2ECONOMY MATTERS

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FOREWORD

JULY 2017

The agriculture sector continues to be the backbone of the Indian economy with around 50 per cent of population earning its livelihood from it. Contributing significantly to inclusive growth, the sector plays a vital role in India’s development journey. Not only does the sector help raise

the standard of living of the rural households but it also provides food security to our populace. De-spite this, agriculture is plagued by multifarious challenges. Some of the problems relate to stagnation of yields, rising input costs, un-remunerative prices to farmers, among others. Hence it is pivotal that a turnaround is scripted in the agriculture sector which will be crucial for achieving inclusive growth. In this context, the distinctive and revolutionary vision enunciated by our Prime Minister of doubling farmer incomes by 2022 is undoubtedly praiseworthy and provides a remarkable opportunity to take the performance of Indian agriculture to a new level.

The benign inflation scenario prompted RBI to announce a 25 bps reduction in the repo rate in its meet-ing held in the first week of August 2017. The rate cut, the first this year, would go a long way in lifting sentiment among businesses. The monetary policy stance taken by the RBI would provide a fillip to growth especially at a time of benign core inflation print and tepid private investment. Having said so, CII feels that a steeper cut in interest rate would have been more in consonance with market realities. It is heartening to note that the government and the RBI are working in tandem to resolve the stressed asset problem which would restore the credit flows to industry. The resumption of rate easing cycle, which is anticipated to bring down short term rates, could motivate industry to contemplate investing in projects. A cut in rates would revive demand in sectors such as capital goods and in the housing and infrastructure space. It would also spur growth in the rate sensitive consumer durables sector. CII is hopeful that the rate easing cycle would continue going forward to provide a boost to demand at a time when favourable monsoons augur well for keeping the inflation trajectory down.

The World Bank released its latest issue of Global Economic Prospects in June 2017. As per the World Bank, after two consecutive years of weakness, industrial activity and global trade are finally picking up. Activity in advanced economies is expected to accelerate in 2017. On the other hand, emerging markets and developing economies (EMDEs) are witnessing a recovery due to a rise in international and domes-tic demand. Meanwhile, in US, the Federal Reserve stayed pat on the fed funds rate, while maintain-ing an accommodative monetary policy stance. However, it indicated that it will begin implementing a balance sheet normalization program ‘relatively soon’. Further rate hikes will be contingent upon the incoming data particularly on inflation.

Chandrajit BanerjeeDirector General, CII

3 JULY 2017

EXECUTIVE SUMMARY

ECONOMY MATTERS 4

Focus of the Month

With close to 50 per cent of the population engaged in agriculture, the sector is a principal source of income and livelihood for a majority of rural households. How-ever, the share of agriculture in Gross Domestic Prod-uct (GDP) has declined over the years and presently constitutes around 15 per cent of GDP. As a result, the farmer’s per capita income from agriculture is shrink-ing. The major challenges faced by the sector relate to stagnation in yields, slow growth of capital formation, rising input costs, crop loss due to vagaries of monsoon and last but not the least, un-remunerative prices to farmers. Realising the government’s ambitious target of doubling farmer’s income by 2022 requires a new strategy of agriculture growth. We need to focus on creating wealth by ensuring remunerative prices for the farmer. For this, reforms in the existing marketing struc-ture, raising productivity, reforming tenancy and leas-ing laws, among others need urgent attention. Besides, diversification of agriculture from traditional crop cul-tivation to horticulture etc. would need to be worked out. Simultaneously efforts should be made to revitalize agriculture through the introduction of bio-technology and other innovations. This would require substantial increase in investment on research & development for agriculture. In this issue’s Focus of the Month, sectoral experts provide an insight into such reform measures pertaining to different areas of agriculture.

Domestic Trends

India is heading towards a normal South-west monsoon this year, with cumulative rainfall for the country as a whole, seen at 1 per cent above long period average (LPA) for the period 1st June to 19th July 2017. Further, the headline IIP growth plummeted to 1.7 per cent in May 2017 from 3.1 per cent posted in the previous month. The slowdown was mainly driven by weakness in the mining and manufacturing sectors. In contrast, substantial positive contribution was made by electric-ity. On the use-based front, significant contraction was witnessed in consumer durables, capital goods and the infrastructure sector. Additionally, consumer price in-dex (CPI) based inflation further moderated to a record low of 1.54 per cent in June 2017 as compared to 2.18 per cent in the previous month, mainly driven by a dip in food prices. This prompted RBI to cut repo rate by 25 bps in its meeting held on 2nd August, 2017. Meanwhile,

merchandise exports moderated for the third consecu-tive month in June 2017 as it grew at a slower rate of 4.4 per cent to US$23.6 billion as compared to 8.3 per cent in the previous month mainly due to lower outward shipments of sectors such as pharmaceuticals, leather and gems & jewellery.

