ECONOMY MATTERS 2

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FOREWORD

JUNE-JULY 2015

China’s economic growth for the second quarter of 2015 beat expectations, rising 7 per cent from a year earlier. Though growth remained relatively robust, there were widespread fears that the world’s second largest economy was slipping into a deeper slowdown, the fears getting reflected in the recent crash in commodity prices. China’s downshifting after

decades of double-digit economic growth has rattled large swaths of Latin America, Africa and Aus-tralia, which have prospered by shipping copper, iron ore and other raw materials to Chinese factory floors at high prices. In this slower-growth environment, implementing the right policies will remain a challenge for Chinese policy makers, and their ability to get it right will have significant implications for global growth.

On the domestic front, the ongoing monsoon session of Parliament has been keenly anticipated by Indian industry which depends on policymakers to set the framework for doing business. This session in particular is critical, given that a number of key legislations are keenly awaited. The last two Par-liament sessions have been among the most productive in recent years. With prudent participation of all political parties, many bills of interest to industry were passed during the winter and budget sessions. The most important of listed bills is the constitutional amendment bill which will formalise introduction of the Goods and Services Tax, a next-generation indirect tax reform. CII believes that with the continued implementation of economic reforms, the GDP growth rate could climb to 7.8-8.2 per cent this year and further to 9-10 per cent in the medium term. With over a crore youngsters join-ing the workforce each year, India cannot afford the luxury of placing other interests over economic compulsions any longer. Therefore, industry would expect that our lawmakers would come together in a constructive manner to give shape to the future of India. Our window of opportunity to create a developed India is now and we must not let it pass.

There is no gainsaying the importance of giving boost to the investment trajectory in a growing economy like India. In fact, investment revival is crucial for spring-boarding growth. CII’s analysis of the corporate performance for the period 2009-10 to 2013-14 has thrown up some interesting results. Growth in both net sales and net profit has dropped sharply in the last two fiscal years. Over the past five years, sectors like Hotels & Retail, Oil & Gas, Media & Entertainment, Consumer Durables, FMCG, Healthcare & Pharmaceuticals, Banks & Financial Services, Textile, Paper, Leather, Rubber & Wood and Auto & Auto Parts have performed better than the aggregate business sector in terms of net sales growth. Worryingly, manufacturing segment has been suffering from chronic lacklustre perfor-mance for several years now. In order to improve the profitability of the sector, there should be an increased emphasis on improving the sector’s productivity along with focus on efficiency.

Chandrajit BanerjeeDirector General, CII

3 JUNE-JULY 2015

EXECUTIVE SUMMARY

ECONOMY MATTERS 4

Global TrendsWorld’s second-largest economy, China’s economic growth showed sign of stabilization, with the GDP posting a 7 per cent growth rate in the second quarter of 2015. In a bid to get projects going, the State Council—China’s cabi-net—issued at least 10 guidance papers on infrastructure investment in May 2015. Across the continent, the crisis in Greece seems to have resolved as if now, with a bailout package being promised by the ’trioka’ in exchange of aus-terity measures which will be implemented by Greece. But worryingly, over the years, the various bailout packages have helped Greece, but its economic problems haven’t gone away. The economy has shrunk by a quarter in five years, and unemployment is above 25 per cent. The bail-out money has mainly gone toward paying off Greece’s international loans, rather than making its way into the economy. And the government still has a staggering debt load that it cannot begin to pay down unless a recovery takes hold.

Domestic TrendsIndustrial production growth inched down to 2.7 per cent in May 2015 from 3.4 per cent in the month of April 2015. April print was revised downward to 3.4 per cent from 4.1 per cent earlier. IIP growth slowed down in May 2015 as the manufacturing sector lost momentum on the back of weak performance of consumer oriented sectors. Un-seasonal rains earlier in the year resulting in lower rural demand are weighing in on consumer goods. The gov-ernment is aware of this situation and has already taken a number of policy and reform initiatives. We are hopeful that the initiatives taken by the government in terms of ex-peditious project clearances, simplification of procedures and new investment announcements as well as the ‘Make in India’ initiative would improve the order book position, revive demand and help effect a turnaround in the invest-ment cycle. On the inflation front, CPI inflation in June 2015 crawled up to 5.4 per cent from 5 per cent in May 2015 due to an increase in food inflation. Food CPI increased to 5.7 per cent from prior of 5.1 per cent. The rise in food CPI has been primarily witnessed in protein inflation to a compos-ite 9.7 per cent as against prior of 8.2 per cent.

Sector in Focus: Proposed 100 Smart Cit-ies & Industrial CorridorsCurrently while 30 per cent of the Indian population re-sides in urban centers, these centers contribute around 65

per cent to the national GDP. It is projected that urban In-dia will contribute about 75 per cent of national GDP in the next 15 to 20 years while another 300 million people will get added to the existing 300 million dwelling in Indian ur-ban centers. The speed of urbanization will exert immense pressure on the urban infrastructure, urban finance, natu-ral resources and quality of urban life. In order to manage this high level of urbanization, it is imperative for the gov-ernment to resort to smart concepts and smart solutions. Government of India has thus decided to develop 100 smart cities in India, as highlighted by the Finance Minister during his budget speech of July 2014. Though the govern-ment has committed to the development of smart cities in India, the state level strategies for quick implementation needs to be formulated and the operating model needs to be finalized. Confederation of Indian Industry (CII) in association with their Knowledge Partner, Brickwork Rat-ings released a report titled ‘Proposed 100 Smart Cities & Industrial Corridors: Developing Innovative Infrastructure Financing options’ in June 2015. The excerpts of the report are covered in this month’s Sector in Focus.

Focus of the Month: Corporate Profitabil-ity and Investment TrendsSales growth in the corporate business sector moder-ated to 9 per cent in FY14, the lowest in past four years, led by a persistent moderation in manufacturing segment, even as the growth figures in services segment remained stable. While growth in gross profit has also witnessed a steady moderation over the years, growth in net profit has dropped sharply, though remaining steady at 5 per cent in the last two fiscal years. Over the past four years, sec-tors like Hotels & Retail, Oil & Gas, Media & Entertainment, Consumer Durables, FMCG, Healthcare & Pharmaceuticals, Banks & Financial Services, Textile, Paper, Leather, Rubber & Wood and Auto & Auto Parts have performed better than the aggregate business sector. After major stimulus to all sectors in FY12, apart from FMCG and Oil & Gas, significant new investment proposals have not been announced for the remaining sectors. Manufacturing segment has been suffering from chronic lackluster performance for several years now. Profitability ratios are dwindling on account of low sales given slow demand. Cost cutting measures have not been able to salvage the situation. Additional stimulus combined with focus on efficiency would grease the stag-gering wheels of the business sector and bring the econo-my on track.

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GLOBAL TRENDS

The Road Ahead for Greece

JUNE-JULY 2015

After the Greeks overwhelmingly rejected aus-terity demands of the creditors in exchange for rescue loans in the referendum called by leftist

Syriza government on 5th July 2015, the possibility of Greece’s ejection from Euro zone had come a step clos-er to becoming a reality. However, as discussed in the first article published last month, the other possibility was a fresh round of bailout talks with European Central bank guaranteeing Greek banks access to its reserves and Greece staying in the Euro zone. This possibility seemed to have materialized as if now.

With Greece suffering a total financial ruin with banks running out of cash and capital controls still in place, Prime Minister Alexis Tsipras, was forced to agree to the terms of the nation’s creditors to avoid a disorderly bankruptcy which would thereby push the economy into deeper recession. This way the second possibility nearly materialized on 12th July 2015 when Greece and rest of the Euro zone reached an agreement leading to a third bailout worth around 86 billion euros that would keep the country in the single currency bloc. The auster-

ity measures were then approved by the Athens parlia-ment with an overwhelming majority voting in favour of the new reforms.

In exchange for the three year rescue package, Greece will have to pay a price by accepting the extreme aus-terity measures imposed by the creditors. The austerity reforms agreed in the final Euro summit includes:

• Reforming pensions: According to Troika, across the board pension cuts can save around one per cent of GDP in 2016 and between 0.25-0.75 per cent in 2015.

• Value added tax system and other taxes: Stream-lining of the VAT system and broadening of the tax base to increase revenue. With VAT to be charged at 13 per cent for basic food, hotels, energy and wa-ter and 23 per cent for the rest and rise in corporate tax from 26 to 28 per cent.

• Labor market reforms: Labor market policies pro-moting sustainable and inclusive growth thus align-ing them with International and European best practices.

• Energy : Privatization of its electricity transmission network operator (ADMIE)

ECONOMY MATTERS 6

GLOBAL TRENDS

With the new reforms approved by the Greek and vari-ous national parliaments, the European Union agreed for a bridging loan for the country worth 7.2 billion euros with almost all of it spent on repaying loans.This allowed Greece to make a 3.5 billion euros payment to European Central Bank which was due on 20th July 2015 and pay outstanding 1.5 billion euros to the IMF, thus allowing the fund to take part in future bailout. The agreement also enabled ECB to resume emergency lending to Greek banks.

Banks too reopened for the first time in three weeks following the bailout deal with capital controls still in place, prohibiting people to withdraw more than 420 euros per week. Around a week later, Athens stock ex-change finally reopened giving investors the first oppor-tunity to react after five weeks of shut down. Predict-ably, banks were hit the most with its four main banks, including the National Bank of Greece crashing to the daily trading limit of a 30 per cent loss.

After passing a series of reforms demanded by the creditors, the Greek government is expecting the nego-tiations to be concluded by 20th August, which marks as a due date for repaying 3.2 billion euros to the Euro-pean Central Bank. The European Commission officials clearly stated that the creditors would not settle for a rushed agreement and that the bailout deal requires detailed reform commitments in writing. According to Prime Minister Alexis Tsipras, Greece is in a final stretch of negotiations with its creditors and expressed his con-fidence in the bailout deal to end the uncertainty about Greece’s future.

In case the bailout deal fails to conclude in the expected time period, Greece would have to approach a Euro-pean Union emergency fund or some other source in order to repay the ECB held bonds. In such a scenario, another set of economic revamping measures would have to be passed in Greece’s parliament, thus creating further pressure on the Prime minister who is already struggling to keep his party from falling apart.

The delay in the new aid program is mainly caused due to the reforms imposed by the creditors to restore their confidence in Greece. While Athens has already passed two packages of reforms through parliament, interna-tional creditors now seek third wave of reforms before they release any aid to keep the already battered econ-omy from total collapse.

• Complete legal independence of Greek statistics of-fice (ELSTAT)

• Liberalising the economy thus calling for more am-bitious product market reforms including Sunday trade, sales periods, milk and bakeries etc

• Action on non performing loans to strengthen the financial sector

• Monetization of assets through privatization and other means

Accepting the terms of its creditors, in a sense was a betrayal for the Greek people as they decisively voted against austerity. Also anti-austerity was the very rea-son why they brought Syriza party to power in January. Prime Minister Alexi Tsipras also faced rebellion in his own party as some of his party members felt that the anti-austerity objectives of the party were being com-promised. Addressing the parliament Tsipras said: “We have chosen a compromise that forces us to implement a programme in which we do not believe, and we will implement it because the alternatives are tough”.

Nevertheless, there was no trouble passing the draft legislation as it was backed by the European opposition parties allowing Greece to begin negotiations with its creditors on the third bailout. Tsipras seems to rely on the support of these opposition parties for the final bail-out deal too, which is expected to be put before Greek parliament before 20th August.

Tsipras who wanted a complete or partial write-down of country’s massive debts –equivalent to 180 per cent of GDP failed to negotiate with the creditors as they re-fused the issue of debt relief. The deal announced clear-ly stated that creditors would not forgive any Greek debt and could only consider further discussions about reducing annual debt payments by lengthening out pay-ment periods or reducing interest rates.

