Diesel 92,061 47,655

PDS kerosene 29,410 22,373

Domestic LPG 39,558 30,604

Total 161,029 100,632

this year's allocations. It has been reported that faced

with severe financial crunch, the government may roll

over a record 40,000 crore rupees of fertiliser subsidy to

the next financial year starting April.

Fertiliser

The subsidy on fertilisers is also set to increase on

account of a rise in the cost of imported fertilisers due to

the rupee's depreciation against the US dollar. At the

same time, an outstanding amount of Rs 32,000 crore

was carried over from 2012-13, which has to be paid from

Expenditure on Fertilizer Subsidy

Source: Budget documents

(Rs crore) 2010-11 2011-12 2012-13 RE 2013-14 BE

Imported (urea) fertilizers 6,454 13,716 15,398 15,545

Indigenous (urea) fertilizers 15,081 20,208 20,000 21,000

Sale of decontrolled fertilizers 40,767 36,089 30,576 29,427with concession to farmers

Total 62,301 70,013 65,974 65,972

times in the last ten. Record procurements in recent

years, increasing cost of handling grains and widening

difference between the procurement cost of grains and

the central issue price have been the major factors

leading to the ballooning food subsidy. With the

implementation of the National Food Security Bill, the

subsidy bill could go up further in coming years as the

issue price has now been fixed by the legislation while

procurement price will need to be revised upwards in

order to provide incentive to farmers to increase

production.

The Finance Ministry has approved a special banking

arrangement for fertilizer companies which will allow

them to raise short-term credit to the extent of Rs 9000

crore from banks in order to tide over the cash crunch in

the industry. The principal will be repaid once the

government makes the subsidy payments. This situation

has made the fertilizer companies in the country

unviable and unable to make any investments.

The food subsidy has been on a rising trend, having more

than doubled in the last five years and increased five

Food

Expenditure on Food Subsidy (Rs crore)

Source: Budget documents

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13R

E

2013

-14B

E

100,000

90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

currency could have an impact on the amount spent on

subsidies. This would have long-term implications that

are debilitating for the economy. In India, for example,

interest rates have remained high even in a year of

slowing growth due to fiscal excesses. And as the

Finance Ministry has slashed expenditure in order to be

able to meet its deficit target, the economy has found it

difficult to recover.

Conclusion

When governments commit to spend on open-ended

subsidies, there should also be a limit to the amount that

can be spent. This limit could be in terms of percentage

of GDP, as in the case of the fiscal deficit. Otherwise,

unexpected events such as slowdown in economic

growth, increase in oil prices or depreciation in the

SPECIAL ARTICLESPECIAL ARTICLE

JANUARY 2014

Page 37: Economy Matters, January 2014

3534ECONOMY MATTERS

petrol, diesel, kerosene and LPG has been inadequate.

According to the Expert Group Report formed by the

Government under Dr. Kirit Parikh, the actual under-

recovery by oil marketing companies in 2013-14 are not

likely to be much lower than last year. As a result, the fuel

subsidy is likely to exceed Rs 65,000 crore budgeted for

2013-14 unless the government makes the upstream oil

companies bear a larger share of the under-recovery or

carries over the subsidy payment to the coming year.

Any new government that comes to power in 2014 will

have to deal with this issue on a priority basis. In fact, the

government may consider a cap on the total

expenditure on fuel subsidies on an annual basis.

Fuel

Fuel subsidies have become the major component of

government expenditure on subsidies. The level of

under-recovery has ballooned over the last few years on

account of high crude oil prices prevailing in the

international market and depreciation in the Indian

rupee. Recently, the Government had taken several

measures to contain the level of subsidies such as

limiting the number of subsidized LPG cylinders to 9 per

annum per household, deregulation of diesel price for

bulk consumers and small monthly increases in retail

prices. However, the level of under-recoveries continues

to remain high as the increase in domestic prices of

Expenditure on Subsidies (Rs crore)