Policy Focus

This section covers the major policy changes announced by government/RBI in the month of July 2017. Amongst the prominent policy news announced during the month was that goods and service tax (GST) became a fully national tax after the Jammu & Kashmir (J&K) assembly adopted a resolution to implement it. The government has exempted goods imported by units or developers of special economic zones (SEZs) from inte-grated goods and services tax (IGST), providing relief to SEZs. Further, the GST Council during its 19th meet-ing held on July 17th, 2017 decided to increase the cess on cigarettes to offset reduced tax revenue from the product. Meanwhile, the Reserve Bank of India (RBI) has made electronic payments safer for consumers by introducing the concept of ‘zero liability’ and ‘limited li-ability’ for bank customers for any card or online fraud. Additionally, the Union Cabinet has accepted the rec-ommendations of the NITI Aayog and has formally ap-proved the privatisation of national airline Air India Ltd and five of its subsidiaries. The Union Cabinet has also approved the wage code bill which will ensure a nation-al minimum wage floor across all sectors by integrating four wage-related labour laws.

Global Trends

Despite substantial policy uncertainty, global growth is projected to accelerate to 2.7 per cent in 2017, up from a post-crisis low of 2.4 per cent in 2016, before strengthening further to 2.9 per cent in 2018-19 as per the latest forecast released by World Bank in Global Economic Prospects. In the US, growth is projected to rise from 1.6 per cent in 2016 to 2.1 per cent in 2017 and 2.2 per cent in 2018, before slowing to 1.9 per cent in 2019 as it moves closer to potential. Further, US Federal Reserve maintained the fed funds target in a range of 1.00-1.25 per cent in its meeting held in the last week of July 2017. The stance of monetary policy continued to remain accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 per cent inflation.

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FOCUS OF THE MONTH

Reforming Agriculture Sector

JULY 2017

opportunity to take the performance of Indian agricul-ture to a new level.

Realising the government’s ambitious target of dou-bling farmer’s income by 2022 requires a new strategy of agriculture growth. We need to focus on creating wealth by ensuring remunerative prices for the farmer. For this, reforms in the existing marketing structure, raising productivity, reforming tenancy and leasing laws, among others need urgent attention. Besides, di-versification of agriculture from traditional crop cultiva-tion to horticulture etc. would need to be worked out. This would require further investments on cold storage, rural roads, communication, marketing network and fa-cilities, warehouses etc. Simultaneously, efforts should be made to revitalize agriculture through the intro-duction of bio-technology and other innovations. This would require a substantial increase in investment on research & development for agriculture. In this issue’s Focus of the Month, sectoral experts provide an insight into such reform measures pertaining to different areas of agriculture.

With close to 50 per cent of the population en-gaged in agriculture, the sector is a principal source of income and livelihood for a major-

ity of rural households. However, the share of agricul-ture in Gross Domestic Product (GDP) has declined over the years and presently constitutes around 15 per cent of GDP. As a result, the farmer’s per capita income from agriculture is shrinking. The major challenges faced by the sector relate to stagnation in yields, slow growth of capital formation, rising input costs, crop loss due to vagaries of monsoon and last but not the least, un-remunerative prices to farmers.

Given the key challenges, a turnaround in the agricul-ture sector is crucial for achieving inclusive growth. In this context, the unique and landmark vision articulated by the Prime Minister of doubling farmer incomes by 2022 is doubtless commendable and provides a singular

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FOCUS OF THE MONTH

ECONOMY MATTERS

Reforms in Agricultural Marketing:A Requisite for Doubling Farmers’ Incomes by 2022

Since the time Prime Minister Shri Narendra Modi gave a clarion call to double farmers’ incomes by 2022, much has been written on the subject, and

many ideas have been floated. This is a complex chal-lenge, and many paths need to be pursued simultane-ously.

Broadly there are three paths:First is raising farm productivity. This will cover produc-tivity per unit of land, water, labour, other farm inputs and cost of cultivation in general, besides increasing the cropping intensity, by leveraging the large investments being made in irrigation – both macro and micro. Since there is enough headroom to do this, one can see a size-able portion of the “doubling” coming from this route.

Second is diversification into high value crops and ex-pand the various on & off-farm activities related to ag-riculture. This will cover growing vegetables & fruits, agro-forestry, increased livestock activity, setting up so-lar farms as well as adding value to the products on the farm through grading & sorting and adopting organic and safe-food practices. Since a substantial segment of consumers is seeking variety and quality of the food on the plate, is concerned about the safety of food being consumed, and is willing to pay a premium for conveni-ence, one can see a sizeable portion of the “doubling” coming from this route as well.

Third is through linking farmers to the markets smartly. This will include lowering the transaction costs along the value chain to plough back a larger share of con-sumer price to the producer, as also to reach the safe & quality food to the target group of consumers thereby raising the value delivered and capturing a fair share of that value as well. It is this third route I want to write

about in this piece, because without requisite action on this front, the efforts put in the first two will only result in further distress to the farmer.

Higher production (route 1), especially of perishables (route 2) has ironically resulted in lower prices for the farmer often, only because the market linkages are poor! Instead of doubling, we may be halving farmer in-comes if we simply accelerate on route 1 and 2 without clearing the roadblocks that are existing on the market-ing front.

