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Public Affairs Round-up

MSLGROUP INDIA

June 2013 | Vol 1 | Issue 1

The Indian economy: Performance and prospects Pg. 2

AirAsia’s India foray Pg. 4

Policy Updates Pg. 5

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The Indian economy: Performance and prospects

subsidies were rationalised earlier through a nutrient-based scheme, last year the government boldly capped the number of subsidised cooking gas cylinders, decontrolled petrol prices and announced that diesel prices would be gradually rationalised too. The decision was significant because the petroleum subsidy alone had grown from 0.5% of GDP in 2010-11 to 1% in 2012-13.

These measures will help reduce demand for oil. Given India’s large oil import bill, it will positively impact the worrisome current account deficit. The government has also taken several measures to moderate gold demand, including higher import duties.

The Direct Benefit Transfer scheme to transfer subsidies directly to beneficiaries’ bank accounts using the Aadhaar platform will help check leakages and better target subsidies. More than 300 million residents were enrolled for the Aadhaar card till March and an additional 300 million are expected to be enrolled over the next 18 months.

These figures and the political faceoff delaying reforms have led to a downswing in investor sentiment. While there is very little it could do about the global economic situation that is partly responsible for lower growth, the government has been focused on addressing domestic causes to the best of its ability, given the pulls and pressures of democracy.

India negotiated the 2008 global economic crisis well, and the financial and monetary stimulus led to strong growth in 2009-10 and 2010-11. However, the boost to consumption, coupled with supply-side constraints, led to higher inflation. Consequently, monetary policy was tightened, even as supply-side issues remained unaddressed and external headwinds increased. The consequent slowdown, especially in 2012-13, left no sector unaffected. Corporate performance during the latter half of 2012-13 indicated that growth of sales as well as profits decelerated significantly1 .

The government has been making concerted efforts to address the issues shackling growth. Subsidies, a politically sensitive issue, are not only being reigned in, an effort is being made to make them more focused so that fiscal consolidation does not adversely impact deserving beneficiaries. While fertiliser

India’s economy continues to face many challenges, growth being the biggest. Growth touched 5% for 2012-13, the lowest in a decade, but that is not the only worry. The current account deficit continues to be at unsustainable levels of over 6% of GDP and the combined fiscal deficit of the Centre and states hovers around a worrisome 10%.

Bipul Kiran Singh, public affairs and strategic communications adviser.He also consults with MSL India

1 Reserve Bank of India. May 2013. Monetary Policy Statement 2013-14.

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Stalled investments continued to increase in 2012 because of bottlenecks, including onerous environment and forest regulations, inadequate availability and high prices of coal and gas, and land acquisition problems. The CCI has made a difference. It has already cleared investments worth $27 billion and streamlined the process of granting environment and forest clearances for mega projects.

Independent regulatory authorities for roads and coal, and for rail tariff setting, have been announced.

However, there may be no quick answers to land acquisition issues as the Land Acquisition, Rehabilitation and Resettlement Bill is stuck in Parliament for the last two years. When approved, while likely to make land acquisition more expensive, it may make it fairer to those whose land would be acquired. It would also bring greater clarity and reduce uncertainty, thereby aiding investments.

After dithering for some months, India has liberalised the foreign direct investment (FDI) regime in areas like multi- and single-brand retail, and civil aviation. The finance minister has set up a committee to remove the ambiguity in the definition FDI and foreign institutional investment.

Wholesale Price Index inflation has been falling in recent months with an average of 7.3% in 2012-13, down from 8.9% the year before. However, food inflation, after a brief slowdown, continues to be higher than overall inflation. Given the higher weightage for food in the Consumer Price Index (CPI), CPI inflation remains close to double digits, averaging 10.2% in 2012-13.

While inflation does not seem to be the biggest concern now, there are pressures that could stoke it again. Inflationary expectations remain elevated; suppressed inflationary pressures from diesel price deregulation, electricity rate hikes, coal price pooling, and reduced cooking gas subsidies may get explicitly manifested. Finally, any demand recovery over 2013-14 could start pushing up core inflation.