Source: Budget documents

Food 43,751 58,443 63,844 72,823 85,000 90,000

Fertilisers 76,602 61,264 62,301 67,199 65,974 65,972

Fuel 2,852 14,951 38,371 68,484 96,880 65,000

2008-09 2009-10 2010-11 2011-12 2012-13 RE 2013-14 BE

Under-Recoveries Reported by OMCs

Source: PPAC website

Rs crore 2012-13 2013-14 (April - December)

Diesel 92,061 47,655

PDS kerosene 29,410 22,373

Domestic LPG 39,558 30,604

Total 161,029 100,632

this year's allocations. It has been reported that faced

with severe financial crunch, the government may roll

over a record 40,000 crore rupees of fertiliser subsidy to

the next financial year starting April.

Fertiliser

The subsidy on fertilisers is also set to increase on

account of a rise in the cost of imported fertilisers due to

the rupee's depreciation against the US dollar. At the

same time, an outstanding amount of Rs 32,000 crore

was carried over from 2012-13, which has to be paid from

Expenditure on Fertilizer Subsidy

Source: Budget documents

(Rs crore) 2010-11 2011-12 2012-13 RE 2013-14 BE

Imported (urea) fertilizers 6,454 13,716 15,398 15,545

Indigenous (urea) fertilizers 15,081 20,208 20,000 21,000

Sale of decontrolled fertilizers 40,767 36,089 30,576 29,427with concession to farmers

Total 62,301 70,013 65,974 65,972

times in the last ten. Record procurements in recent

years, increasing cost of handling grains and widening

difference between the procurement cost of grains and

the central issue price have been the major factors

leading to the ballooning food subsidy. With the

implementation of the National Food Security Bill, the

subsidy bill could go up further in coming years as the

issue price has now been fixed by the legislation while

procurement price will need to be revised upwards in

order to provide incentive to farmers to increase

production.

The Finance Ministry has approved a special banking

arrangement for fertilizer companies which will allow

them to raise short-term credit to the extent of Rs 9000

crore from banks in order to tide over the cash crunch in

the industry. The principal will be repaid once the

government makes the subsidy payments. This situation

has made the fertilizer companies in the country

unviable and unable to make any investments.

The food subsidy has been on a rising trend, having more

than doubled in the last five years and increased five

Food

Expenditure on Food Subsidy (Rs crore)

Source: Budget documents

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13R

E

2013

-14B

E

100,000

90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

currency could have an impact on the amount spent on

subsidies. This would have long-term implications that

are debilitating for the economy. In India, for example,

interest rates have remained high even in a year of

slowing growth due to fiscal excesses. And as the

Finance Ministry has slashed expenditure in order to be

able to meet its deficit target, the economy has found it

difficult to recover.

Conclusion

When governments commit to spend on open-ended

subsidies, there should also be a limit to the amount that

can be spent. This limit could be in terms of percentage

of GDP, as in the case of the fiscal deficit. Otherwise,

unexpected events such as slowdown in economic

growth, increase in oil prices or depreciation in the

SPECIAL ARTICLESPECIAL ARTICLE

JANUARY 2014

Page 38: Economy Matters, January 2014

3736ECONOMY MATTERS

(Views are personal)

inflation, especially inflation in food products,

arguments have also been made for fiscal correction as a

means of holding back the growth of food demand. In

these circumstances, it may be desirable to understand

some of the underlying features of the Indian economy

which have led us to this pass.

The most underappreciated feature of what has

happened in the Indian economy is the fairly substantial

income redistribution that has occurred over the last

several years. Due to a combination of factors, there has

been a shift in terms of trade in favour of agriculture;

and, within agriculture, in favour of agricultural labour.