Actually, what I am calling roadblocks have all been excellent policy measures and institutions when they were first conceived several decades ago and have contributed to doubling farmers’ incomes a few times since then. It’s just that the context is different now and those very instruments have become road blocks.

Agricultural Produce Marketing Committees (APMC) governed by the different State APMC Acts (of 1960s and 70s vintage) were major saviours of farmers, who till then were at the mercy of the village traders to sell their produce. In the absence of channels for market price information, farmers had to rely on the same trad-ers for price discovery. Under the APMC regime, well laid-out market-yards and sub-yards were constructed around the country to display individual farmers’ pro-duce for quality assessment by the participating buy-ers. An auction system was put in place for competitive price discovery.

Over time, however, since this was a monopoly system, transaction costs rose for the farmers in terms of com-missions charged by the Agents licensed by the APMCs, not to mention malpractices in some mandis in terms of quality assessment, weighment and even cartelisation

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FOCUS OF THE MONTH

JULY 2017

during price discovery. Also, since the farmer had to transport his produce even before price discovery, the sunk costs put pressure on him to sell at whatever price offered. Withdrawing the produce from auction means more costs with no guarantee of price some other day. More importantly, an unintended consequence of the auction-based price discovery mechanism is the nature of relationship between the farmer and the other play-ers in the downstream value chain. The transactional nature of this relationship didn’t lend itself to the pos-sibilities of agribusinesses or food processors helping farmer with production technologies or post-harvest practices, barring a few exceptions.

Appreciating these gaps, the APMC Act was remodelled in 2003, allowing farmers to directly market to consum-ers / businesses, or contract-farm, as also letting pri-vate sector to set up marketplaces. Not all states have adopted that Model Act, and among those adopted, many have prescribed Rules that are not in the spirit of the Act. Although some progress has been made, this reform remained largely on paper. Meanwhile, an electronic National Agriculture Market (e-NAM) was launched last year. While this has removed the physi-cal boundaries of a mandi in a farmer’s neighbourhood and he can theoretically sell to an Agent in any other mandi, the real benefits will accrue only after assaying and logistics systems get integrated. In any case, this doesn’t solve the relationship issue. More recently, the central government has released an improved model APMC Act for stakeholder consultation. Hopefully, this time around, the adoption by the states is quicker and more widespread.

Another important instrument used by the Govern-ment to aid green revolution, half a century ago, was the Minimum Support Price (MSP) mechanism. This removed the market price risk for the farmer and gave him confidence to invest in high-yielding varieties of wheat & paddy and fertilisers. The Government’s need to buy these food grains for public distribution (PDS) to the low-income consumers complemented the MSP system, and gave muscle to the Food Corporation of India (and some state government agencies) to be able to stabilise the price volatility. With the number of crops multiplying, and many of them being perishables, implementing such an MSP + PDS system in so many crops across India is next to impossible. Consequently, the farmer has no clue about the post-harvest price he would realise while he decides on the specific crop to plant from among several crops. Often, his decision is based on the previous season’s prices. Many a time, this

results in excess production of a crop that was in short supply in the previous season. It is also likely that im-ported stocks of the same product that were brought in to make up the previous year’s deficit. That’s a dou-ble whammy for the farmer. How often we have seen a farmer smiling at his bountiful crop that’s ready for harvest, but crying just a few weeks later, because the new market price won’t even fetch the cost of harvest-ing and transporting to the mandi.

A practical alternative to government declaring MSPs to a large number of crops – and undertaking buying op-erations, not knowing how to deal with the challenges of storage and marketing of fast-perishing products – is the commodity derivative markets–both futures and op-tions. Indeed this is how the world has been managing the risks arising out of uncertainty of prices for a long time. When we were a shortages economy, the govern-ment had banned trading in commodity derivatives, with the belief that financialisation of physical markets fuels inflation through excessive speculation. With the change in the context of food & agriculture sectors, fu-tures were allowed to be traded in 2003 by reforming the Forward Contracts Regulation Act (FCRA). Options were also to be introduced soon after. However, this optimism was short lived when the food prices went through the roof in 2007, due to the shortfall in global food production. Futures trading in some commodities was promptly prohibited. A case of shooting the mes-senger for carrying the bad news! Since then, the fu-tures were slowly opened up.

More recently, options have also been permitted. Next steps can surely be calibrated, taking market evolu-tion and the related risks into account, but those steps must surely be taken. There’s often a criticism that small farmers cannot directly participate in the deriva-tive markets, so what good these institutions are for them. This is where aggregators come in, whether they are producers’ collective enterprises themselves, or agribusinesses / food processors who can price their physical transactions with the farmers by linking to the futures or embedding options into their pricing formu-lae. By adopting these instruments, farm production re-sponds to the market signals continuously and creates equilibrium on a dynamic basis.

While a reform in FCRA enables timely price discovery & risk minimisation through vibrant derivative markets, the reform in APMC Act enables real-time demand dis-covery & value maximisation through seamless physical markets. A surer way to double farmer’s incomes than merely raising the agricultural GDP.