On the other hand, with unsustainable debt levels the International Monetary Fund (IMF) officials repeatedly emphasized on debt restructuring of Greece by the Euro zone and that it would consider to support the new bailout only if Greece’s debt is reduced, ensuring country’s comfort in debt repayments. This created fund’s conflict with other creditors of Greece namely Euro zone and European Central Bank.

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GLOBAL TRENDS

JUNE-JULY 2015

Will the Third Bailout Restore Greece to Good Health?Assuming that the three year bailout deal goes through, Greece’s immediate future seems secured. But does this assure that the country will not demand a fourth bailout in the medium or long-run?

Answers to such questions remain disputed as some economists believe that the fresh austerity measures are bound to have a contractionary effect on growth. While some were of the view that Greece’s third bail-out is bound to fail for the same reasons that the last two bailouts did, more optimistic views stated that the structural reforms demanded by the creditors will have a favorable impact on growth and employment. Cen-tre for European Reform, a British think tank predicted that the Greece’s economy will be 4.2 per cent smaller by 2018 as a result of austerity measures imposed by the creditors.

With stubbornly high unemployment rates and econo-my having shrunk by a quarter in five years, Greeks will now suffer the pain of fresh austerity measures. Even if debt relief is granted by the creditors, as suggested by

IMF, next few years will be hard because economy will continue to shrink before settling into a period of low growth.

Prolonged recession followed by a phase of low recov-ery would make Greece’s debt highly unsustainable. IMF has even warned Euro zone creditors about the Greece’s government debt expected to climb to 200 per cent of national income by 2017.

• Shipping industry may take a hit as the government has agreed to raise the taxes. This may be fearsome for the industry which employs more than two lakh people and contributes around 7.5 per cent of GDP. If enacted, Greece would become one of the most expensive countries to own a ship in the European Union.

• Tax hikes will adversely impact Greece’s tourism industry which constitutes 9 per cent of GDP. The bailout proposal being considered by European leaders would boost Greek meal sales tax from the current 13 per cent to 23 per cent and for hotels room sales taxes would rise from 6.5 per cent to 13 percent.

ConclusionOnly time will tell, whether the latest bailout package for Greece, will be able to solve its problems. Over the years, the various bailout packages have helped Greece, but its economic problems haven’t gone away. The economy has shrunk by a quarter in five years, and unemployment is above 25 per cent. The bailout money has mainly gone toward paying off Greece’s international loans, rather than making its way into the economy. And the government still has a staggering debt load that it cannot begin to pay down unless a recovery takes hold. Almost two-thirds of Greece’s debt, about 200 billion euros, is owed to the Euro zone bailout fund or other Euro zone countries. Greece does not have to make any payments on that debt until 2023. The International Monetary Fund has proposed ex-tending the grace period until mid-century.

So while Greece’s total debt is big—as much as double the country’s annual economic output—it might not matter much if the government did not need to make payments for decades to come. By the time the money came due, the Greek economy could have grown enough that the sum no longer seemed daunting. In the short-term, though, Greece has a problem making payments due on loans from the International Monetary Fund and on bonds held by the European Central Bank. Those obligations amount to more than 24 billion euros through the middle of 2018 and it is unlikely that either institution would agree to long delays in repayment.

ECONOMY MATTERS 8

GLOBAL TRENDS

China’s Economy Shows Moderate but Steady Growth in 1H2015

China’s economic growth shows sign of stabiliza-tion, with the GDP posting a 7 per cent growth rate in the second quarter of 2015 as per the Na-

tional Bureau of Statistics. The gross domestic product figure announced by the National Bureau of Statistics

(NBS) matched the 7.0 per cent expansion in the first three months of this year. With this, the first-half GDP stood at 7.0 per cent. The value added of the primary industry was up by 3.5 per cent; the secondary industry, up by 6.1 per cent; and the tertiary industry up by 8.4 per cent in the second quarter.

In the first six months, the investment in fixed assets (excluding rural households) grew by nominal year-on-year growth of 11.4 per cent (a real growth of 12.5 per cent after deducting price factors), 2.1 percentage points slower than the first quarter, due to the contrac-tion of real estate investment despite the government’s supportive policy. Specifically, the investment by the state holding enterprises rose by 12.3 per cent; private investment was up by 11.4 per cent, accounting for 65.1 percent of the total investment. Further, in the first half year, the total retail sales of consumer goods reached 14,157.7 billion yuan, a nominal year-on-year rise of 10.4 per cent (a real growth of 10.5 percent after deducting price factors), 0.2 percentage point slower than that in the first quarter. Coming to exports, the total value of imports and exports in the first half year of 2015 was 11,531.6 billion yuan, a decrease of 6.9 per cent on year-

on-year basis. The total value of exports was up by 0.9 per cent; the total value of imports showed decrease of 15.5 per cent. Consequently, the trade balance stood at 1,612.8 billion yuan in surplus.

In the first six months, the consumer price went up by 1.3 per cent year-on-year, 0.1 percentage point higher than that in the first quarter. Specifically, the price went up by 1.3 per cent in urban areas and 1.1 per cent in ru-ral areas. Grouped by commodity categories, prices for food was up by 2.0 per cent; tobacco, liquor and articles up by 0.5 per cent; clothing up by 2.9 per cent; house-hold facilities, articles and maintenance services up by 1.1 per cent; health care and personal articles up by 1.8 per cent; transportation and communication down by 1.6 per cent; recreation, education, culture articles and services up by 1.5 per cent and housing up by 0.7 per cent.

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GLOBAL TRENDS

JUNE-JULY 2015

Chinese Stock Market Crash

The recent stock market crash in China’s stock market had reverberations throughout the global markets too. The deleveraging of the Chinese economy has always seemed likely to be a long and troublesome saga, last-ing many years or even decades if it is to prove success-ful. The latest episode involves a sudden collapse in do-mestic “A” shares, which have dropped by 19 per cent in less than a fortnight, and have triggered what has been widely described as an “emergency” easing in monetary policy. Market volatility is likely to stay dangerously high for quite a while, making this a very speculative market for Chinese residents to enter. Even after the latest crash, the domestic equity market has still more than doubled in the past 12 months. So far, this has had very little effect on the wider economy, which suggests that the crash could prove to be nothing more than a market event that will not translate into consumer spending or bank lending. However, the fact that the central bank has responded immediately to the crash with a decisive monetary policy shift suggests that the authorities are genuinely concerned.

But overall credit extension in the economy is still grow-ing at 15.8 per cent, compared to growth of only 6.2 per cent in nominal GDP, so the credit/GDP ratio is still soaring. The attempts to control credit after President Xi Jinping came to office in 2013 initially seemed to be working, but only at the expense of a slowdown in GDP that was obviously getting out of control early in 2015.

Policy Changes

China’s economy, a key driver of world growth, ex-

panded 7.4 per cent last year, slower than the 7.7 per cent in 2013, and its weakest annual growth since 3.8 per cent in 1990. The slowdown has been a major fac-tor in a global fall in commodity prices, and so far the economy has largely failed to pick up momentum this year. Economists said the stable growth momentum is underpinned by the slight rebound in industrial produc-tion. They expect the government to continue escalate policy supports in the coming months.

Chinese authorities are looking to diversify growth away from big-ticket projects -- that helped drive years of double-digit GDP expansion to consumer demand, which is seen as more sustainable. But too fast a decel-eration in investment can be harmful to overall growth. They have been taking more aggressive pre-emptive steps with the People’s Bank of China (PBoC), the cen-tral bank, cutting benchmark interest rates four times since November 2014 and reducing bank reserve re-quirements in a bid to boost lending. Such measures can take time to affect growth. It is very likely that the economic growth in the second half will be better than the first half considering the positive factors including policy support and a recovery in the property market. Additionally, in a bid to get projects going, the State Council—China’s cabinet—issued at least 10 guidance papers on infrastructure investment in May 2015. Chi-na’s top economic planning agency, the National De-velopment and Reform Commission, has outlined 1,043 projects for public-private partnership totaling 2 trillion yuan ($322.1 billion) in investment. For 2015, the Chinese government expects the economy to grow around 7 per cent, the weakest expansion in 25 years.

ECONOMY MATTERS 10

DOMESTIC TRENDS

A Critical Monsoon Session

The monsoon session of Parliament has been keenly anticipated by Indian industry which de-pends on policymakers to set the framework for

doing business. This session in particular is critical, given that a number of key legislations are keenly awaited.

A stable and predictable investment climate arising from a well-functioning Parliament with time-bound procedures is central to our economic development as-pirations. The last two Parliament sessions have been among the most productive in recent years. With pru-dent participation of all political parties, many bills of interest to industry were passed during the winter and budget sessions.

These include the Mines and Mineral (Development

and Regulation) Act, the Insurance Act, the Companies (Amendment) Act, the Motor Vehicles Act, Coal Mining Act, and so on. Industry hopes that the monsoon ses-sion will be equally productive and enact major legisla-tions that would have far-reaching benefits for India’s development.

The most important of listed bills is the constitutional amendment bill which will formalise introduction of the Goods and Services Tax, a next-generation indirect tax reform. The GST, first mentioned in the budget speech of 2005-06, is to be introduced by April 1, 2016. After the bill is passed in Parliament, it will have to be ratified by the state governments and preparations for its intro-duction can begin.

We are happy that most of the issues seem to be ironed out for a GST that will subsume nearly all indirect taxes and cover almost all sectors. Most political parties have been supporting GST in principle, and it is imperative that the bill is passed in this session to avoid further de-lay.

As CII has said time and again, GST is likely to add 1.5 percentage points to GDP growth rate. It is also the first concrete step to convert India into a single market, make the supply chain smooth and efficient, and curb inflation. Besides, it would also add to indirect tax rev-

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DOMESTIC TRENDS

JUNE-JULY 2015

enues. The Make in India campaign would gain greatly from its introduction.

The other crucial legislation is the Right to Fair Compen-sation and Transparency in Land Acquisition, Resettle-ment and Rehabilitation (Second Amendment) Bill. It was passed by Lok Sabha during the winter session and is undergoing committee review in the Rajya Sabha.

Projects worth Rs 2.44 lakh crore have been stalled, many of them due to land acquisition issues. Industry has no objection to the compensation rates for acquisi-tion as well as resettlement and rehabilitation require-ments. However, the time taken under the current Act of 56 months is far too long given the urgency of infra-structure and other developments. Also, the processes are complicated.

Delay in land acquisition has led to funds being tied up, which in turn has impacted bank lending capacity. Due to this, proposed investments are facing challenges in obtaining finance. The process of land acquisition must be made smoother, faster and more efficient, with suffi-cient satisfaction to all stakeholders in a balanced man-ner.

The proposed amendment would apply to five sectors of defence, rural infrastructure, affordable housing, in-dustrial corridors, and infrastructure development un-der public-private partnership. These would be exempt from social impact assessment, restrictions on acquisi-tion of multi-cropped land and consent clause. Industry believes that these are reasonable exemptions; other-wise, India may be faced with a situation where we are unable to respond to external threats due to requisite land not being available for defence! Similarly, industrial corridors such as the Delhi-Mumbai and Chennai-Ben-galuru corridors are aspirational strategies designed to boost investments, create millions of new jobs, develop smart cities, and act as a magnet for growth.

A third important bill pending in Parliament is the Micro, Small and Medium Enterprises Development (Amend-ment) Bill, not listed for this session. This bill proposes to raise MSME investment limits in plant and machin-ery, and also link the investment limits to inflation. Thus, more enterprises would come under the ambit of the law and be eligible for multiple benefits relating to tax-es, credit and other facilities. CII believes this would pro-pel the entrepreneurship boom and encourage more manufacturing enterprises, thus offering livelihood op-portunities to millions of people.

The Electricity Amendment Bill is also significant. It would separate the distribution and electricity supply segments and provide for efficient licensing and proce-dures. It would also include renewable energy and in-stitute a smart grid. These amendments are necessary to resolve the multiple issues in the power generation sector.