Three factors are of particular importance. First the

rapid expansion of alternative work opportunities for

rural labour triggered off by improved rural connectivity

through the Pradhan Mantri Gram Sadak Yojana

(PMGSY) and the spread of rural telephony. Second, the

sharp increases in minimum support price for some

agricultural products since 2004. Third, the role of

Mahatama Gandhi National Rural Employment

Guarantee Scheme (MNREGS) in providing a credible

reservation wage which landless labour could use to

bargain for higher wages. The main consequence of

these redistributions was to shift relative incomes away

from people with high savings propensities to those

The combination of high and persistent inflation and low

growth that has characterized the Indian economy over

the past two years has led to considerable anxiety about

the nature of the policy responses that are required.

Although the situation is by no means one of classic

stagflation, the policy conundrum is pretty much the

same. Any effort at taming inflation through the use of

tighter monetary policies raises the risk of a further slow

down in growth; while any effort at boosting growth

runs the risk of a further acceleration in inflation. The

classical prescription of a tight monitoring policy and

expansionary fiscal policy runs aground on the fiscal

stresses that are already being felt by the government.

Moreover, given the structural causes of much of the

The Tradeoffs for Policy Makers in India Today

SPECIAL FEATUREsector and have relatively lesser relevance in the rural.

As a consequence, the lower income groups in urban

areas are being squeezed in a pincer of rising prices and

falling income growth opportunities.

The situation as outlined above presents a rather

disturbing ethical dilemma. It would be possible to

control the inflationary pressures simply by cutting the

rates of growth of MSP and the MNREGS wages. This

would obviously directly impact the well being of the

poor in the rural areas and would reverse the rapid

decline in poverty that has been witnessed in the past

decade. On the other hand, it would give sufficient

policy head room to increase the growth rate of the

economy and thereby the welfare of those in non-

agricultural activities.

This tradeoff between the welfare of the rural poor and

the welfare of the urban poor is perhaps an even more

compelling issue than the inflation growth trade off that

has preoccupied much of the current policy debate.

Perhaps it is high time we reorient our thinking about

macro economics to focus more on not just the costs of

macroeconomic adjustments but who bears those

costs. Sadly, structuralist macro economics, which had

such issues at its core is now a fading memory. Perhaps

it is time to revive some of the insights that came from

this approach and apply them in the correct situation.

with high consumption propensities. This fact has been

very visible from the household consumption data

which shows an unprecedented rise in the consumption

of lower expenditure classes leading thereby to a rapid

fall in poverty.

The increase in the consumption of the poor quite

naturally went mostly into increasing their consumption

of food, especially high quality food. Since supply

responses in agriculture are relatively slow, and

substantial increases in the MSPs for cereals retarded

the shift from cereals to other food products, non cereal

food inflation has accelerated sharply. What makes this

process robust is that the increase in food prices

contributes to further increases in the incomes of those

whose consumption led to this situation to begin with.

The principal losers of this process have been the urban

poor and lower middle class.

The standard prescriptions for inflation control which

rely on compression of demand essentially operate

through three channels. First the reduction in

investments which holds down income growth; second,

increase in the cost of consumer finance which usually

impacts the demand for consumer credit; and third, the

wealth effect which reduces the value of assets held by

households. It should be noted that in the Indian context

all these three channels essentially impact the urban

Guest Article

SPECIAL ARTICLE

Dr. Pronab SenChairman, National Statistical Commission

JANUARY 2014

Page 39: Economy Matters, January 2014

3736ECONOMY MATTERS

(Views are personal)

inflation, especially inflation in food products,

arguments have also been made for fiscal correction as a

means of holding back the growth of food demand. In

these circumstances, it may be desirable to understand

some of the underlying features of the Indian economy

which have led us to this pass.

The most underappreciated feature of what has

happened in the Indian economy is the fairly substantial

income redistribution that has occurred over the last

several years. Due to a combination of factors, there has

been a shift in terms of trade in favour of agriculture;

and, within agriculture, in favour of agricultural labour.