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FOCUS OF THE MONTH

ECONOMY MATTERS

Re-imagining Indian Agriculture – The Services Paradigm

Indian agriculture has made tremendous progress

over the past few years and the time is right to scale

up our efforts to further revamp Indian Agriculture

and explore the full potential of the sector to emerge as

a large, vibrant and transformed enterprise.

This will entail a shift in approach from the “static” con-

cept of quantum of production in terms of quintals per

acre to a more dynamic model of augmenting farmer

income. The end objective needs to shift to creating

wealth for the farmer.

To begin with, let us treat agriculture like an enterprise.

There are many reasons for this. Any enterprise, take

for example a factory, needs input and output manage-

ment, expertise in processing, ERP, data, intelligence

and decision making tools. An enterprise needs mech-

anisms for quality assurance at the start of the opera-

tion, quality control and management systems during

the operating process and subsequently ascertain the

availability of markets for deriving information regard-

ing deployment of the produce appropriately. Besides,

it is very important that during the process of “manu-

facture”, the enterprise has access to the requisite data

so as to aid and drive decision-making for the future. I

propose that such practices should be emulated by agri-

culture. The wherewithal is easily accessible.

Further since each line function in an enterprise is a dif-

ferent skill set, one cannot imagine an individual entre-

preneur being in a position to do it all. He would have

to outsource services to service providers who are in a

position to deliver on quality and on demand. For exam-

ple, in a factory, outsourcing takes place in manpower

management, IT, quality assurance, payment & collec-

tion- and sometimes in production itself. Hence, the de-

pendence of an enterprise on a wide range of services,

produced beyond its immediate boundaries is immense.

It is no different in agriculture. Hence, the future suc-

cess of agriculture will inevitably depend on such ser-

vice providers. Thus the paradigm of services led agri-

cultural reform – all with the intention of not merely

creating massive tonnes of food, but to also meet mar-

ket demand, keep markets steadily fed, maintain stable

prices with accent on quality and cost management. All

this needs to be suitably packaged to be delivered on

time, at a profit to the farmers.

At this juncture, we need to look at the problems faced

by agriculture through two different lenses.

The first one relates to the constraints faced by a farm

which is to produce more per acre in line with market

requirements, within cost and with a high degree of

productivity. The second is to look at the entire domain

through the lens of the farmer. The farmer is not the

farm alone. The farmer is beyond the farm who buys,

sells, needs insurance products and have all the facilitat-

ing elements of business available to him to be able to

convert his produce to cash - at a profit.

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FOCUS OF THE MONTH

JULY 2017

One of the primary vectors through which agriculture

can be transformed is through its services. It is no se-

cret that India has a leading global position in all crops,

with agriculture sector being the engine of Indian GDP

growth, employing close to 50 per cent of the popula-

tion. Equally, and unfortunately, despite its positive at-

tributes, this is not considered to be the “preferred”

sector of the economy. Hence, the smartest and most

talented in agricultural families are leaving the field and

migrating to cities seeking jobs in the non-agriculture

sector. It is only the least talented child that gets left

behind to pursue farming. Obviously, this would be the

case since the yield per square meter of land in rupee

terms is not what it ought to be, and the effort- to- re-

ward ratio is skewed taking talent away from the farm-

ing sector.

Our yield per square meter is perhaps amongst the low-

est in the world. While being blessed with the best rain,

sunshine, land, water quality etc. compared to best-in-

class, we are getting a fraction of what we should, both

in volume and in rupee terms, from the soil.

Why is this so? Two major reasons. The first one- our

land parcels are very small, so the “balance sheet” and

the “Profit & Loss account” of an individual farmer (if

we look at it as an enterprise) is not enough to feed

the farmer and create surplus for improvement and

reinvestment – just like any normal factory would. And

because there are no surpluses to re-invest, the pro-

ductivity of agriculture does not improve over time.

For a breakthrough to be achieved, application of tech-

nology, capital and machines is crucial - and that can

happen only if there are surpluses. Unfortunately, the

Indian farmer is left with none. Therefore, the Indian

farmer has been left severely behind in the application

of (advances in) science and technology with the result

that agri productivity, even in quintals per acre, remains

stagnant. The situation is worse when seen in terms of

rupees per acre.

The only way out to deliver technology to the farmer is

by way of doing what taxis do for transportation in the

event that the populace cannot afford individual auto-

mobiles. We really need to promote “taxi services” of

farm equipment and farm technology for the benefit of

farmers and then make these available on demand at

very reasonable prices, per acre, and use IT and mobile

technology (apps etc.) to deliver it efficiently to the indi-

vidual farmer. Thus, it is time to look at FaaS (Farming as

a Service), just as we have SaaS (Software as a Service).

There is no guesswork in figuring the dramatic impact of

this move on productivity in terms of quintals per acre.

The second aspect is how to transform the enhanced

productivity into revenue in terms of rupees per acre,

and then into profit per acre for the farmer. Clearly here

also individual farmers are not in a position to access,

apply and use technologies. To do this, collectives of

such farmers would have to be created and assisted by

service providers, who would then have to re-imagine

technology deployment, such as perceive price signals

and making sure goods are diverted to right market,

setting quality/price standards in tandem to be able to

send early signals on what the farmer should produce.