Above all, industry would expect Parliament to transact business — discuss and deliberate on key issues of na-tional and economic importance, including the bills in question. The Indian economy appears to be reviving. However, for this revival to become strong and to take firm roots it is important that the pace of policy reforms that has been on display in the last 14 months continues unabated.

CII believes that GDP growth rate could climb to 7.8-8.2 per cent this year and further to 9-10 per cent in the medium term. However, this is contingent on contin-ued reforms. With over a crore youngsters joining the workforce each year, India cannot afford the luxury of placing other interests over economic compulsions any longer. Therefore, industry would expect that our lawmakers would come together in a constructive man-ner to give shape to the future of India. Our window of opportunity to create a developed India is now and we must not let it pass.

This article appeared in Times of India dated 24th July 2015. The online version can be accessed from the following link: http:// http://blogs.times ofindia.indiatimes.com/toi-edit-page/a-critical-monsoon-session-parliament-must- transact-business-pass-key-bills-to-nurse-economy-back-to-health/

ECONOMY MATTERS 12

DOMESTIC TRENDS

Industrial production growth inched down to 2.7 per

cent in May 2015 from 3.4 per cent in the month of April

2015. April print was revised downward to 3.4 per cent

from 4.1 per cent earlier. IIP growth slowed down in

May 2015 as the manufacturing sector lost momentum

on the back of weak performance of consumer oriented

sectors. Unseasonal rains earlier in the year resulting in

lower rural demand are weighing in on consumer goods.

The index of eight core industries rose by 4.4 per cent in

May 2015 to 178.6, compared to its level in May 2014, the

fastest seen since November 2014, and followed two

straight months of contraction. The eight core indus-

tries — coal, crude oil, natural gas, refinery products,

fertilisers, steel, cement, and electricity — account for

a combined weight of 37.9 per cent in the overall IIP.

The refinery products industry grew the fastest, at 7.9

per cent in May 2015, compared to May 2014. This is far

faster than the -2.9 per cent seen in April 2015. Coal pro-

duction grew the second-fastest, at 7.8 per cent. How-

ever, this was marginally slower than the growth of 7.9

per cent registered in April 2015. Coming as welcome

news to those fearing severe power outages this sum-

This is reflected in lower two wheeler and tractor sales

in April and May 2015. Therefore, a favourable distribu-

tion of rainfall so far and deficiency at -4 per cent of

LPA – much lower than last year – is a welcome respite.

In balance, in FY16, we expect industrial production to

grow at a higher rate as compared to the previous fiscal

on the back of improving global conditions and policy

aided domestic upturn.

mer, electricity generation increased 5.5 per cent in May

2015 against -1.1 per cent in the previous month.

The growth of production of crude oil, fertilisers, and

cement all entered the green in May 2015 from contract-

ing in April 2015. Crude oil production growth grew 0.8

per cent, while those of fertilisers and cement were at

1.3 per cent and 2.6 per cent, respectively. The perfor-

mance of the natural gas industry improved marginally,

but it still contracted in May — this marks 54 consecu-

tive months of contraction since December 2010. The

industry’s output was -3.1 per cent lower than its per-

formance in May 2014. It was -3.5 per cent in April. The

steel industry accelerated its growth by two percentage

points to 2.6 per cent in May from 0.6 per cent in April

2015.

IIP Growth Slows Down in May 2015

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DOMESTIC TRENDS

JUNE-JULY 2015

On the sectoral front, growth of manufacturing sec-tor, which constitutes over 75 per cent of the index, halved to 2.2 per cent in May 2015 compared with 4.2 per cent growth in the previous month. In terms of in-dustries, twelve (12) out of the twenty two (22) industry groups (as per 2-digit NIC-2004) in the manufacturing sector showed positive growth during the month of May 2015 as compared to the corresponding month of the previous year. The industry group ‘Wearing ap-parel; dressing and dyeing of fur’ grew at the high-est positive growth of 15.8 per cent, followed by 11.2 per cent in ‘Furniture; manufacturing n.e.c.’ and 11.1 per cent in ‘Coke, refined petroleum products & nu-clear fuel’. On the other hand, the industry group ‘Ra-dio, TV and communication equipment & apparatus’ showed the highest negative growth of (-) 24.3 per cent, followed by (-) 18.9 pr cent in ‘Office, accounting & computing machinery’ and (-) 9.2 per cent in ‘Pub-lishing, printing & reproduction of recorded media’.

In contrast, electricity output grew at a robust rate of 6.0 per cent in May 2015 as compared with a con-traction in the previous month. Mining output contin-ued to remain in the positive territory for the fourth consecutive month, with its pace of growth further

galloping to 2.8 per cent in May 2015 as compared to 0.2 per cent in April 2015. The recent auction of coal mines by the government could provide some impetus to coal production in the months to come.

On the use-based front, capital goods sector growth was subdued in May 2015, which does not augur well for the outlook of investment demand in the economy. Capital goods sector growth grew by a paltry 1.8 per cent in May 2015 as compared to 6.8 per cent in the previous month. Consumer goods sector growth which had moved into the positive territory in April 2015, once again contracted in May 2015. Worryingly, consumer durables sector growth which had turned positive in the previous month, once again turned negative in May 2015. This raises doubts about the credence of the one-off positive figure in April 2015. Non-durable sector growth too moved into the negative territory in May 2015 after remaining consistently in the positive territo-ry for 6 months. Going ahead, the progress of monsoons becomes critical as it would have immediate bearing on consumer goods especially non-durables. Notably, non durables have a significant share in IIP at 21.4 per cent. Basic and intermediate goods posted positive growth.

ECONOMY MATTERS 14

DOMESTIC TRENDS

Wholesale price index (WPI) recorded a deflation of 2.4 per cent in June 2015. This is the eighth consecutive month wherein the deflationary trend has continued. In June 2014, as a stark contrast, the wholesale price infla-tion had stood at 5.7 per cent. Inflation, as measured on the Wholesale Price Index (WPI), has been in the nega-tive zone since January 2015, resulting in an interest rate cut by the central bank in its policy review on 2 June, 2015.

CPI inflation in June 2015 crawled up to 5.4 per cent from 5 per cent in May 2015 due to an increase in food inflation. Food CPI increased to 5.7 per cent from pri-or of 5.1 per cent. The sequential momentum in food prices spiked to 1.8 per cent month-on-month basis, highest since July 2014. The rise in food CPI has been

primarily witnessed in protein inflation to a composite 9.7 per cent as against prior of 8.2 per cent. Pulses infla-tion rose for the 6th consecutive month and was at its highest rate of 22.2 per cent in June 2015. This year, the Ministry of Agriculture has already raised minimum sup-port prices (MSPs) for pulses by 1.1 to 1.7 per cent plus a bonus of Rs. 200 per quintal. This could add some more pressure to pulses prices. Core inflation rose by 20 bps to 5.3 per cent in June 2015, a slower climb compared to 40 bps in May 2015. The pick-up however, came from a sharp jump in personal care and effects (up 120 bps) and in household services, health, transport and com-munication and, recreation and amusement (all up 30 bps). Some of this rise is likely to be led by the impact of higher prices due to the service tax hike announced in the budget.

CPI Inflation Crawls Up in June 2015

OutlookIndustrial growth of 2.7 per cent during the month of May 2015 due to slow growth of mining and manufacturing sectors is below potential. However, industrial growth is on the path of recovery, as many of the stalled projects have started to move. Consumer goods sector has again entered the negative territory, signalling a decline in the purchasing power, particularly in the power sector. The government is aware of this situation and has already taken a number of policy and reform initiatives. We are hopeful that the initiatives taken by the government in terms of expeditious project clearances, simplification of procedures and new investment announcements as well as the ‘Make in India’ initiative would improve the order book position, revive demand and help effect a turnaround in the investment cycle.

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Primary products continued to face deflation to the tune of 0.8 per cent in June 2015. However, primary food arti-cles recorded inflation to the tune of 2.9 per cent, albeit at a slower pace from the previous month. However, going forward, there is upside risks to food inflation on the back of the expected fall in food grain production due to unseasonal rainfalls in March and April 2015. Fur-ther, primary non-food inflation moved into the positive territory in June 2015, after remaining in negative terri-tory for the last eight consecutive months.

Fuel sector continued to remain under deflation as it

stood at -10.0 per cent in June 2015 as compared to -10.5 per cent in the month before. Both petrol and diesel too showed deflation during the month.

Manufacturing sector too posted deflation for the fourth consecutive month in June 2015 as it stood at -0.8 per cent as compared to -0.6 per cent in the previ-ous month. Non-food manufacturing or core inflation, which is widely regarded as the proxy for demand-side pressures in the economy remained range bound at -0.9 per cent during the month as compared to -0.6 per cent during the previous month.

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Exports contracted for the seventh consecutive month, by 15.8 per cent in June 2015 as compared to decline to the tune of 20.0 per cent in the prior month. The key sec-tors that have witnessed a decline include petroleum, engineering and electronic goods items. The weakness in exports growth reflected the weak global demand conditions, sharp contraction in commodity prices and relative strong currency vis-à-vis other Asian peers. Ser-vices sector exports, too, fell sharply. At US$11.8 billion – the lowest in almost three years – services exports declined 14.8 per cent on-year in May 2015. With this,

A fall in imports was positive for the trade deficit, which improved to US$10.83 billion in June from US$11.76 bil-lion last year. Cumulatively during April-June 2015-16,

services exports have declined for the third consecutive month.Imports too contracted by 13.5 per cent in June 2015, compared to previous month’s contraction of 16.1 per cent. Gold imports eased to US$2.0 billion in June 2015 as compared to US$2.4 billion in the previous month. Meanwhile, the oil import bill increased to US$8.7 bil-lion from US$8.5 billion recorded in June 2015. Oil prices have declined significantly in the last few weeks in the wake of the Iran-P5+1 nuclear accord being reached, which paved the way for removal of sanctions imposed on Iran.

trade deficit stood at US$32.2 billion, marginally lower than US$33.1 billion in the year ago period.

OutlookSo far, the southwest monsoon conditions remain favourable – rainfall at seven per cent below the long term aver-age, and reasonably well-distributed. But, what has raised red flags is the inflation in pulses crossing 22 per cent in June as production has suffered largely a result of weak monsoons last year and damage to crops from unseasonal rains this year. This necessitates proactive measures from government to contain runaway inflation particularly in pulses, in case monsoons turn unfavourable in the crucial July and August months.

Exports Continue to Slide

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Government launched SKILL INDIA on the occasion of the first-ever World Youth Skills Day on July 15th, 2015. During the event, Prime Minister Shri Narendra Modi unveiled the Skill India logo and launched four land-mark initiatives of the Ministry of Skill Development and Entrepreneurship: National Skill Development Mis-sion, National Policy for Skill Development and Entre-preneurship 2015, Pradhan Mantri Kaushal Vikas Yojana (PMKVY) scheme and the Skill Loan scheme.

The Pradhan Mantri Kaushal Vikas Yojana (PMKVY), the Ministry’s flagship, demand-driven, reward-based skill training scheme will incentivise skill training by provid-ing financial rewards to candidates who successfully complete approved skill training programmes. Over the next year, PMKVY will skill 24 lakh youth, across India. For the first time, the skills of young people who lack formal certification, such as workers in India’s vast un-organised sector, will be recognised. Through an initia-tive known as ‘Recognition of Prior Learning’ (RPL), 10 lakh youth will be assessed and certified for the skills that they already possess.

Prime Minister also launched the Skill Loan scheme. Loans ranging from Rs 5,000-1.5 lakhs will be made available to 34 lakh youth of India seeking to attend

skill development programmes over the next five years. Sanction letters for the first ever Skill Loans were hand-ed out by the Prime Minister to aspiring trainees.

While addressing the audience Prime Minister, articulat-ed a clear overarching vision for Skill India. He highlight-ed the centrality of skills to India’s development and called on government, private sector and India’s youth to work together to make this vision a reality. The Prime Minister also highlighted the potential for skilled Indian youth to be recognized around the world.