Three factors are of particular importance. First the

rapid expansion of alternative work opportunities for

rural labour triggered off by improved rural connectivity

through the Pradhan Mantri Gram Sadak Yojana

(PMGSY) and the spread of rural telephony. Second, the

sharp increases in minimum support price for some

agricultural products since 2004. Third, the role of

Mahatama Gandhi National Rural Employment

Guarantee Scheme (MNREGS) in providing a credible

reservation wage which landless labour could use to

bargain for higher wages. The main consequence of

these redistributions was to shift relative incomes away

from people with high savings propensities to those

The combination of high and persistent inflation and low

growth that has characterized the Indian economy over

the past two years has led to considerable anxiety about

the nature of the policy responses that are required.

Although the situation is by no means one of classic

stagflation, the policy conundrum is pretty much the

same. Any effort at taming inflation through the use of

tighter monetary policies raises the risk of a further slow

down in growth; while any effort at boosting growth

runs the risk of a further acceleration in inflation. The

classical prescription of a tight monitoring policy and

expansionary fiscal policy runs aground on the fiscal

stresses that are already being felt by the government.

Moreover, given the structural causes of much of the

The Tradeoffs for Policy Makers in India Today

SPECIAL FEATUREsector and have relatively lesser relevance in the rural.

As a consequence, the lower income groups in urban

areas are being squeezed in a pincer of rising prices and

falling income growth opportunities.

The situation as outlined above presents a rather

disturbing ethical dilemma. It would be possible to

control the inflationary pressures simply by cutting the

rates of growth of MSP and the MNREGS wages. This

would obviously directly impact the well being of the

poor in the rural areas and would reverse the rapid

decline in poverty that has been witnessed in the past

decade. On the other hand, it would give sufficient

policy head room to increase the growth rate of the

economy and thereby the welfare of those in non-

agricultural activities.

This tradeoff between the welfare of the rural poor and

the welfare of the urban poor is perhaps an even more

compelling issue than the inflation growth trade off that

has preoccupied much of the current policy debate.

Perhaps it is high time we reorient our thinking about

macro economics to focus more on not just the costs of

macroeconomic adjustments but who bears those

costs. Sadly, structuralist macro economics, which had

such issues at its core is now a fading memory. Perhaps

it is time to revive some of the insights that came from

this approach and apply them in the correct situation.

with high consumption propensities. This fact has been

very visible from the household consumption data

which shows an unprecedented rise in the consumption

of lower expenditure classes leading thereby to a rapid

fall in poverty.

The increase in the consumption of the poor quite

naturally went mostly into increasing their consumption

of food, especially high quality food. Since supply

responses in agriculture are relatively slow, and

substantial increases in the MSPs for cereals retarded

the shift from cereals to other food products, non cereal

food inflation has accelerated sharply. What makes this

process robust is that the increase in food prices

contributes to further increases in the incomes of those

whose consumption led to this situation to begin with.

The principal losers of this process have been the urban

poor and lower middle class.

The standard prescriptions for inflation control which

rely on compression of demand essentially operate

through three channels. First the reduction in

investments which holds down income growth; second,

increase in the cost of consumer finance which usually

impacts the demand for consumer credit; and third, the

wealth effect which reduces the value of assets held by

households. It should be noted that in the Indian context

all these three channels essentially impact the urban

Guest Article

SPECIAL ARTICLE

Dr. Pronab SenChairman, National Statistical Commission

JANUARY 2014

Page 40: Economy Matters, January 2014

ECONOMY MONITOR

38ECONOMY MATTERS

GDP GROWTH (y-o-y%)

WPI INFLATION (y-o-y%)

INDEX OF INDUSTRIAL PRODUCTION (IIP) (y-o-y%)