Right now, our farmer entrepreneur is in the dark about

the demand prospects of his produce in the market, and

his decision making is gut led.

Then there is the question of using technology as a ser-

vice to be able to help the farmer to transact, to be able

to get farm credit on time, or ensuring that payment de-

livery mechanisms such that pricing is transparent and

settlement immediate - and that the farmer goes back

to his farm with a hefty wallet in his pocket. Here too,

services will play a major role so to ensure that this hap-

pens seamlessly and efficiently.

The third aspect is that of looking at the “re-assurance”

system. No doubt, agriculture is a risky business, open

to the vagaries of nature. But it is no more risky than

any other enterprises which are beset with their own

problems and therefore needs “intelligence” to handle

it. In case of agriculture we will need to re-imagine the

re-assurance aspect of output i.e. creating insurance

products especially and those can only be delivered as

a service using technology. However, more important

than “creating” insurance products is the ability of the

system to be able to redeem the pledge, so to speak, in

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FOCUS OF THE MONTH

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case the events turn out to be adverse for the farmer.

Technology such as weather measurement or satellite

imagery needs to step in to be able to quickly assess

crop yields and then deliver to the underwriting prom-

ise.

There is a case to overhaul the entire agri extension

effort to be able to intelligently target demos to the

farmer and intelligence to boot, to make sure the farm-

er produces what needs to be produced, which can be

sold at remunerative prices and make attractive profit

while meeting the requirements of the consumer. Ser-

vices would play a huge role in this “know-how” deliv-

ery.

All these are but examples.

All said, there is a very strong need for the services sec-

tor to re-juvenate agriculture – and there is a huge op-

portunity waiting to be tapped. Obviously, this will need

significant effort to deliver at the last mile – as is usual in

uncharted waters.

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At the outset, I consider farm credit to be as

important and critical a tool for production as

any other farm input. It is hence inconceivable

that we can reach the production targets to feed incre-

mentally millions each year unless we sort out the agri/

rural credit delivery gaps. It is disheartening to find that

India has not addressed this question adequately thus

far. Rather, the response has been mostly adhoc, often

motivated and certainly unsustainable. Add to it the de-

livery conundrum and we find ourselves in a situation

where food, water and sanitation are either completely

missing or diminishing at a fast pace. Hence, the ques-

tion essentially is not about affordability of credit but

the availability of credit to the farm sector.

Agriculture, along with fisheries and forestry, has re-

corded an impressive performance in recent times,

backed by favourable monsoon. Agriculture GDP grew

at an impressive rate of 4.9 per cent in FY17. Further,

the expenditure on food is expected to double in the

next 6 years (from US$386 billion to US$772 billion). The

demand-side of equation is thus hugely positive but the

same cannot be said about the supply-side. Productivity

is obviously the key question when yield, in most crops,

is less than half of world’s average and as mentioned

earlier, credit delivery is both inadequate and ineffi-

cient. The huge public sector banking infrastructure,

which includes Regional Rural Banks, of over 50,000

rural branches still cannot serve millions of farmers

spread over 600,000 villages. Besides the limited reach,

banks suffer from constraints like (i) inability of small

farmers to provide collaterals (ii) cumbersome credit

delivery process of banks which frustrates small farm-

ers who are mostly poor and uneducated (iii) absence

or reluctance to extend (clean) consumption credit

which forces the farmers to seek it from informal chan-

nels (e.g. from money lenders) which in turn drives the

poor farmers to a vicious circle of indebtedness, and

(iv) absence or inadequacy of pragmatic crop insur-

ance schemes. I have consistently maintained that the

most effective agri or rural credit delivery mechanism

has to be the State Cooperative Banks/District Credit

Cooperatives (DCCs) and Primary Agricultural Credit

Societies or PACS. It is discouraging to see the failure

of every successive Government in power, both in the

Centre and the States, to bring in sustainable meas-

ures to reform the structure and transform the banks

into viable, self-sustaining institutions. They are rather

concerned with putting in place survival kits assembled

in haste by the Government through internal and ex-

ternal support. Most of these banks have staggering

non-performing loans (NPAs) and seek repeated recap-

italizations to keep afloat. There has to be a robust so-

lution, which will necessarily involve unshackling them

from legislative and bureaucratic control, which means

changing their capital and control structure. This has to

be done by an unwavering, coordinated action plan to

be inked between the Centre and State governments.

Let us now take the question of affordability. To me,

affordability of credit is relative to the farm size, crop-

ping, natural endowments and other risks. A rate ap-

Access to Affordable Credit - Giving Agriculture its Due

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ECONOMY MATTERS

plicable to a small and marginal farmer with 1 hectare

of land with complete dependence on the vagaries

of nature has to be low as compared to a farmer with

100 hectares of land with lower risk factors. In other

words, mapping, factoring and pricing risks is key to

determine the affordability of credit for a particular bor-

rower. I can actually empathize with farmers who get

their loans waived since it pushes them into a sense of

complacency which moves them away from pursuing

agri-business instead of agriculture. At the same time,

it is equally true that for banks, loan waiver is disastrous

as it ruins their credit culture. However, having said

that, the case for ameliorating genuine hardships also

cannot be ignored. The conundrum is actually due to a

continuing imbalanced focus on credit and insurance

for agriculture. The frequent appeasement by Govern-

ments by waiving farm loans is actually hindering a fast-

paced development of crop/yield insurance products.