World Youth Skills Day and the launch of SKILL INDIA were celebrated nation-wide. State Governments or-ganized events to emphasize the importance of skill development for the youth in their states, mobilizing candidates, launching fresh training programs and felic-itating successful trainees. Across India, special PMKVY mobilization camps are being organized at 100 locations with Nehru Yuva Kendra Sangathan (NYKS). A national SMS campaign is being rolled out to build awareness of the program, reaching about 40 crore subscribes. Fresh PMKVY training was initiated in 1,000 centres across all States and Union Territories in India today, covering 50,000 youth in 100 job roles across 25 sectors.

Prime Minister Launches SKILL INDIA on the Occasion of World

Youth Skills Day

Prime Minister Shri Narendra Modi and Minister of State (Independent Charge) for Skill Development & Entrepreneurship, Shri Rajiv Pratap Rudy at the launch of Skill India

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A Pleasant Experience with the Rajya Sabha Panel on GST Bill

The esteemed Select Committee of Rajya Sabha has tabled its report in Parliament after exami-nation of the 122nd Constitution Amendment Bill,

on the 23rd of July 2015. Now that the Report has been placed in the public domain, I thought of sharing my experience in this regard. I was requested to appear before the Select Committee on the forenoon of 16th of June, 2015. Besides the Chairman of the Empowered Committee of the State Finance Ministers, the Revenue Secretary, Additional Secretary (Revenue), Member (GST) and other senior officers of the Central Board of Excise & Customs, four experts were also invited on that forenoon. Excepting me, the other three experts were eminent economists viz Dr. Abhijit Sen, former Member, Planning Commission, Dr. Rathin Roy, Direc-

tor NIPFP, Delhi and Dr. Pinaki Chakraborty, Professor, NIPFP.

At the outset, Shri Bhupendra Yadav, the Chairman of the Select Committee, while welcoming the par-ticipants, requested them to offer their views on the GST Bill, one by one. As the presentations started, the Hon’ble Members of the Select Committee also inter-vened from time to time seeking clarifications. In the next few paragraphs, I would like to set out a summary of my submissions before the esteemed Committee.

I submitted at the outset that it was my belief that com-promises become necessary in a federal democracy, and as a corollary, the compulsions of cooperative fed-eralism in a federal democracy more often than not lead only to incremental reforms, and not necessarily a big bang reform in one go. It was explained that the Dual GST model proposed in the Bill would be like a joint ven-ture between Centre and the twenty-nine plus States. In order to make this joint venture successful, all the States will have to be taken on board. Therefore, out of the compulsions of federal democracy, the Finance Minister had to make certain necessary compromises in the structure of the GST.

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While appreciating the inclusion of Petroleum and certain Petroleum Products, within the ambit of GST, constitutionally, I made certain suggestions for the in-clusion of Alcohol as well within GST on the grounds of keeping the input tax credit (ITC) chain intact and wid-ening of the tax base so as to bring down the Revenue Neutral Rate (RNR). My view was that Alcohol, a de-merit good should also be brought within the ambit of GST, as was proposed in case of Tobacco & Cigarettes, the other demerit goods. Further, State excise duty in addition to GST could be levied by the States on Alcohol so as to cover the duty difference between GST rate and the prevalent State Excise Duty Rate, as has been pro-posed in the case of Tobacco & Cigarettes.

However, if the States oppose this proposition, my al-ternative proposal was to give Alcohol the same treat-ment as was being given to Petroleum and its products. In either case, the clause ‘except taxes on the supply of the alcoholic liquor for human consumption’ would have to be deleted from the definition of GST at Clause 12A of the Bill. Further, as has been done in the case of Petroleum and its products, the levy of GST on Alcohol may be postponed to a later date to be decided by the GST council. Till that time, the States will continue to levy State Excise duty and State VAT on Alcohol. The advantage would be that no further amendment of the Constitution would be needed, when the States agree to bring in Alcohol within GST at a later date.

While appreciating the subsuming of ‘Entry Tax includ-ing Octroi’ within the ambit of GST, it was noted that there were some concerns that the abolition of Entry Tax and Octroi would adversely hurt the revenue in-terest of the local municipalities and Panchayats etc. I explained the importance of subsuming of Entry Tax in breaking the trade barriers in interstate movement of goods, and thus facilitating one of the main objectives of GST i.e. creation of ‘common economic market’.

The Clause (4) of the proposed Article 279A at sub clause (e) states that the GST Council shall make recom-mendations to the Union and the States on “the rates including floor rates with bands of goods and services tax”. Although the common perception was that the band would be a narrow one, but the provision did not specify so. Therefore, it may be wise to add the word ‘narrow’ before the word ‘bands’ in the aforesaid sub

clause (e). In fact, this band should not be wider than 1 per cent (+ - 0.5%). Otherwise, there may be too much of variation of GST rates across the country causing harm to the objective of ‘common economic market’.

On compensation to the States by Centre in case of revenue loss by the States after introduction of GST, I observed that the Union Finance Minister had made the necessary compromise by proposing to incorporate a provision regarding compensation in the Constitution at Clause 19 of the Bill. The States have now demand-ed 100 per cent compensation in all the five years, and not restricted upto the 3rd year. I explained that it is my belief that in the GST regime there will be high tax buoyancy due to two factors – widening of the tax base and efficient technology based tax collection machinery with much less scope of tax evasion. Once that hap-pens, it can be expected that after about three years, there will be no loss of revenue by the states, and thus there will be no need for compensation. Therefore, hav-ing agreed to give compensation, there was no harm in Centre agreeing to give 100 per cent compensation for all the five years, in case of loss of revenue; – that would raise the comfort level of the States, and bridge the evi-dent trust-deficit between Centre and the States.

On the proposal to impose one per cent origin based tax to be collected by the origin states in respect of in-terstate movement of goods and services in addition to the Integrated GST (IGST), it was pointed out that this tax would be against the basic principle of GST that the State’s share of GST would accrue to the destina-tion States. Further, this provision was the sore point for the trade and industry as well, for the simple rea-son that there won’t be any input tax credit for this tax. This denial of credit will lead to cascading of taxes and consequent inflation. It would be still worse in the case of stock transfer where the one per cent tax on supply (and not ‘sale‘) will keep on accumulating with each transfer, thus increasing the tax incidence to 6 per cent where there are six transfers. Moreover, at each state border there will be inevitable compliance costs – both visible and invisible. Thus, this tax would also under-mine the growth of common economic market, one of the major objectives to be achieved through GST.

While urging for deletion of this clause, it was suggest-ed that in order to raise the comfort level of the pre-

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dominantly manufacturing States, it may be specifically mentioned in the Compensation scheme that this factor of loss of revenue may be specially taken into consid-eration while calculating the compensation amount for that State.

The need for a separate Dispute Settlement Authority for settling disputes between Centre and States, and among States, that would be independent of the GST Council was emphasized. As the cause of action giving rise to disputes would emanate only from the recom-mendations of the GST Council, it was felt imperative that the dispute is settled by a body independent of GST Council, to bring fairness and transparency in dispute settlement process.

It was also explained to the esteemed Committee that there was a need to change the definition of ‘Services’. The following definition of ‘Supply of Services’ was sug-gested, which appeared to be a better option instead of defining ‘Services’: “Supply of Services’ means any busi-ness activity which is not supply of goods.”

A note of caution was sounded on fixing the GST Rate stating that it must not add to inflation. The way to keep the GST rate low was also explained. The GST rate is a very important factor in earning the trust of the tax pay-ers. Howsoever efficient the GST machinery may be, the tax-payers won’t welcome GST happily if the GST rate is kept high, because that will lead to high inflation. Even in developed countries like Australia and Canada, GST was initially opposed by the poorer sections of the tax-payers because of high GST rate. It was explained that the GST rate is normally based on the Revenue Neutral Rate (RNR). In the present circumstances, the RNR is expected to be high because Petroleum and its prod-ucts and Alcohol have been kept out of GST and conse-quently, the tax base would shrink. But, a high GST rate in line with high RNR would definitely lead to high infla-tion. Therefore, my submission was that the esteemed Committee may advise the Government not to go strict-ly by the RNR while fixing the GST rate. To start with, India’s GST rate should not go beyond 20 per cent for standard rate and perhaps 14 per cent for reduced rate.

As for Food and Food products, at present these are mostly exempt from Central Excise duty, but these are charged to State VAT. As a welfare measure, all food

items of use by poor, including some of the packaged food of essential items may be exempted from GST. The packaged food at higher end for use by the upper mid-dle class may be charged at the reduced rate of GST. There may not be any food item at standard rate of GST except for certain special items identifiable to be con-sumed by the rich people only. It was explained that I was laying emphasis on low GST rate for food items, be-cause this is the most sensitive issue for the poor and middle class. As is commonly known, the poor spend the highest percentage of their incomes in food and food products. Therefore high rate of GST on food items would hit the poor hard. Whenever we have seen agita-tion against GST across the world, it has been mainly due to increase in price of food and food products after introduction of GST.

As for the service component of GST, the consumers are currently paying Service Tax at 14 per cent. The services sector contributes around 60 per cent of the country’s GDP. In the GST regime, if the standard rate, which can be expected to be at least 20 per cent, is applied to the Services as well it will lead to inflation, and it will affect adversely the service sector, whose contribution is the mainstay of our GDP. Therefore, it was submitted that the services may be charged to the reduced rate of GST which can be expected to be somewhere near the pre-sent Service Tax rate of 14 per cent.

I further explained that there was a way to keep the GST rate lower than the RNR and yet achieve the targeted revenue, by simply denying the input tax credit of some indentified items at the intermediate stage of the flow of goods. This will no doubt give rise to a little amount of cascading of taxes – but that can be managed in the overall interest of keeping the GST rate low, while not losing much revenue. It was pointed out that even now in the Central Excise regime, input tax credit is not al-lowed to certain Petroleum Products.

While talking about GST on Small Business, it was sug-gested that very small business should not be brought within GST, since that is not at all cost – effective, and administering them is cumbersome. An ideal GST law would demand that the threshold should be very low and the exemptions should be kept minimum. But pure economic laws cannot always be applied in the taxation matters of a developing economy due to many factors.

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The present threshold limits in respect of Central Excise, Service Tax and State VAT are Rs 1.5 crore, Rs 10 lakhs and Rs 3 to 5 lakhs respectively. It was explained that the threshold limit for GST would decide whether we want to bring small business as well within the ambit of GST. The VAT/GST specialists across the world maintain that it is not at all advisable to bring the small business in the GST. Keeping this in mind, the threshold should be kept reasonably high.

Considering that the implementation issues would be as important as the policy formulation issues in a big tax reform like GST, a few critical implementation issues were brought to the notice of the Committee. These are summarized below.

It was submitted that even as the target date for imple-menting GST is 1st April, 2016, there has been no serious consultation so far with the trade and industry and oth-er taxpayers and stake holders. With just a few months to go, the taxpayers are completely unaware of the pro-posed laws, rules and procedures etc. for the GST.

It was submitted that the feedback from taxpayers and other stake holders about deficiencies, if any, would help the tax administrations immensely. Similarly, the stakeholders would need to know more about the GST-Net, the Special Purpose Vehicle that would provide the common IT platform for all the stakeholders to work on, in the GST regime. That would help in their prepara-tions for working in the GST scenario.

Further, it was explained to the esteemed Commit-tee that the administrative structure of the Central GST and State GST authorities will have to be uniform. Considering the vast coverage of GST across the cities, small towns and rural areas, both the Centre and the EC should jointly finalize the administrative structures on priority. Based on that, the infrastructure and logis-tics for functioning of the different field formations will have to be kept ready well before 1st April, 2016. Noth-ing much has been heard in these areas relating to the GST administrative structure.