Another consequence of the slowdown has been lower-than-targeted tax and non-tax revenues. While the government was able to achieve the revised estimate of 5.2% of GDP for the fiscal deficit in 2012-13 from 5.7% a year earlier through curbing expenditure as well as increasing revenues, the key risk to the 4.8% target for 2013-14 are lower-than-budgeted revenues from disinvestment and telecom spectrum sales and spending on the food bill.

India has the potential to accelerate growth. Despite the slowdown, India is likely to remain one of the faster-growing nations2. Among large countries, only China and Indonesia grew faster in 2012-13. In 2013-14, only China is projected to grow faster. But the fractured nature of Indian polity, not expected to change even after the next parliamentary elections, will make the reform process laborious. India’s climb back to higher growth will be gradual.

The government is focusing also on reviving investments. To fast-track projects and address supply-side constraints, the Cabinet Committee on Investment (CCI) was set up in January. Headed by the prime minister and mandated to fast-track mega projects worth more than Rs 1,000 crore ($200 million), its functions include prescribing deadlines for the issue of required approvals by ministries and taking decisions on unduly-delayed projects.

The measures taken since July 2012 when P Chidambaram took over as finance minister have not only arrested the declining sentiment, but also improved the situation. But much remains to be done to steer India back to its 8%-9% growth rate.

Reflecting this assessment, India’s central bank, the Reserve Bank of India, in its Mid-Quarter Monetary Policy Review, cautiously reduced the repo rate by 25 basis points to 7.5% (and further to 7.25% in the Monetary Policy Review in May) while keeping the cash reserve ratio unchanged at 4%.

2 World Bank. April 2013. India Development Update

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AirAsia is expected to face challenges in executing its low-cost base model in an environment characterised by high fuel prices, high airport charges and a conservative regulatory framework. Some of this may affect AirAsia’s key differentiators, like high aircraft utilisation, low costs and strong ancillary revenues. The carrier has also leant from its experience as a foreign airline operating in India. It discontinued its long-haul low-cost flights from Delhi, Mumbai and Hyderabad, presumably due to high airport charges. AirAsia India is expected to face teething troubles as it flies to India’s interiors, but is expected to emerge as one of the top three airlines in India in three to four years.

The airline's innovative business model, track record and tie-ups with strong local partners make it a formidable player. We are likely to witness a gory fight for supremacy in the Indian skies in the next 12 months.

May the best airline win!(The views expressed are personal)

Apart from bringing foreign capital to Indian carriers, the reform was expected to give rise to one or two start-ups – between a global airline and Indian partners. The first start-up off the blocks was a joint venture between AirAsia, the Tatas and Telestra Tradeplace. They recently received approval from the Foreign Investment Promotion Board (FIPB) and have applied to Ministry of Civil Aviation (MoCA) for a no-objection certificate.

AirAsia enters the troubled Indian aviation market as a highly successful airline with strong Indian partners. The company plans to start small and then grow. Their low-cost model is built around high focus on operational excellence, single aircraft configuration, high utilisation rate (more than 12 hrs of flying per day), quick turnaround of aircraft, aggressive pricing and a focus on tiers 2 and 3 airports where charges are low. Their selection of Chennai as the operational base seems logical since most of AirAsia’s current flights to Malaysia and Thailand focus on traffic from South India.

The choice of the Tata Group as a partner is interesting. All airlines need tie-ups with companies providing catering, IT, cars, buses, low-priced and premium hotels, a nationwide distribution network, engineering services, etc. If there’s one group providing all this under one roof, it’s the Tatas.

Though competition is fierce, the country’s potential passenger base of more than 300 million middle-class people is largely untapped. Last year, barely 58 million passengers flew on domestic routes. This presents a significant growth potential. India’s growing economy, large middle-class, low air travel penetration and growing ‘value of time’ would be the key growth drivers.