Credit and insurance products have to co-exist in a fully

coordinated and supplementary formulation. There is a

need to tap the enormous talent available in our coun-

try and make use of the innovations existing around the

world in the area of insurance. I do understand that pre-

miums are unaffordable for the farmers and this would

continue until the insurance companies reach a certain

size and scale. However, this is exactly where the State

has to come in and create medium-term viability gap

funding models for the insurers alongside subventions

for deserving small and marginal farmers, rather than

distorting the credit culture of banks.

Another concept which needs to be pursued in order

to give agriculture sustainable bankability is to create

“closed loops” on marketing of produce. I can bet that

our farmers will be better borrowers, if their produce

could be marketed efficiently, without intermediaries,

to processors, exporters or retailers, thus saving the

enormous wastage as we see today. This will include

transparent pricing discovery and prompt bank-routed

payments.

In the pursuit of a viable agriculture, organized retailing

has to be fostered at a frenetic pace to help agriculture.

Retailing is the biggest tool to organizing our pernicious

value chains. The paranoia around modern retailing has

to be tackled at the soonest and I am glad that we are

moving towards it.

In conclusion, affordability of credit to agriculture is not

an isolated interest related concept. Unless we make

agriculture move irreversibly to agri-business, which

means that all other important business risk related ten-

ets like insurance and marketing are also in place, we

will be artificially and indefinitely straining the banks,

uprooting the basic principle of lending. Let us make

no mistake – our farmers are actually the most discern-

ing and intelligent lot as proven by their choice of farm

inputs and cellular adaptation. We should not hesitate

to upscale ourselves to give them the best credit, risk,

insurance and marketing products. The results will be

startling and in 10 years we will be comparing returns on

capital employed in agriculture vis-à-vis industry.

We all know that the present Government has the cour-

age to introduce the most visionary reforms. Financing

agriculture certainly needs a vision.

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DOMESTIC TRENDS

Economy: Overview

ECONOMY MATTERS

Real GDP growth decelerated sharply to 7.1 per cent in FY17 as compared to 8.0 per cent in the previous fiscal on low-er capex spending. GVA growth at basic prices slowed down as well. While most sectors recorded slower growth, high agricultural growth due to normal monsoon and record food grain production limited the downside to the overall GVA growth. Industrial activity slowed down sharply in FY17, reflecting subdued private investment demand. Services sector growth also came down in the fiscal. However, economic activity is picking up on the ground, capac-ity utilization is improving and we can expect a turnaround in growth going forward. CII expects real GDP growth to come in a range of 7.5-8.0 per cent in FY18.

Inflation measured by both CPI and WPI meanwhile dropped to record low levels in June 2017 underpinned by low food prices. The declining inflation scenario, which has been undershooting the Central Bank’s inflation target by a large margin allowed the RBI to resume its rate easing cycle. The Central Bank reduced its key repo rate by 25 bps in its recent meeting held in August 2017. However, since RBI had kept interest rates on hold since October 2016, before paring them recently, the yield on the benchmark 10-year G-sec has remained relatively benign. Meanwhile, non-food credit growth picked up marginally since the start of FY18 after falling to record low-levels in FY17 due to economic activity slowly inching towards normalcy post the note ban.

On the external front, robust portfolio inflows, especially net FDI flows, since the start of FY18 have resulted in ru-pee gaining some strength which in turn has adversely affected the exports growth in the recent months. Imports growth though still remains in double-digit underpinned by non-oil non-gold imports. With import growth signifi-cantly outpacing export growth, the trade deficit increased sizably.

15

DOMESTIC TRENDS

JULY 2017

SW monsoon 1 per cent above LPA so far

India is heading towards a normal South-west monsoon this year, with cumulative rainfall for the country as a whole, seen at 1 per cent above long period average (LPA) for the period 1st June to 19th July 2017. The India Meteorological Department (IMD) categorizes rainfall in the 96-104 per cent long-period average range as

Kerala records the highest rainfall deficiency so far

Among the major states, rainfall deficiency has so far been the highest for Kerala, with the rainfall gap (from

normal and rainfall between 104-110 per cent of LPA as above normal.

Out of 36 meteorological sub-divisions, rainfall was large excess/excess in six, normal in 26 and deficient/large deficient in four. Much of the rainfall deficit has been seen in the East & Northeast parts and South pen-insula of the country, which are predominantly non-agriculture dependent. As per the IMD, this year the country is expected to receive rainfall at 98 per cent of the LPA due to reduced chances of the occurrence of an El-Nino, a phenomenon associated with the heating of the Pacific waters.