US GDP Growth Japan GDP Growth

IndustryOverall GDP

Overall

Euro Area GDP Growth China GDP Growth

Agriculture Services

Primary Fuel Manufacturing

General Manufacturing Electricity Mining

1Q13 2Q13

7.97.7 7.5 7.8

2.01.3

2.0

-1.2

-0.4

3Q12 4Q12 1Q13 2Q13

-0.3

0.11.2

3Q12 4Q12 1Q13 2Q13

5.24.8 4.4

2QFY13 3QFY13 4QFY13 2QFY14

1.7 1.81.4

2.7

2QFY13 3QFY13 4QFY13 1QFY14

1.3

2.52.7

0.2

7.6

6.7 6.6 6.6

2QFY13 3QFY13 4QFY13 1QFY14

4Q12 1Q13 2Q13 3Q13

Aug-13 Sep-13 Oct-13

14.014.7

Aug-13 Sep-13 Oct-13

12.7

10.3

Aug-13 Sep-13 Oct-13

2.8

Aug-13 Sep-13 Oct-13

Jul-13 Aug-13 Sep-13 Jul-13 Aug-13 Sep-13

12.9

Jul-13 Aug-13 Sep-13

-0.9

Jul-13 Aug-13 Sep-13

GLOBAL GDP (y-o-y%)

3Q13

1.6

7.0 7.0

13.6

11.7

2.3 2.4

2.6

0.4

2.03.0

-0.2

0.6

5.2

-3.0

3.3

-0.7-1.0

-0.6

3Q13

-0.2

3Q13

2.4

4.7 4.8

1QFY14

4.6

2QFY14

2.4

2QFY13 3QFY13 4QFY13 1QFY14 2QFY14

5.9

2QFY14

7.0

7.5

Nov-13

15.9

Nov-13

11.1

Nov-13 Nov-13

2.6

-1.6

Oct-13

-1.8

Oct-13

1.3

Oct-13

-3.2

Oct-13

7.7

4Q13

6.2

10.8

Dec-13 Dec-13

11.0

Dec-13

2.6

Dec-13

-2.1

Nov-13

-3.5

Nov-13 Nov-13

7.26.3

1.0

Nov-13

39

Exports (%) Imports (%) Trade Deficit (US$ Bn) Current Account Deficit (US$ Bn) Avg Exchange Rate (Rs/US$)

MONETARY VARIABLES (%)

CAPITAL FLOWS (US$ billion)

OTHER IMPORTANT INDICATORS (y-o-y%)

Non-Food Credit Growth (y-o-y%) M3 Growth (y-o-y%) Repo Rate (%) Cash Reserve Ratio (%)

Net FII Flows Net FDI Flows Forex Reserves ECB Flows

Core Sector Growth Cement Production Growth Steel Production Growth Commercial VehiclesProduction Growth

7.75

4.00 4.00 4.00 4.00 4.00

5.9

-16.4

10.5

Aug-13 Sep-13 Oct-13

22.6

32.6

18.121.8

2QFY13 3QFY13 4QFY13 1QFY14

61.6

Aug-13 Sep-13 Oct-13

18.417.9

16.8

14.1

Sep-13 Oct-13

0.4

Aug-13 Sep-13 Oct-13

1.7

3.2

Jul-13 Aug-13 Sep-13

281.3

Aug-13 Sep-13 Oct-13

1.0

2.8

4.2

0.9

2QFY13 3QFY13 4QFY13 1QFY14

8.0

Jul-13 Aug-13 Sep-13

11.5

Jul-13 Aug-13 Sep-13

6.6

Jul-13 Aug-13 Sep-13

-22.6

Aug-13 Sep-13 Oct-13

EXTERNAL ACCOUNT

10.9

6.8

63.263.8

12.2 12.5

-2.5

1.21.7

275.5 276.3

3.13.7

0.8

5.57.0

4.3

2.0

4.0

6.0

8.0

10.0

12.0

0.0

-19.6-28.6

13.0

-0.7

11.2

-18.1

13.5

-14.5

Aug-13 Sep-13 Oct-13 Nov-13 Nov-13

9.2

5.2

2QFY14

62.6

Nov-13

14.6

Aug-13 Sep-13 Oct-13 Nov-13

14.5

Aug-13 Sep-13 Oct-13 Nov-13

7.75

Nov-13

7.507.75

Dec-13 Sep-13 Oct-13 Nov-13 Dec-13

0.3

Nov-13

1.8

Oct-13

291.3

Nov-13

1.5

2QFY14

-0.6

Oct-13

1.0

Oct-13

3.5

Oct-13

3.5

-15.3

Dec-13

10.1

Dec-13

61.9

14.8

Dec-13

Dec-13

14.9

Dec-13

8.00

Jan-14 Jan-14

3.5

Dec-13

1.8

Nov-13

295.7

Dec-13

1.7

Nov-13 Nov-13

4.2

Nov-13

3.9

Nov-13

-15.2-25.3

Dec-13

Source: RBI, CSO, SEBI, Office of Economic Advisor, Bureau of Economic Analysis, Euro Stat, Bank of Japan, National Bureau of Statistics