It was also explained that the Dispute Resolution ar-rangements with respect to technical issues between the taxpayers and taxmen attain particular significance because there will be two authorities – Central GST au-thority and State GST authority, and they will have to work in tandem. The process of dispute resolution will start with the issuance of show cause notice by the tax-man to the taxpayer. Since the two authorities for CGST and SGST would be governed by two different Acts i.e. CGST Act and SGST Act, the show cause notices for the same violation of law or rule will have to be issued by the two authorities independently. It was suggested to the Committee that to ease the agony of the taxpayers, the adjudication proceedings followed by the appeal proceedings should preferably be done at one place by a Bench of Adjudicators and a Bench of Appellate Au-thorities. The Bench could comprise one from the CGST authority and the other from the SGST authority. This will ensure that the taxpayers do not have to represent / appear before two authorities separately either at the adjudication or in appeal proceedings. Orders emanat-ing from those Benches could be made applicable to both the CGST and the SGST authorities. The details could be worked out. This will add to the cause of ‘ease of dong business’.

I concluded by saying that the Indian GST, although still an ‘imperfect GST’, will be a good GST that India would be proud of. A purist may not like these compromises. But, it is a bitter truth that compromises do become necessary for furthering the cause of cooperative fed-eralism in federal democracies. The question is - how long can the country wait with endless negotiations be-tween Centre and the States. It’s time to move forward with an ‘imperfect GST’ and let the all powerful GST Council make further course corrections at the earliest opportunity so that we can quickly move to get the per-fect GST in the near future. Today’s imperfections in the Dual GST model can surely be corrected when the un-founded fear of the States about loss of revenue is dis-pelled by virtue of tax buoyancy which would definitely happen with wider tax base and technology based ef-ficient tax collection machineries in the GST regime.

[Mr. Sumit Dutt Majumdar is also the author of a book titled “GST in India-its travails, tribulations and challenges ahead”]

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SECTOR IN FOCUS

Proposed 100 Smart Cities & Industrial Corridors

IntroductionThe Indian economy has managed to escape relatively unhurt from the global economic turmoil owing to strong fundamentals, which would continue to drive its growth. It is important to undertake integrated efforts to further strengthen these fundamentals and fulfil the aspiration of achieving a strong growth in future. With half of the world’s population living in cities, increasing the strain on energy, transportation, water, building and public spaces, there is a growing need for “smart” city solutions which are both efficient and sustainable on one hand and can generate economic prosperity and social wellbeing on the other.

Currently while 30 per cent of the Indian population re-sides in urban centers, these centers contribute around 65 per cent to the national GDP. It is projected that ur-ban India will contribute about 75 per cent of national

GDP in the next 15 to 20 years while another 300 million people will get added to the existing 300 million dwell-ing in Indian urban centers. The speed of urbanization will exert immense pressure on the urban infrastruc-ture, urban finance, natural resources and quality of urban life. In order to manage this high level of urbani-zation, it is imperative for the government to resort to smart concepts and smart solutions. Government of In-dia has thus decided to develop 100 smart cities in India, as highlighted by the Finance Minister during his budget speech of July 2014.

Though the government has committed to the devel-opment of smart cities in India, the state level strate-gies for quick implementation needs to be formulated and the operating model needs to be finalized. Confed-eration of Indian Industry (CII) in association with their Knowledge Partner, Brickwork Ratings released a re-port titled ‘Proposed 100 Smart Cities & Industrial Cor-

ridors: Developing Innovative Infrastructure Financing

options’ during the Financial Market Conclave 2015: Changes for Growth organized by CII on 27 June, 2015 at Kolkata. The excerpts of the report are covered in this month’s Sector in Focus.

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Prime Minister’s Vision to Set up 100 Smart Cities

The Union Cabinet cleared Prime Minister Narendra Modi’s vision - 100 smart cities spread across the coun-try - and the new urban renewal mission named after Atal Bihari Vajpayee (AMRUT), replacing the existing one named after Jawaharlal Nehru (JNNURM), with a total outlay of Rs 98,000 crore for the next five years. The move is expected to recast the urban landscape of the country to make them more liveable and inclusive.

This would be implemented as:

• Smart City aspirants: Each Smart City aspirant will be selected through a ‘City Challenge Competition’ intended to link financing with the ability of the cit-ies to perform and achieve the mission objectives. Each state will shortlist a certain number of smart city aspirants as per the norms to be indicated and they will prepare smart city proposals for further evaluation for extending central support.

• Central Assistance: Each selected city under the scheme would get Central assistance of Rs 100 crore a year for five years. The remaining money has to come from the states, urban bodies and the consortium that they form with corporate entities. The mission aims to release funds depending on multi-pronged progress of the projects and makes citizen participation an integral part of the plan-ning of these cities. Central assistance will be to the extent of 50 percent of project cost for cities and towns with a population of up to 10 lakh and one third of the project cost for those with a population of above 10 lakh.

• Each state will get at least one Smart City: A Spe-cial Purpose Vehicle will be created for each city to implement Smart City action plan. The SPV will be created with the Urban Local Body (ULB), state government and the Centre as partners for imple-mentation of the project.

• Formation of Smart Cities Council: Smart Cities Council India has been formed to promote develop-ment of smart cities in the country. It is part of the

US-based Smart Cities Council, which is a consor-tium of smart city practitioners and experts, with a 100-plus member and advisor organizations operat-ing in over 140 countries.

• Enhancing quality of life: The Mission of building 100 smart cities intends to promote adoption of smart solutions for efficient use of available assets, resources and infrastructure with the objective of enhancing the quality of urban life and providing a clean and sustainable environment, the govern-ment said. Focus will be on core infrastructure ser-vices like adequate and clean water supply, sanita-tion and solid waste management, efficient urban mobility and public transportation, affordable hous-ing for poor, power supply and robust IT connectiv-ity.

• Atal Mission for Rejuvenation & Urban Transfor-

mation (AMRUT), which seeks to lay a foundation to enable cities and towns to eventually grow into smart cities, will be implemented in 500 locations with a population of one lakh and above. Under this mission, states will get flexibility of designing schemes that best suit their needs.

• AMRUT to focus on basic infrastructure services:

AMRUT will focus on ensuring basic infrastructure services such as water supply, sewerage, storm water drains, transport and development of green spaces and parks with special provision for meeting the needs of children.

What is a Smart City?

The term encompasses a vision of an urban space that is ecologically friendly, technologically integrated and me-ticulously planned, with a particular reliance on the use of information technology to improve efficiency.

The Modi government’s idea is a little different. The government’s reference note for Members of Parlia-ment on the issue actually offers a fairly simple defini-tion: “Smart Cities are those that are able to attract investments.” Everything else, such as good infrastruc-ture and simple processes that make it easy to start and run businesses, follow from this.

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Why do we need smart cities?

India is urbanising at an unprecedented rate, so much that estimates suggest nearly 600 million of Indians will be living in cities by 2030, up from 290 million as report-ed in the 2001 census. According to a McKinsey Global Institute study estimated that cities would generate 70 per cent of the new jobs created by 2030, produce more than 70 per cent of the Indian gross domestic product and drive a fourfold increase in per capita income across the country.

How to turn out the City as Smart?

The cabinet note focuses on retrofitting, redevelop-ment, pan-city initiatives and development of new cit-ies. It also gave a few examples. “Under retrofitting, de-ficiencies in an identified area will be addressed through necessary interventions as in the case of Local Area Plan for downtown Ahmedabad. Redevelopment enables reconstruction of already built-up area that is not ame-

nable for any interventions, to make it smart, as in the case of Bhendi Bazar of Mumbai and West Kidwai Nagar in New Delhi. Pan-city components could be interven-tions like Intelligent Transport Solutions that benefits all residents by reducing commuting time,” it said.

Policy Initiatives from the Government & Financial Reg-ulators to Develop Innovative Infrastructure Finance Options

The government and the financial regulators viz., RBI and SEBI have been working in tandem to launch initia-tives to promote the infrastructure sector. A few initia-tives on this front are delineated below:

RBI Initiatives to Support Infrastruc-ture Financing

• RBI draft circular allowing Indian companies to issue rupee bonds: RBI has issued a draft circular to allow companies to issue rupee-denominated bonds overseas, at a coupon not greater than 500 bps than that offered by Government securities of similar maturity. This would also help companies raise resources and would facilitate more foreign investors to invest in infrastructure sector.

• Creating a suitable atmosphere to resolve NPAs : This will facilitate and make it a good sys-tem for stressed asset management with greater emphasis on asset reconstruction rather than asset stripping. A few steps taken in this matter are:

- Introduction of a comprehensive Framework for Revitalising Distressed Assets in the Econo-my for early detection of sickness and remedial measures.

- Issued guidelines to encourage sale of assets to Securitisation Companies (SCs) / Recon-struction

- Companies (RCs) at a stage when the assets have good chance of revival and fair amount of realisable value.

• Exempted from regulatory requirements: RBI has permitted banks to issue long-term bonds with a minimum maturity of 7 years to raise resources for lending to (i) long term projects in infrastructure sub-sectors, and (ii) affordable housing. The instru-

The key feature of a Smart City is the intersect be-tween Competitiveness, Capital and Sustainability. The smart cities should be able to provide good infra-structure such as water, sanitation, and reliable utility services, health care; attract investments; transpar-ent processes that make it easy to run a commercial activities; simple and online processes for obtaining approvals, and various citizen centric services to make citizens feel safe and happy.

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ments are exempted from regulatory requirements such as maintenance of CRR/SLR and priority sector lending. This will ensure adequate credit flow to in-frastructure and to affordable housing sector.

• Issue of long term bonds and facilitate crosshold-ing by banks: RBI has allowed cross holding in issue of long-term bonds by banks for financing of infra-structure and affordable housing, allowed banks to extend loans to individuals against such long-term bonds issued by them in order to provide liquidity to retail investors in such bonds, banks can invest in the long term bonds issued by other banks to pro-vide liquidity and tradability of these bonds.

• Infrastructure Debt Funds (IDFs): It has allowed entry of IDF-NBFCs into sectors where there is no Project Authority. Further, it has allowed IDF-NBFCs to undertake investments in non-PPP projects and PPP projects without a Project Authority.

• Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries: RBI issued guidelines to banks for flexible structuring and re-financing of fresh term loans to long term project loans to infrastructure and core industries. It has ac-ceded to requests made by the NBFCs, for extend-ing the banks’ guidelines to them.

• Strategic Debt Restructuring (SDR): Banks may, at their discretion, undertake a ‘Strategic Debt Restructuring (SDR)’ by converting loan dues to equity shares. RBI has allowed SDR under the gen-eral principle of restructuring that the shareholders bear the first loss rather than the debt holders. This will facilitate the lender’s hands to unblock the capi-tal locked through appropriate measures.

SEBI Initiatives Enabling Investment in Infra-structure• REIT & InvIT Regulations 2014: SEBI has created an

enabling framework for REITs and InvITs through regulations with the intention to help entities in the infrastructure and real estate sectors to raise funds and provide much needed liquidity. These instru-ments are pooled investments, earn income and have to distribute earnings from real estate.

The trusts would issue units for the funds raised from investors and the corpus would be invested in infrastructure or real estate projects. The units would be listed on a stock exchange with a mini-mum subscription limit for REITs of Rs. 2 lacs and for InvITs it will be Rs. 10 lacs. The investments will be carried through a SPV held by REITs with more than 50 per cent holding. SPV can invest in commer-cial real estate and hold more than 80 per cent in properties with other restrictions.

In one of the facilitating moves, the union cabinet allowed REITs to be an eligible financial instrument or structure under the FEMA Act, 1999. Once REIT takes off, it will provide a good opportunity to un-lock value in these asset classes. Further, it is ex-pected to lift the pressure on banks for funds in these sectors and enable the player to access for-eign funds. As an alternative investment option, RE-ITs/InvITs are potential game changers in the capital market.

• Regulation-International Financial Services Cen-tres and GIFT City in Gujarat: IFCs across the world have evolved in different ways depending on the competence of the domestic system, needs of the economy and tax arbitrage. The Government has evinced its interest in working closely with the In-dustry and the way forward to evolve GIFT to the best standards across the globe.