1st June to 19th July, 2017) standing at 24.3 per cent be-low LPA followed by Tamil Nadu (18.8 per cent below LPA), West Bengal (16.6 per cent below LPA) and Assam (14.8 per cent below LPA). In contrast, the states which have received bountiful rainfall so far include- Jammu

Monsoon Progress: So Far So Good

16

DOMESTIC TRENDS

ECONOMY MATTERS

Kharif crops sowing progressing well, ex-cept for oilseedsKharif sowing starts with the onset of June and the crop is harvested during September-October. Area sown un-der kharif crops increased to 685.31 lakh hectares dur-ing the period 1st June - 21st July 2017. This is 1.8 per cent higher than the area sown during this time last year. Ex-cept oilseeds, all major agri commodities have recorded an increase in the area sown as compared to the previ-ous fiscal. Rice recorded an increase in area sown to the tune of 4.6 per cent to 177.04 lakh hectares while total pulses saw an increase in acreage of 3.4 per cent so far this year. Among pulses, urad recorded the maximum increase in acreage.

& Kashmir (59.5 per cent above LPA), Andhra Pradesh (23.6 per cent), Gujarat (22.7 per cent), Rajasthan (17

Area sown under coarse cereals, which include crops such as jowar, bajra, maize and ragi, expanded by 1.2 per cent to 130.90 lakh hectares in the period 1st June-21st July 2017, cushioned by higher sowing in states such as Rajasthan, Madhya Pradesh and Haryana amongst others. The acreage under oilseeds, as a group, stood at 123.55 lakh hectares, down by 14.7 per cent com-pared with last year, with soya-bean recording a decline of 17.8 per cent, chiefly due to the lower plantings in Madhya Pradesh, Andhra Pradesh, Telangana and Uttar Pradesh. One of the major kharif crops, cotton, saw its acreage increase by an impressive 20.1 per cent over the last year, mainly due to good rainfall in Gujarat, which happens to be the key cotton growing state in the country.

per cent), Punjab (16.2 per cent) and Haryana (14.7 per cent).

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DOMESTIC TRENDS

JULY 2017

Though the monsoon has covered the country as a whole, there is still concern regarding its spatial distri-bution. The spread of rainfall is not consistent and there are wide variations in the quantum of rainfall received

by various regions. Nevertheless, there is still some time to go before the closure of the South-west monsoons this year. The positive prognosis of the IMD, in this re-gard, provides succor to the policymakers.

The headline IIP growth plummeted to 1.7 per cent in May 2017 from 3.1 per cent posted in the previous month. This is the third consecutive month of slow-down in industrial production. The slowdown was main-ly driven by weakness in the mining and manufacturing

In terms of sectoral classification, May indus-trial production saw slowdown in two out of three sub-sectors

The growth rate of the manufacturing sector slowed to 1.2 per cent in May 2017 as compared to 2.3 per cent in the previous month. Mining sector growth declined to 0.9 per cent in May 2017 as compared to 3.2 per cent in the previous month as power plants purchased lesser coal due to sufficient inventory stock. In contrast, the electricity sector witnessed a rise in growth for the fourth successive month to 8.7 per cent in May 2017 from 5.4 per cent in the previous month aided by strong growth in hydro and thermal power.

Capital goods output continued to contract

As per the use-based classification, the capital goods sector experienced a further contraction in output in the reporting month. The sector de-grew by 3.9 per cent during May 2017 as compared to a contraction of 2.9 per cent in the previous month led by continued weakness

sectors. In contrast, substantial positive contribution was made by electricity. On the use- based front, signifi-cant contraction was witnessed in consumer durables, capital goods and the infrastructure sector.

in commercial vehicles production. Infrastructure and construction goods—a new category of IIP- also wit-nessed a significant fall in growth to 0.1 per cent in May 2017 from 5.2 per cent in the previous month indicating the weakness in the real economy.

Weakness in consumer durables sector con-tinues to persist

In terms of consumer products, durables production continued to contract while non-durables witnessed a moderate slowdown in May 2017. The output of the consumer durables sector—which is widely regarded as the proxy of urban consumption demand stood at -4.5 per cent in May 2017. In contrast, the consumer non-du-rables sector grew at 7.9 per cent in May 2017, which is slightly lower than the 8.4 per cent growth in the previ-ous month. Going forward, robust agricultural output supported by normal monsoons is likely to lift senti-ments and provide a boost to the non-durables sector.

Industrial Output Remains Anemic

18

DOMESTIC TRENDS

ECONOMY MATTERS

OutlookThe slowdown in IIP growth during the month was mainly driven by weakness in manufacturing and mining sec-tors. Part of the weakness could also be attributed to the high base of last year. The weakness in industrial output was however on expected lines due to the inventory de-stocking in view of GST implementation. On the bright side, this slowdown is expected to be transitory in nature as once the GST related issues are ironed out, we will once again witness a fillip in IP growth.

Core sector growth moderates sharply in June 2017

Core sector output decelerated sharply to 0.4 per cent in June 2017 as compared to revised growth of 4.1 per

cent seen in May 2017 partly on account of the high base of last year. The slowdown in growth during the month could be attributed to a moderation seen in the output growth of coal, refinery products and electricity.