4Q12 4Q13

2.7

ECONOMY MONITOR

JANUARY 2014

Page 41: Economy Matters, January 2014

ECONOMY MONITOR

38ECONOMY MATTERS

GDP GROWTH (y-o-y%)

WPI INFLATION (y-o-y%)

INDEX OF INDUSTRIAL PRODUCTION (IIP) (y-o-y%)

US GDP Growth Japan GDP Growth

IndustryOverall GDP

Overall

Euro Area GDP Growth China GDP Growth

Agriculture Services

Primary Fuel Manufacturing

General Manufacturing Electricity Mining

1Q13 2Q13

7.97.7 7.5 7.8

2.01.3

2.0

-1.2

-0.4

3Q12 4Q12 1Q13 2Q13

-0.3

0.11.2

3Q12 4Q12 1Q13 2Q13

5.24.8 4.4

2QFY13 3QFY13 4QFY13 2QFY14

1.7 1.81.4

2.7

2QFY13 3QFY13 4QFY13 1QFY14

1.3

2.52.7

0.2

7.6

6.7 6.6 6.6

2QFY13 3QFY13 4QFY13 1QFY14

4Q12 1Q13 2Q13 3Q13

Aug-13 Sep-13 Oct-13

14.014.7

Aug-13 Sep-13 Oct-13

12.7

10.3

Aug-13 Sep-13 Oct-13

2.8

Aug-13 Sep-13 Oct-13

Jul-13 Aug-13 Sep-13 Jul-13 Aug-13 Sep-13

12.9

Jul-13 Aug-13 Sep-13

-0.9

Jul-13 Aug-13 Sep-13

GLOBAL GDP (y-o-y%)

3Q13

1.6

7.0 7.0

13.6

11.7

2.3 2.4

2.6

0.4

2.03.0

-0.2

0.6

5.2

-3.0

3.3

-0.7-1.0

-0.6

3Q13

-0.2

3Q13

2.4

4.7 4.8

1QFY14

4.6

2QFY14

2.4

2QFY13 3QFY13 4QFY13 1QFY14 2QFY14

5.9

2QFY14

7.0

7.5

Nov-13

15.9

Nov-13

11.1

Nov-13 Nov-13

2.6

-1.6

Oct-13

-1.8

Oct-13

1.3

Oct-13

-3.2

Oct-13

7.7

4Q13

6.2

10.8

Dec-13 Dec-13

11.0

Dec-13

2.6

Dec-13

-2.1

Nov-13

-3.5

Nov-13 Nov-13

7.26.3

1.0

Nov-13

39

Exports (%) Imports (%) Trade Deficit (US$ Bn) Current Account Deficit (US$ Bn) Avg Exchange Rate (Rs/US$)

MONETARY VARIABLES (%)

CAPITAL FLOWS (US$ billion)

OTHER IMPORTANT INDICATORS (y-o-y%)

Non-Food Credit Growth (y-o-y%) M3 Growth (y-o-y%) Repo Rate (%) Cash Reserve Ratio (%)

Net FII Flows Net FDI Flows Forex Reserves ECB Flows

Core Sector Growth Cement Production Growth Steel Production Growth Commercial VehiclesProduction Growth