AirAsia understands this. The airline recently stated that it would rather work on opening new markets where there is no connectivity in order to increase its market share. The carrier categorically said that it would avoid Delhi and Mumbai, presumably to avoid the high airport charges. The arrival of AirAsia is expected to shake up the domestic market, starting from South India. The airline is renowned for its strategy of offering low-priced tickets to stimulate demand. This is likely to lead to a price war and an increase in traffic volumes but with lower yields per seat-km. The bet will survive and we may see some mergers and acquisitions in the next 24 months. The consumer is expected to benefit hugely from the increased competition. I hope that we don’t go back to the era when market share was more important than profitability.

Amber Dubey, partner and head (aviation), KPMG in India, with assistance from Kunal Sinha, senior consultant, KPMG in India

AirAsia’s India foray

In a landmark decision in September 2012, the Government of India decided to allow foreign airlines to invest up to 49% in Indian carriers. All along, the industry’s demand had been for around 26% of foreign direct investment (FDI) by foreign airlines. The decision was a pleasant surprise.

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Policy Updates

Trade pact with Australia soon?India and Australia are exploring the possibility of a free trade agreement or a comprehensive economic cooperation agreement covering goods, services, investments and related matters. Discussions were held in the working groups on goods, investment, services, legal and institutional matter, sanitary and phyto-sanitary, technical barriers to trade, customs procedures and trade facilitation. The negotiations are under way and no timeframe has been fixed for the signing of the agreement.

PDS computerisation on fast trackComputerisation of the Targeted Public Distribution System is being implemented as a Mission Mode Project under the National e-Governance Plan by the Central Government. It has been taken up to ensure correct identification of beneficiaries, distribution of commodities to the deserving, elimination of bogus or duplicate ration cards, etc. It would also enable timely availability of foodgrains at Fair Price Shops, check leakages and diversion of foodgrains, and introduce transparency and public accountability in implementation. The government has initiated implementation of Component-I of the scheme for end-to-end computerisation of operations: digitisation of ration cards and other databases, computerisation of the supply-chain management, setting up of a transparency portal and a grievance redressal mechanism.

Quality seed supply to farmersFor ensuring supply of quality seeds to farmers, the Department of Agriculture and Cooperation is implementing the Development and Strengthening of Infrastructure Facilities for Production and Distribution of Quality Seeds Scheme, under which assistance is provided for strengthening

and modernising seed infrastructure, upgrading the quality of farm-saved seeds, production and distribution of quality seeds, establishing ‘seed banks’ for ensuring availability in contingent situations, and establishing and strengthening quality-control infrastructure.

30,000 MW capacity targetThe Ministry of New and Renewable Energy is targeting a capacity addition of 30,000 MW during the 12th Plan period (2012-17) from various renewable energy programmes such as wind, small hydro, biomass and solar across India. The government has formulated an Integrated Energy Policy (IEP) covering all sources of energy, including renewable sources. The IEP document gives a roadmap to develop energy supply options and increase exploitation of renewable energy sources.

Flexible use of airspace okayedThe Cabinet Committee on Security cleared Flexible Use of Airspace (FUA) by civil and military users, a matter that had been unresolved for years. The primary objective is to enhance airspace capacity, minimise delays, fuel conservation, emission reduction and consumer benefit. Implementation of FUA through efficient civilian-military coordination is essential to foster traffic growth. FUA permits both military and civilian users to efficiently utilise the airspace on a sharing basis to gain optimum usage, thereby enhancing capacity and making operations more efficient.

New drug price control process startedTo implement the provisions of the National Pharmaceutical Pricing Policy, 2012, the process of finalising a new Drug (Price Control) Order has begun. The National Pharmaceutical Pricing Authority is the implementing authority of the existing Drug (Price Control) Order.

Telecom funding may get a leg upThe 12th Five Year Plan (2012-2017) has recommended that the Telecom Finance Corporation be created as a vehicle for the sector to access funds at competitive rates. It would provide long- and short-term loans to telecom infrastructure firms, service providers, equipment manufacturers, internet service providers, etc.

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Primarily, there are three elements intended to be controlled:

Anti-competitive agreements Abuse of dominant position Regulation of combinations likely to have an adverse effect on competition.