• Intended SEBI regulations on Municipal Bonds: SEBI is expected to issue regulations on Municipal Bonds very shortly. This will enable infrastructure projects of municipal corporations to issue bonds and list them on stock exchanges. The new norms provide adequate safeguards like having invest-ment grade credit rating, the issuers should not have defaulted on their repayment obligations in the last one year and through disclosure require-ments to be made by the prospective issuers.

• Crowd funding: Crowd funding is an innovative way to provide funding to entrepreneurs through pro-vision of seed capital. Crowd funding is solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause.

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SECTOR IN FOCUS

• SEBI discussion paper on alternate capital raising platform and review of other regulatory require-ments: There is a proposal on alternate capital rais-ing platform wherein money shall be raised only from institutions and high net worth individuals by the new-age companies having innovative business model and belonging to knowledge-based technol-ogy sector. This will be initially made applicable to companies which are in the area of software prod-uct development, ecommerce, new-age compa-nies having innovative business model, etc. which create new business opportunities or which serve important efficiency enhancement in existing busi-ness activities.

• SEBI consultative paper on guidelines on overseas investments and other issues/clarifications for AIFs/VCFs: There are 136 Alternative Investments Funds (AIFs) registered with SEBI. SEBI intends to issue a proposal for AIFs to invest in equity and eq-uity linked instruments only of off-shore venture capital undertakings, subject to overall limit of US$500 million.

• Discussion paper on revisiting the capital raising process: There is a proposal on use of Secondary Market infrastructure for making applications in Public Issue (e-IPO) Proposal on Fast Track Issu-ances (FPO and Rights Issue). It will facilitate capi-tal raising by industry and pave the way for existing listed companies to issue FPO/Rights issue to retail investors. It is expected that raising capital process time will be curtailed to the benefit of issuers and investors.

• Conversion of debt to equity: SEBI will allow banks to convert debt to equity after relaxing some of the disclosure and acquisition clauses applicable under ICDR and SAST when they convert debt to equity of “listed borrower companies in distress.

Policy Initiatives from the Government

The government has carried out substantial structural reforms to provide an impetus to the growth machin-ery. Some of the key measures initiated are as follows:

The NITI Aayog as an institution is expected to rejuve-nate the policy process through innovation. The enhanc-ing of FDI in insurance has given a boost to the financial sector and auction of natural resources like coal has given the fillip to the investment in core sector. Taken together, it is likely to boost the infrastructure sector.

The Rail and Union Budgets have outlined the reforms to be undertaken in times to come which can usher in a sustained growth without inflicting pain on the fis-cal side. The Union Budget proposal to set up National Investment and Infrastructure Fund though budgetary support of around Rs. 20,000 crores is a move in the right direction.

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FOCUS OF THE MONTH

Corporate Profitability and Investment Trends

JUNE-JULY 2015

Sales growth in the corporate business sector moderated to 9 per cent in FY14, the lowest in past four years, led by a persistent moderation in

manufacturing segment, even as the growth figures in services segment remained stable. Apart from a major spurt in FY12, wherein, growth in net sales stood at the tune of 22 per cent, led by services segment, growth figures have been dwindling. While growth in gross profit has also witnessed a steady moderation over the years, growth in net profit has dropped sharply, though remaining steady at 5 per cent in the last two fiscal years. Even in FY12, despite high sales, net profits had contracted given high cost of raw materials and inter-est. Over the years, costs have moderated, thus main-taining profitability in wake of dismal net sales growth. Sectors like Banks and Financial Services, Healthcare & Pharmaceuticals, Hotels & Retail, IT & Telecom, Metals

& Minerals and Textile, Paper, Leather, Rubber & Wood fared well in FY14 in terms of sales growth, while others like Auto & Auto Parts, Capital Goods, Construction & Construction Materials, Consumer Durables, Fertilizers & Chemicals, FMCG, Media & Entertainment, Oil & Gas, Packaging & Logistics, Power witnessed moderation in sales growth.

The analysis factors in the financial performance during fiscal years 2009-10 to 2013-14 of a balanced panel of 17,457 Indian firms spread across 16 major sectors: Auto & Auto Parts, Capital Goods, Banks and Financial Servic-es, Construction & Construction Materials, Consumer Durables, Fertilizers & Chemicals, FMCG, Healthcare & Pharmaceuticals, Hotels & Retail, IT & Telecom, Media & Entertainment, Metals & Minerals, Oil & Gas, Packag-ing & Logistics, Power and Textile, Paper, Leather, Rub-ber & Wood. 2014-15 has been excluded from the sam-ple, as the number of firms which have declared their final consolidated annual results for the year were very few. The data has been extracted from Ace Equity. For investment proposals analysis, data from CMIE’s data-base Capex has been used.

ECONOMY MATTERS 28

SECTOR IN FOCUS

While net sales growth has been declining, a simulta-neous cost cutting in cost of raw materials and inter-est cost has kept profitability in line. New investment proposals have taken a steep fall in the last three fiscal

The profitability ratios have seen a slight moderation over the years on an aggregate basis. Net margin (PAT/Net sales) has come down from 8 per cent in FY10 to 6 per cent in FY14. Gross margin (PBDIT/Net sales) has also seen slight decline from 18 per cent in FY10 to 17 per cent in FY14. Interest coverage defined by ratio of gross profit (PBDIT) and interest cost has seen a steep fall from 167 per cent in FY10 to 114 per cent in FY14, thus af-

years. While they stood above Rs. 15 trillion during fis-cals years 2010 and 2011, in fiscal years 2013 and 2014 the figure stood at nearly Rs. 5 trillion.

fecting the ability of firms to secure loans. Further inter-est cost as a percentage of net sales increased though this was more of a denominator effect as net sales have declined. Staff costs as a proportion of net sales have remained steady over the past five years. Cost of raw materials as a percentage of net sales has come down steadily, from as much as 42 per cent in FY10 to 36 per cent in FY14.

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FOCUS OF THE MONTH

JUNE-JULY 2015

In manufacturing segment, net sales saw a huge dip from as high as 22 per cent in FY10 to meager 5 per cent in FY14. Gross profits and net profits, while on a declin-ing trend in long-term, saw an improvement in the lat-est year majorly on the back of decline in tax burden and staff costs as well as cost of raw materials. Net profits

still hovered in the negative territory though. Profitabil-ity ratios have seen a decline. Interest coverage has also declined majorly because of declining growth in gross profit. New investment proposals have declined three-folds in the last five years. New investment proposals to the tune of greater than Rs. 10 trillion in FY10 declined steeply to close to Rs. 3 trillion in FY14.

ECONOMY MATTERS 30

FOCUS OF THE MONTH

Net sales growth in services sector improved marginally in FY14 to 14 per cent, though growth in both growth in gross profits and net profits fell on account of rise in cost of raw materials and tax burden. Gross margins have remained steady over the years even as gross profit has fallen consistently largely because net sales have correspondingly declined. The figure stood at 19

per cent in FY14. Interest cost as a proportion of net sales saw a rise, even as interest costs fell, on account of denominator effect. Interest coverage has dropped sharply over the years attributed to declining gross profit growth. New investment proposals in this seg-ment too have declined hugely from nearly Rs. 5 trillion in FY10 to nearly Rs 1 trillion in FY14.

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FOCUS OF THE MONTH

JUNE-JULY 2015

Sectoral AnalysisOn an average over the past five years, Hotels & Retail and Media & Entertainment dominated the business sector in growth in net sales, net profits and gross prof-its. Sectors like Banks & Financial Services and Health-care & Pharmaceuticals displayed above average prof-

its despite mediocre growth in net sales. IT & Telecom fared comparatively well in net profits and gross profits despite dismal net sales growth. A major concern was presented as important sectors like Capital Goods and Construction & Construction Materials remained in the bottom five sectors in net sales growth and gross and net profits growth over the five year period.

ECONOMY MATTERS 32

FOCUS OF THE MONTH

New investment proposals saw an overall decline over the years, thus the compounded average growth rate (CAGR) for the last five fiscal years remained in the neg-ative territory for all the other sectors except Oil & Gas

For the fiscal year, 2013-14, the leading sectors in prof-itability ratios were Metals and Minerals, Banks and Fi-nancial Services, IT & Telecom and Healthcare and Phar-

and FMCG. While Consumer Durables, Textile, Paper, Leather, Rubber & Wood fared somewhat better than the average, IT & telecom, Hotels & Retail and Media & Entertainment bore the brunt of steep cuts in new investment proposals.

maceuticals. Net margins stood as high as 10 per cent in these sectors. These four sectors along with Power reported gross margins to the tune of 21-22 per cent.

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FOCUS OF THE MONTH

JUNE-JULY 2015

Sectors like Auto & Auto Parts, Packaging and Logistics, Consumer Durables, Textile, Paper, Leather, Rubber &

Interest Coverage ratio measured by gross profits as a ratio of interest costs, stood as high as 913 per cent for Oil & Gas sector in FY14. Other sectors, where this ratio was high were- IT & Telecom, Healthcare & pharmaceu-ticals, Auto & auto Parts and FMCG. The figure was as low as 44 per cent for Banks and Financial Services. The sector also saw an exceptionally high ratio of interest cost/net sales standing at 48 per cent as compared to

Proportion of cost of raw materials to net Sales was as high as 83 per cent for Oil & Gas sector and even for Hotels and Retail, Fertilizers & Chemicals, Textile, Pa-per, Leather, Rubber & Wood and Auto & Auto Parts it

Wood, Hotels & Retail and Fertilizers & Chemical fared below average in performance in profitability ratios.

only single digit ratios for all the other sectors. Power, Construction & Construction Materials and Metals & Minerals along with Hotels & Retail had higher values of ratios such as interest costs as a proportion of net sales. For sector such as, Fertilizers & Chemicals, FMCG, Consumer Durables, Auto & Auto Parts and Oil & Gas, the ratio of interest cost to net sales was as low as only 1 to 3 per cent.

stood at greater than 50 per cent in FY14. Lowest ratios were seen for Media & Entertainment, IT & Telecom and Power at 15 per cent, 13 per cent and 10 per cent respec-tively. Staff costs as a percentage of net sales were ex-

ECONOMY MATTERS 34

FOCUS OF THE MONTH

ceptionally high for IT & Telecom sector and stood at 24 per cent. For Media & Entertainment and Healthcare & Pharmaceuticals, it stood at 10 per cent. The proportion

Auto & Auto PartsNet sales growth in FY14 stood as low as 1 per cent as compared to a strong 32 per cent growth in FY11. This was also reflected in gross profits and net profits growth. The former fell from 17 per cent in FY11 to 3 per cent in FY14. The latter contracted by the tune of 7 per cent as compared to a growth of 16 per cent in FY11. It was however a respite over contraction to the tune of 16 per cent in FY13. Growth in interest costs and staff

of costs remained low for Fertilizers & Chemicals and FMCG at 4 per cent and Consumer Durables and Oil & Gas at 3 per cent and 2 per cent respectively.

costs saw moderation and cost of raw materials in fact saw a contraction in FY14, although not enough to miti-gate the meager sales growth. New investment propos-als in the sector have declined from Rs 377 billion in FY10 to mere Rs 88 billion in FY14. Net margin in the sector declined to 3 per cent in the years FY13 and FY14 from a ratio of 6 per cent five years ago. Gross margin stood at 10 per cent in FY14 as compared to 13 per cent in FY10, though marginally above 9 per cent figure in FY13. Inter-est coverage has also fallen to 619 per cent in FY14 from 842 per cent in FY11.

A further disaggregated analysis of the sectors is undertaken in the subsequent section.