7.75

4.00 4.00 4.00 4.00 4.00

5.9

-16.4

10.5

Aug-13 Sep-13 Oct-13

22.6

32.6

18.121.8

2QFY13 3QFY13 4QFY13 1QFY14

61.6

Aug-13 Sep-13 Oct-13

18.417.9

16.8

14.1

Sep-13 Oct-13

0.4

Aug-13 Sep-13 Oct-13

1.7

3.2

Jul-13 Aug-13 Sep-13

281.3

Aug-13 Sep-13 Oct-13

1.0

2.8

4.2

0.9

2QFY13 3QFY13 4QFY13 1QFY14

8.0

Jul-13 Aug-13 Sep-13

11.5

Jul-13 Aug-13 Sep-13

6.6

Jul-13 Aug-13 Sep-13

-22.6

Aug-13 Sep-13 Oct-13

EXTERNAL ACCOUNT

10.9

6.8

63.263.8

12.2 12.5

-2.5

1.21.7

275.5 276.3

3.13.7

0.8

5.57.0

4.3

2.0

4.0

6.0

8.0

10.0

12.0

0.0

-19.6-28.6

13.0

-0.7

11.2

-18.1

13.5

-14.5

Aug-13 Sep-13 Oct-13 Nov-13 Nov-13

9.2

5.2

2QFY14

62.6

Nov-13

14.6

Aug-13 Sep-13 Oct-13 Nov-13

14.5

Aug-13 Sep-13 Oct-13 Nov-13

7.75

Nov-13

7.507.75

Dec-13 Sep-13 Oct-13 Nov-13 Dec-13

0.3

Nov-13

1.8

Oct-13

291.3

Nov-13

1.5

2QFY14

-0.6

Oct-13

1.0

Oct-13

3.5

Oct-13

3.5

-15.3

Dec-13

10.1

Dec-13

61.9

14.8

Dec-13

Dec-13

14.9

Dec-13

8.00

Jan-14 Jan-14

3.5

Dec-13

1.8

Nov-13

295.7

Dec-13

1.7

Nov-13 Nov-13

4.2

Nov-13

3.9

Nov-13

-15.2-25.3

Dec-13

Source: RBI, CSO, SEBI, Office of Economic Advisor, Bureau of Economic Analysis, Euro Stat, Bank of Japan, National Bureau of Statistics

4Q12 4Q13

2.7

ECONOMY MONITOR

JANUARY 2014

Page 42: Economy Matters, January 2014

40ECONOMY MATTERS

DISCLAIMER

Copyright © 2013 by Confederation of Indian Industry (CII), All rights reserved.

No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by

any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the

copyright owner. CII has made every effort to ensure the accuracy of information presented in this document. However,

neither CII nor any of its office bearers or analysts or employees can be held responsible for any financial consequences arising

out of the use of information provided herein. However, in case of any discrepancy, error, etc., same may please be brought to

the notice of CII for appropriate corrections.

Published by Confederation of Indian Industry (CII), The Mantosh Sondhi Centre; 23, Institutional Area, Lodi Road, New Delhi-

110003 (INDIA),

Tel: +91-11-24629994-7, Fax: +91-11-24626149; Email: [email protected]; Web: www.cii.in

The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India, partnering industry, Government, and civil society, through advisory and consultative processes.

CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in India's development process. Founded over 118 years ago, India's premier business association has over 7100 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 enterprises from around 257 national and regional sectoral industry bodies.

CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized services and strategic global linkages. It also provides a platform for consensus-building and networking on key issues.

Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated and inclusive development across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment of women, and water, to name a few.

The CII Theme for 2013-14 is Accelerating Economic Growth through Innovation, Transformation, Inclusion and Governance. Towards this, CII advocacy will accord top priority to stepping up the growth trajectory of the nation, while retaining a strong focus on accountability, transparency and measurement in the corporate and social eco-system, building a knowledge economy, and broad-basing development to help deliver the fruits of progress to all.

With 63 offices, including 9 Centres of Excellence, in India, and 7 overseas offices in Australia, China, Egypt, France, Singapore, UK, and USA, as well as institutional partnerships with 224 counterpart organizations in 90 countries, CII serves as a reference point for Indian industry and the international business community.