On December 10, 2012, the government introduced the Competition (Amendment) Bill in Parliament. The Bill aims to modify certain provisions of the Act, as well as insert some new provisions, to meet the evolving needs of industry. The Bill still has to be debated and passed by both houses of Parliament before it becomes law.

The substantive amendments proposed to the Act:

Section 3 (4) states that if vertical agreements cause or are likely to cause any appreciable adverse effect on competition, they shall be deemed void. While this provision makes reference to provision of services, the

illustrations mentioned therein only refer to “sale of goods” and not to services. The Bill now aims to include reference to “provision of services” in the explanation.

The Bill proposes to replace Section 4(1) with “no enterprise or group, jointly or singly, shall abuse its dominant position”. The objective is to include enterprises or groups, related or unrelated, whether or not within the same management, to fall within the ambit of Section 4. In a significant judgment, the CCI imposed a penalty of $ 114 million on DLF Ltd in the Belaire Owner’s Association vs DLF Ltd and Others case. One ground was that DLF allegedly abused its dominant position in the market by imposing unfair conditions in its builder contracts. Other real estate enterprises accused of indulging in similar practices were not reprimanded since they did not singly stand out as ‘dominant’ in the market. With the proposed amendment, if all (or at least more than one) real estate companies indulge in similar practices, they could collectively be held in contravention of the Act.

The Bill proposes to modify Section 2(y) to include value of sale of goods or services, excluding taxes levied.

Section 5 (b)(i) defines a group wherein two or more enterprises which, directly or indirectly, are in a position to exercise 26% or more of the voting rights in other enterprises. This threshold was increased from 26% to 50% on March 2, 2011. Now, the Bill aims to bring the Act in sync with the notification and revises the definition of ‘group’ to include “two or more enterprises which, directly or indirectly, are in a position to exercise 50% or more of the voting rights in the other enterprise”. Also, 50:50 joint ventures continue to fall within its scope.

Sources: http://knowledgetoday.wharton.upenn.edu/2013/01/indias-

competition-law-raises-concerns-among-multinationals/, http://www.

mondaq.com/india/x/223500/Antitrust+Competition/Proposed+Amen

dments+In+The+Competition+Act+A+Positive+Step+Forward

Policy Roadmap

Competition (Amendment) Bill

After attaining independence, India adopted policies comprising ‘command-and-control’ laws and regulations. The Monopoly and Restrictive Trade Practices Act was passed in 1969, replaced by the Competition Act, 2002, governed by the Competition Commission of India (CCI). The Competition Act was replaced by the Competition (Amendment) Act, 2007, and again by the Competition (Amendment) Act, 2009. The Act deals with the establishment, powers and functions as well as the CCI’s adjudicatory functions.

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Rs 28,400 croreFunds managed by the National Pension Scheme as of March 2, 2013. It has 44.93 lakh subscribers. The government is easing withdrawal norms and providing tax incentives to make it more attractive for small savers

24%

The stake sold by Jet Airways to Etihad for Rs 2,046 crore

$24 billionValue of manufacturing projects stalled due to lack of clearances

$500 million Collective value of five deals struck this year in the renewable energy sector, led by wind energy

12% Rate at which the Indian IT services market is expected to grow, according to Gartner, in 2013. It is expected to touch $10.2 billion (Rs 55,590 crore)

Number View

$1.2 billion Value of shares sold by India-dedicated funds and exchange traded funds during the March quarter of 2013

$11 billion Amount infused by foreign institutional investors in the equity market in the first four months of this year

$814.3 billion What global sales of connected devices like smartphones, tablets and PCs are expected to touch, according to IDC. Sales are expected to surpass 2.2 billion units

6.1% World Bank’s scaled-down growth forecast for India, from 7% projected six months ago for the current fiscal

51.0HSBC Manufacturing Purchasing Managers’ Index for April 2013, down from 52.0 in March 2013. It is at its lowest since November 2011

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Public Affairs Round-up

MSLGROUP INDIA

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