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FOCUS OF THE MONTH

JUNE-JULY 2015

Banks & Financial ServicesGrowth in net sales in FY14 at 17 per cent was much lower than the figure for FY12 at 37 per cent. Net prof-its witnessed flat growth as compared to growth of 24 per cent in FY11 while growth in gross profits fell from 24 per cent to 7 per cent in FY14. Interest cost growth moderated to 14 per cent in FY14 from 42 per cent in FY12, while growth in raw materials cost stood at 31 per cent in FY14 as compared to 67 per cent in FY12. Growth in tax burden has steadily moderated from 26 per cent

in FY11 to 5 per cent in FY14. Profitability ratios have fol-lowed an inverted ‘U’ trend in the past five years. Gross margin and net margin stood at their highest in the last five years in FY11 at 27 per cent and 14 per cent respec-tively. Interest coverage has fallen from 53 per cent in FY10 to 44 per cent in FY14. While the proportion of net sales to interest costs and cost of raw materials has in-creased steadily, that of staff costs has declined over the past five years. The sector saw no new investment proposals in the last five years.

ECONOMY MATTERS 36

FOCUS OF THE MONTH

Capital GoodsThe sector, being pivotal for growth in economy, pre-sented major reasons of concern. Net sales contracted in FY14 by 5 per cent as compared to a growth to the tune of 20 per cent in FY11 in the sector. Gross profits saw a contraction to the tune of 6 per cent for the sec-ond consecutive year while net profits contracted for the third straight year, and by as much as 25 per cent in FY14. Cost of raw materials saw a contraction as well, by 4 per cent in FY14, led by a decline in demand. Growth in staff costs too has declined over the years. While new

Construction & Construction MaterialsNet sales in this sector too saw a steep decline and stood at mere 1 per cent in FY14 from double-digit figures in FY11 and FY12. Gross profits contracted to the tune of 9 per cent in FY14 while net profits saw a contraction for the third straight year and contracted by as much

investment proposals were as high as Rs 236 billion in FY12, they have fallen to a meagre Rs 39 billion in FY14. Net margin in the sector has halved in the past five years and stood at a low of 4 per cent in FY14. Gross margin too has declined from 17 per cent in FY10 to 12 per cent in FY14. Interest coverage has halved to 311 per cent in FY14 from 652 per cent in FY11. Proportion to net sales of components of expenditure – interest cost, cost of raw materials and staff cost, did not exhibit much vari-ability, apart from a minor decline in raw materials cost, over the five years given the fixity in the nature of pro-duction process.

as 24 per cent in FY14. Growth in interest cost halved in last four years to 12 per cent in FY14. Cost of raw materi-als saw a contraction by 4 per cent in FY14 compared to double-digit growth figures in previous three years. Tax burden also saw a contraction for third straight year in FY14. New investment proposals fell from as high as Rs. 2,482 billion in FY11 to Rs. 404 billion in FY14. Net mar-gin fell three fold in past five years and stood at 3 per

37

FOCUS OF THE MONTH

JUNE-JULY 2015

Consumer DurablesNet sales in the sector fell steeply to 9 per cent in FY14 from 22 per cent in FY11. Net profits contracted to the tune of 8 per cent in FY14 while growth in gross profits also fell to 8 per cent in FY14 from 25 per cent in FY11. Growth in interest costs has seen huge variation over the years, standing as high as 51 per cent in FY12 and as low as 9 per cent in FY13. Growth in cost of raw materi-als stood as high as 22 per cent in FY12 but contracted by 1 per cent in FY14. Staff costs growth has come down steeply from 22 per cent in FY11 to 7 per cent in FY14. The sector saw new investment proposals to the tune

of Rs 24 billion in FY14 while they stood at a high of Rs 62 billion in FY12. Net margin halved over the past five years and stood at 2 per cent in FY14. Gross mar-gin remained fairly constant throughout and stood at 7 per cent in FY14. Interest coverage too fell from 498 per cent in FY10 to 359 per cent in FY14. Proportion of interest costs to net sales for the sector has remained fairly stable throughout and stood at 2 per cent in FY14. Proportion of raw materials to net sales stood at 53 per cent in FY14, the lowest in five years while proportion of staff costs to net sales stood at 3 per cent for the fifth consecutive year in FY14.

cent in FY14. Interest coverage fell from 389 per cent in FY10 to 195 per cent in FY14. Proportion of interest costs to net sales increased to 9 per cent in FY14 from 6 per

cent in FY10, while ratio of cost of raw materials to net sales increased to 36 per cent in FY14 from 31 per cent in FY10. Proportion of staff costs to net sales did not vary much over the years.

ECONOMY MATTERS 38

FOCUS OF THE MONTH

Fertilizers and ChemicalsNet sales growth in the sector fell drastically to 4 per cent in FY13 and FY14 from 23 per cent in FY11 and FY12. Net profits saw a contraction to the tune of 28 per cent in FY14 as compared to growth of 26 per cent in FY11. Gross profits contracted by 5 per cent in FY14 as com-pared to growth of 17 per cent in FY11. Growth in inter-est costs has fluctuated over the years and stood at 17 per cent in FY14. In FY14 the tax burden contracted by 20 per cent in the same year. New investment propos-

als stood at as high as Rs. 482 billion in FY11 but declined hugely to Rs 76 billion in FY14. Profitability ratios have not seen much variation over the years; net margin and gross margin stood at 4 per cent and 10 per cent respec-tively in FY14. Interest coverage in line with aggregate trend fell steeply from 500 per cent in FY10 to 395 per cent in FY14. Proportion to net sales of components of expenditure – interest cost, cost of raw materials and staff costs remained invariant over the years and stood at 3 per cent, 60 per cent and 4 per cent respectively in FY14.

39

FOCUS OF THE MONTH

JUNE-JULY 2015

FMCGNet sales growth in the sector fell sharply to 9 per cent in FY14, though a marginal improvement over 7 per cent in FY13. Net profits saw a contraction to the tune of 32 per cent in FY14 even as a steady growth was visible over previous three years and had stood at 21 per cent in FY13. Gross profits contracted by 4 per cent in FY14 as compared to growth of 21 per cent in FY12. Growth in interest costs stood at 9 per cent in FY14, lower than 42 per cent in FY12. In FY14, the growth in cost of raw mate-rials stood at 9 per cent, down from 20 per cent in FY12. Growth in staff costs also moderated to 15 per cent in

FY14 as compared to 17 per cent a year ago. FMCG was the only sector without huge decline in new investment proposals. New investment proposals stood at as high as Rs. 125 billion in FY12 and at Rs 102 billion in FY14. Net margin and gross margin stood at 4 per cent and 11 per cent respectively in FY14 as compared to 7 per cent and 13 per cent in FY11. Interest coverage fell steeply from 649 per cent in FY10 to 496 per cent in FY14. Proportion to net sales to components of expenditure – interest cost and staff costs remained invariant over the years and stood at 2 per cent and 4 per cent respectively in FY14. Cost of raw materials as a proportion to net sales fluctuated over the years standing at 52 per cent in FY14.

ECONOMY MATTERS 40

FOCUS OF THE MONTH

Healthcare & PharmaceuticalsNet sales growth in the sector improved to 14 per cent in FY14 as compared to 6 per cent in FY13 though modera-tion from 31 per cent in FY12. Net profits moderated to 5 per cent in FY14 from 14 per cent a year before. Growth in gross profits has improved steadily to 21 per cent in FY14 from 12 per cent in FY11. In FY14, the growth in cost of raw materials stood at 6 per cent, down from 25 per cent in FY12. Growth in staff costs also moderated to 16 per cent in FY14 as compared to 25 per cent in FY11. New

investment proposals stood at as high as Rs. 340 billion in FY11 but merely at Rs 73 billion in FY14. Net margin and gross margin stood at 10 per cent and 21 per cent respectively in FY14 as compared to 22 per cent and 20 per cent in FY11. Proportion to net sales of components of expenditure – interest cost and staff costs remained invariant over the years and stood at 3 per cent and 10 per cent respectively in FY14. Cost of raw materials as a proportion to net sales fluctuated over the years stand-ing at 37 per cent in FY14.

Hotels & RetailNet sales growth in the sector fell to 23 per cent in FY14, from 28 per cent in FY12. Net profits saw a decline in growth to the tune of 21 per cent in FY14 as compared to 61 per cent in FY13, albeit remaining in positive re-gion unlike FY11 and FY12 wherein it had contracted. Gross profits improved to 26 per cent in FY14 as com-pared to growth of 19 per cent in FY13. Growth in inter-est costs moderated to 12 per cent in FY14 from 31 per cent in FY12. In FY13 and FY14, the growth in cost of raw materials stood at 32 per cent, down from 42 per cent in FY12. Growth in staff costs also moderated to 11 per

cent in FY13 as compared to 19 per cent in FY12. New investment proposals stood at as high as Rs. 128 bil-lion in FY12 but merely at Rs 8 billion in FY14. Net mar-gin contracted to the tune of 4 per cent in FY14, being negative for third consecutive year while gross margin stood at 7 per cent in FY14. Unlike other sectors, inter-est coverage remained fairly steady at stood at 142 per cent in FY14. Proportion to net sales of components of expenditure – interest cost and staff costs remained invariant over the years and stood at 5 per cent and 8 per cent respectively in FY14. Cost of raw materials as a proportion to net sales fluctuated over the years and stood at 62 per cent in FY14.

41

FOCUS OF THE MONTH

JUNE-JULY 2015

IT & TelecomNet sales growth remained fairly stable over the years and stood at 12 per cent in FY14. The sector recorded net profits growth to the tune of 97 per cent in FY14. Gross profits improved to 22 per cent in FY13 as com-pared to growth of 15 per cent in FY12. Growth in inter-est costs has consistently declined from 66 per cent in FY11 to a contraction of 2 per cent in FY14. In FY14, the growth in cost of raw materials stood at 8 per cent, down from 13 per cent in FY13. Growth in staff costs also

moderated to 18 per cent in FY14 as compared to 20 per cent a year ago. New investment proposals stood at as high as Rs. 312 billion in FY12 but merely at Rs 64 billion in FY14. Net margin and gross margin stood at 10 per cent and 22 per cent respectively in FY14. Interest cov-erage fell steeply from 1279 per cent in FY10 to 732 per cent in FY14. Proportion to net sales of components of expenditure – interest cost, cost of raw materials and staff costs remained fairly consistent over the years and stood at 3 per cent, 13 per cent and 24 per cent respectively in FY14.

ECONOMY MATTERS 42

FOCUS OF THE MONTH

Media & EntertainmentNet sales growth in the sector fell drastically to 9 per cent in FY14 from 27 per cent in FY11. Net profits saw a moderation in growth to the tune of 64 per cent in FY14 as compared to 77 per cent in FY13. Gross profits growth moderated to 13 per cent in FY14 as compared to growth of 24 per cent in FY12. In FY14, the growth in cost of raw materials stood at 2 per cent, down from 18 per cent in FY11. Growth in staff costs also moderated to

9 per cent in FY14 as compared to 47 per cent in FY12. New investment proposals stood at as high as Rs. 171 billion in FY12, but no new investments were made in FY14. Net margin and gross margin stood at 4 per cent and 18 per cent respectively in FY14, fairly invariant over the years. Proportion to net sales of components of expenditure – interest cost, cost of raw materials and staff costs remained fairly similar since FY10 and stood at 4 per cent, 15 per cent and 10 per cent respectively in FY14.