ABOUT CII ResearchThe CII Research team regularly tracks economic, political and business developments within India and abroad to comment on the emerging economic scenario for the Indian corporate sector. It tracks policy developments, offers comprehensive analysis of industries and comments on and analyzes the economic climate through its regular publications– Economy Matters, Business Outlook Survey and, Fortnightly Economic Updates.

We have in-house expertise in providing the most comprehensive, in-depth, unbiased and incisive analysis and forecasts on the Indian economy and various sectors. CII Research is also well versed and well equipped to offer customized research based consultancy services on any theme. It has been catering to the needs of various stakeholders including industries, business houses and government providing meaningful insights about the prevailing trends, outlook on likely future trends, factors behind these trends, existing government policies and policy recommendations with an objective to help stakeholders in better understanding of the issues at hand. The objective of CII Research is to assist stakeholders in taking more informed and strategic decisions with due focus on the attainment of short term as well as long term goals. For more details and to advertise in our products, write to us at [email protected]

facebook.com/followcii twitter.com/followcii www.mycii.in

Page 43: Economy Matters, January 2014

40ECONOMY MATTERS

DISCLAIMER

Copyright © 2013 by Confederation of Indian Industry (CII), All rights reserved.

No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by

any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the

copyright owner. CII has made every effort to ensure the accuracy of information presented in this document. However,

neither CII nor any of its office bearers or analysts or employees can be held responsible for any financial consequences arising

out of the use of information provided herein. However, in case of any discrepancy, error, etc., same may please be brought to

the notice of CII for appropriate corrections.

Published by Confederation of Indian Industry (CII), The Mantosh Sondhi Centre; 23, Institutional Area, Lodi Road, New Delhi-

110003 (INDIA),

Tel: +91-11-24629994-7, Fax: +91-11-24626149; Email: [email protected]; Web: www.cii.in

The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India, partnering industry, Government, and civil society, through advisory and consultative processes.

CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in India's development process. Founded over 118 years ago, India's premier business association has over 7100 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 enterprises from around 257 national and regional sectoral industry bodies.

CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized services and strategic global linkages. It also provides a platform for consensus-building and networking on key issues.

Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated and inclusive development across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment of women, and water, to name a few.

The CII Theme for 2013-14 is Accelerating Economic Growth through Innovation, Transformation, Inclusion and Governance. Towards this, CII advocacy will accord top priority to stepping up the growth trajectory of the nation, while retaining a strong focus on accountability, transparency and measurement in the corporate and social eco-system, building a knowledge economy, and broad-basing development to help deliver the fruits of progress to all.

With 63 offices, including 9 Centres of Excellence, in India, and 7 overseas offices in Australia, China, Egypt, France, Singapore, UK, and USA, as well as institutional partnerships with 224 counterpart organizations in 90 countries, CII serves as a reference point for Indian industry and the international business community.

ABOUT CII ResearchThe CII Research team regularly tracks economic, political and business developments within India and abroad to comment on the emerging economic scenario for the Indian corporate sector. It tracks policy developments, offers comprehensive analysis of industries and comments on and analyzes the economic climate through its regular publications– Economy Matters, Business Outlook Survey and, Fortnightly Economic Updates.

We have in-house expertise in providing the most comprehensive, in-depth, unbiased and incisive analysis and forecasts on the Indian economy and various sectors. CII Research is also well versed and well equipped to offer customized research based consultancy services on any theme. It has been catering to the needs of various stakeholders including industries, business houses and government providing meaningful insights about the prevailing trends, outlook on likely future trends, factors behind these trends, existing government policies and policy recommendations with an objective to help stakeholders in better understanding of the issues at hand. The objective of CII Research is to assist stakeholders in taking more informed and strategic decisions with due focus on the attainment of short term as well as long term goals. For more details and to advertise in our products, write to us at [email protected]

facebook.com/followcii twitter.com/followcii www.mycii.in

Page 44: Economy Matters, January 2014