43

FOCUS OF THE MONTH

JUNE-JULY 2015

Oil & GasNet sales growth in the sector moderated sharply to 8 per cent in FY14 from 25 per cent in FY11. Net profits and gross profits saw an improved growth to 16 per cent and 10 per cent in FY14 from 5 per cent and 3 per cent respectively in FY13. Interest costs saw a contraction to the tune of 7 per cent in FY14. In FY14, the growth in cost of raw materials stood at 8 per cent, down from 32 per cent in FY12. Staff costs also contracted by 1 per cent in FY14 as compared to growth of 36 per cent a

Metals & MineralsNet sales growth in the sector moderated to 8 per cent in FY14, though a marginal improvement over 4 per cent in FY13. Net profits saw an improved growth to 7 per cent in FY14 from contraction of 9 per cent in FY13. Gross profits saw an improved growth to 12 per cent in FY14 as compared to contraction to the tune of 2 per cent in FY13. Growth in interest costs increased to 40 per cent in FY14, up from 19 per cent in FY11. In FY14,

year ago. New investment proposals stood at a respect-able level of Rs. 1,237 billion in FY14, while the highest has been Rs. 1,318 billion in FY12. Net margin and gross margin stood at 4 per cent and 9 per cent respectively in FY14 as compared to 6 per cent and 14 per cent in FY11. Interest coverage fell steeply from 1411 per cent in FY10 to 913 per cent in FY14. Proportion to net sales of components of expenditure – interest cost, cost of raw materials and staff costs remained invariant over the years and stood at 1 per cent, 83 per cent and 2 per cent respectively in FY14.

the growth in cost of raw materials stood at 8 per cent, down from 27 per cent in FY11. Staff costs increased to 13 per cent in FY14 as compared to contraction to the tune of 4 per cent a year ago. New investment propos-als stood at as high as Rs. 2,974 billion in FY12 but merely at Rs 850 billion in FY14. Net margin and gross margin stood at 10 per cent and 22 per cent respectively in FY14 as compared to 14 per cent and 26 per cent in FY11. In-terest coverage fell steeply from 852 per cent in FY10 to 424 per cent in FY14.

ECONOMY MATTERS 44

FOCUS OF THE MONTH

Packaging & Logistics Net sales saw a flat growth in FY14. Net profit saw a con-traction to the tune of 25 per cent in FY14 and remained in the negative territory for the third consecutive year. Gross profits growth moderated to 2 per cent in FY14 as compared to growth of 15 per cent in FY12. Growth in interest costs stood at 19 per cent in FY14, lower than 39 per cent in FY12. Growth in staff costs also moderated

to 8 per cent in FY14 as compared to 18 per cent growth a year ago. New investment proposals stood at as high as Rs. 282 billion in FY12 but merely at Rs 65 billion in FY14. Net margin and gross margin stood at 3 per cent and 12 per cent respectively in FY14 as compared to 4 per cent and 9 per cent in FY11. Cost of raw materials and staff costs as a proportion to net sales fluctuated over the years standing at 52 per cent and 6 per cent respectively in FY14.

45

FOCUS OF THE MONTH

JUNE-JULY 2015

erated to 8 per cent in FY14 as compared to 10 per cent a year ago. New investment proposals stood at as high as Rs. 5,323 billion in FY12 but merely at Rs 1,623 billion in FY14. Net margin and gross margin stood at 3 per cent and 21 per cent respectively in FY14 as compared to 7 per cent and 22 per cent in FY11. Proportion to net sales of components of expenditure – interest cost, cost of raw materials and staff costs remained invariant over the years and stood at 9 per cent, 10 per cent and 7 per cent respectively in FY14.

PowerNet sales growth in the sector moderated sharply to 6 per cent in FY14 from 21 per cent in FY11. Net profits saw a growth of 120 per cent in FY14 as compared to contrac-tion to the tune of 60 per cent in FY13. Gross profits saw an improved growth to 17 per cent in FY14 as compared to flat growth the previous year. In FY14, the cost of raw materials contracted by 1 per cent, compared to decline to the tune of 4 per cent in FY13. Staff cost growth mod-

ECONOMY MATTERS 46

FOCUS OF THE MONTH

Textile, Paper, Leather Rubber & WoodNet sales growth in the sector slowed down to 13 per cent in FY14, though an improvement over 9 per cent in FY13 from 27 per cent in FY11. Net profits and gross profits saw a moderation in growth to the tune of 10 per cent and 11 per cent in FY14 from 100 per cent and 27 per cent respectively in FY13. Growth in interest costs stood at 6 per cent in FY14, lower than 36 per cent in FY12. In FY14, the growth in cost of raw materials increased

to 13 per cent, up from 4 per cent in FY13. Staff costs moderated to 12 per cent in FY14 as compared to 15 per cent a year ago. New investment proposals stood at as high as Rs. 151 billion in FY12 but merely at Rs 60 billion in FY14. Net margin and gross margin stood at 2 per cent and 11 per cent respectively in FY14 as compared to 3 per cent and 13 per cent in FY11. Proportion to net sales of components of expenditure – interest cost, cost of raw materials and staff costs remained invariant over the years and stood at 5 per cent, 58 per cent and 6 per cent respectively in FY14.

After major stimulus to all sectors in FY12, apart from FMCG and Oil & Gas, significant new invest-ment proposals have not been announced for the re-maining sectors. Manufacturing segment has been suffering from chronic lackluster performance for several years now. Profitability ratios are dwindling

on account of low sales given slow demand. Cost cut-ting measures have not been able to salvage the situ-ation. Additional stimulus combined with focus on efficiency would grease the staggering wheels of the business sector and bring the economy on track.

47 JUNE-JULY 2015

SPECIAL FEATURE

India’s Human Capital: Asset or Liability for India Inc.?

Harbingers of economic recovery and a series of bold reforms are giving industry leaders in India renewed confidence in the future. To unleash

their organizations’ growth potential, there is no doubt that business leaders today must deal with unparal-leled changes in the workforce, which are influenced by concurrent macroeconomic and structural forces, such as technological, demographic and social trends. With 65 per cent of its human capital younger than 35 and the prospect of becoming one of the fastest-growing

economies, India is waiting in the wings of the world’s centre stage.

According to OECD Economic surveys and government estimates, the labour force is projected to increase by 88 to 113 million people between 2010 and 2020, mainly through young people entering the workforce. 1 India is set to become the world’s youngest country by 2020 with an average age of 29 years as compared to China and the US where average age is expected to be 37 years and 45 years in Western Europe.2

There are, however, challenges related to these seem-ingly favourable demographics. The Towers Watson-CII Industry Opinions study examined industry experts’ views on major workforce trends — shortages of skilled workers, rising workforce costs, attraction and reten-tion challenges, and labour reforms, future of wage and employment growth. The survey (fielded online between December 2014 and January 2015) covers the

1 See OECD, OECD Economic Surveys India: Overview (OECD, November 2014), http://www.oecd.org/eco/surveys/ India-2014-Overview.pdf (ac-cessed March 5, 2015).

2 See CSIS (2011), Global Aging and the Future of Emerging Markets http://csis.org/files/publication/110307_GlobalAging_Future_of_Emerging_Markets.pdf (accessed July 20, 2015).

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SPECIAL FEATURE

views of over 300 industry experts including 100 CEOs/Presidents/CFOs across Indian and multinational compa-nies spanning 23 sectors. 3

Inadequate Supply of Skilled Workers

For businesses seeking highly skilled employees, the outlook remains poor. Even though India’s working-age population is enormous, almost 70 per cent have no ed-ucation beyond primary school.4 According to a recent study, less than one out of four engineering graduates are employable due to lack of required skills.5 Unsurpris-ingly, 53 per cent of industry experts say that an inad-equate supply of skilled workers poses a major obstacle to industry performance over the next five years.

Attraction and Retention Challenges

A significant majority (64 per cent) of respondents ex-pect that difficulties in attracting and retaining key tal-ent could stand in the way of industry performance. According to Towers Watson’s studies Indian employers view career advancement opportunities and a challeng-ing work environment as the top two attraction drivers, whereas employees rate job security and base pay as most important. Both employees and employers view base pay and career advancement as the most impor-tant drivers of retention. However, employees consider length of commute, job security and retirement benefits next in importance, while employers cite relationship with supervisor/manager, learning and development opportunities, and flexible work arrangements. To in-

crease their competitiveness and successfully manage key talent, there is a need for companies to become more aware of what matters to employees and design their incentives accordingly. 6

Rising Workforce Costs

Significantly, 42 per cent of respondents cite rising workforce costs as a major obstacle to industry perfor-mance in five years. When asked to forecast five years into the future, 39 per cent of industry experts expect that wages in their industry will significantly outpace in-flation for senior positions (high earners), while 26 per cent expect the same boost for junior positions (low earners). Like many countries across the globe, India is witnessing a dual gap in wage trends. Wages for top/high earners are rising much faster than wages for most workers, and average wage growth is lagging behind la-bour productivity growth. When asked to predict the five-year evolution of this wage gap, 58 per cent of cor-porate leaders expect the gap between the highest and lowest earners in their industry to widen.

Slow Labour Reforms

India’s restrictive labour mandates have hurt invest-ments, especially in the manufacturing sector. Recent efforts towards undoing some of these counterproduc-tive mandates will encourage labour productivity. 7 Thir-ty-nine percent of responding industry experts worry about slow labour reforms holding back their industry’s future performance.

3 See Towers Watson, 2015 TW-CII Industry Opinions Study (Towers Watson, 2015),http://www.towerswatson.com/en-IN/Insights/IC-Types/Survey-Research-Results/2015/06/Towers-Watson-CII-Industry-Opinions-Study-A-Glimpse-into-Indias-Future (accessed July 20, 2015).

4 See The Economist, “Indian’s Economy: A Chance to Fly,” The Economist, Feb. 21, 2015, http://www.economist.com/news/leaders/21644145-india-has-rare-opportunity-become-worlds-most-dynamic-big-economy-chance-fly/ (accessed March 5, 2015).

5 See “Only 18% Engineering Grads are Employable, Says Survey,” The Times of India, July 15, 2014, http://timesofindia.indiatimes.com/city/mumbai/Only-18-engineering-grads-are-employable-says-survey/ articleshow/38438996.cms (accessed April 1, 2015).

6 See Towers Watson, 2014 Global Workforce Study: At a Glance (Towers Watson, 2014), towerswatson.com/en-US/Insights/IC-Types/Survey-Re-search-Results/2014/08/the-2014-global-workforce-study; and Towers Watson, 2014 Talent Management and Rewards Study: At a Glance (Towers Watson, 2014), towerswatson.com/en-US/Insights/IC-Types/Survey-Research-Results/2014/08/2014-global-talent-management-and-rewards-study-making-the-most-ofemployment- deal (accessed March 11, 2015).

7 See Pravakar Sahoo, “Finally, a Push for Labour Reforms,” The Hindu Business Line, Oct. 23, 2014, http://www.thehindubusinessline.com/opinion/finally-a-push-for-labour-reforms/article6528145.ece (accessed March 5, 2015)

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Jobs Outlook

While India’s unemployment rate is low, underemploy-ment remains high. To capitalize on India’s favourable demographic dividend, job creation needs to pick up. Recent efforts to simplify labour regulations should encourage companies to expand employment and pro-vide social protection to employees, thereby encourag-ing workers to join the formal sector. More workers in the formal sector, higher literacy and skill levels, and greater female workforce participation will create bet-ter-quality employment in the country. A majority of these experts (77 per cent) think jobs creation will pick up for low earners. Fifty-three percent think the num-ber of jobs generated in their industries will increase for high earners, while 64 per cent expect a significant rise in mid-level positions.

The Way Forward — Increasing In-vestment in Human Capital

The government’s emphasis on skill development and

fostering labour market efficiency over the last year has fuelled hope that India is on track to fully leverage its favorable demographic dividend. Business leaders rec-ognize that human capital will be an increasingly crucial driver of business growth and need to continue the ef-forts to develop a talented workforce. Seventy-one per-cent of the respondents plan to invest more resources in workforce management over the next five years.

In the high-stakes quest for talent, leaders are increas-ingly adopting strategies like aligning programs with key drivers of attraction and retention, providing more on-the-job-training, using workforce segmentation to better manage high-performing and critical-skill em-ployees, and adopting programs to foster employee engagement, according to Towers Watson research. Organizations willing to invest in the design, delivery and differentiation of their employee value proposition (EVP) can build a successful future for both the organi-zation and its employees in a culturally diverse country like India. 8

Will the following factors be major obstacles to your industry’s performance in five years - Different Perspectives?

8 See footnote 6.

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