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DOMESTIC TRENDS

JULY 2017

Consumer price index (CPI) based inflation further mod-erated to a record low of 1.54 per cent in June 2017 as compared to 2.18 per cent in the previous month, main-ly driven by a dip in food prices. CPI food inflation fell to -2.12 per cent in June 2017 as compared to -1.05 per cent in May 2017. Within the food category, vegetables and protein prices contracted by 16.5 per cent and 2 per cent respectively while cereal prices softened to 4.4 per cent. Improved harvest of pulses has capped the prices of protein items. Core inflation moderated during the month as well, with the slowdown being broad-based.

Mirroring the moderation in CPI inflation, the wholesale price index (WPI) based inflation stood at its lowest level in at least eight months — since the availability of data for the new 2011-12 base year series. WPI inflation stood at 0.9 per cent in June 2017 from 2.17 per cent in May 2017. The moderation came on the back of sub-

All the major categories of core inflation, such as hous-ing, clothing and services witnessed a drop in prices in June 2017. Going forward, an impending upside risk to inflation is the implementation of 7th pay commission payouts. This is likely to play an important role in push-ing up headline CPI inflation higher by the end of the year.The RBI in its recent policy statement has lowered the range for inflation trajectory sharply to between 2.0-3.5 per cent for the first-half and between 3.5-4.5 per cent for the second-half of FY18.

dued food inflation and weak manufacturing prices. The composite food index within the WPI, combining the values of food items in the primary articles category and manufactured food items, contracted 1.25 per cent in June 2017 compared with a growth of 0.15 per cent in the previous month.

Inflationary Pressure Ebbs Further

20

DOMESTIC TRENDS

ECONOMY MATTERS

Primary articles inflation slows down sharp-ly due to deflation in all its 3 sub-sectors

Amongst the WPI sub-categories, inflation in primary articles contracted by 3.86 per cent in June 2017 as compared to decline of 1.79 per cent posted in the pre-vious month. Inflation in all its three sub-sectors, viz, food, non-food and minerals contracted in the report-ing month. Among food articles, pulses, vegetables and fruits posted a decline during the month due to sea-sonal factors. Going forward, deflation in food prices is likely to slow down in July 2017 due to cyclical weather-related factors, in the absence of strong demand condi-tions.

Fuel inflation moderates on lower adminis-tered component of fuel

Inflation in the fuel group of WPI almost halved to 5.28

per cent in June 2017 as compared to 11.69 per cent in the previous month on the back of declining global crude oil prices. During the reporting month, prices of the administered component of the fuel group eased sharply. Inflation in both petrol and diesel decelerated to 6.49 per cent (from 18.51 per cent in the previous month) and 7.07 per cent (from 22.71 per cent in the pre-vious month) respectively in June 2017 aided by lower global crude oil prices.

Manufacturing inflation slows down margin-ally on lower food prices

Inflation in the manufactured group slowed down mar-ginally to 2.27 per cent in June 2017 from 2.55 per cent in the previous month on softer manufacturing food inflation.

OutlookThe continuous easing of both CPI and WPI inflation print over the last few months, culminating in prices touching a record low in June 2017, reflects a paradigm shift towards an era of benign inflation. At a time when the retail inflation is also converging to a new low, it is apparent that overall price pressures are presently subdued in the economy. The declining inflation scenario, which has been undershooting the Central Bank’s inflation target by a large margin has induced the RBI to resume its rate easing cycle in August 2017.

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DOMESTIC TRENDS

JULY 2017

In line with market expectation, the monetary policy committee (MPC) reduced the repo rate by 25 bps to 6.0 per cent while adjusted the reverse repo as well as marginal standing facility (MSF) to 5.75 per cent and 6.25 per cent respectively on benign inflation scenario. Four out of six members voted in favour of the decision, while one voted for 50 bps cut and another for status-quo.

On growth front, RBI retains its growth fore-cast for FY18On the growth front, though RBI retained its growth forecast for FY18 at 7.3 per cent, it flagged that the sen-timent for the manufacturing sector remained low. As per the central bank, the upsides to the baseline projec-tions emanated from the rising probability of another good kharif harvest, the boost to rural demand from the higher budgetary allocation to housing in rural areas, the significant step-up in the budgetary allocation for roads and bridges, and the growth-enhancing effects of GST. Additionally, an improving external environment should also support the domestic economy.

Upside risks to inflation persistOn the inflation front, RBI acknowledged that food inflation has been under check amid normal monsoon and effective supply management by the government. However the MPC expects inflation to move towards the higher range of 3.5-4.5 per cent in second half of the year from 2.0-3.5 per cent in the first half. The pick-up in inflation is primarily on account of the fading base effect, impact of house rent allowance under the 7th pay

The MPC maintained its neutral monetary policy stance, but is now more comfortable with the inflation trajecto-ry since several upside risks have reduced or not materi-alised. To be sure, this is the first rate cut since October 2016, reflecting the ebbing of inflationary pressures in the recent months.

commission, spill-overs from farm loan waivers, impact of GST led price revisions etc. There are, however, some moderating forces at work as per the RBI. First, the sec-ond successive normal monsoon coupled with effective supply management measures may keep food inflation under check. Second, if the general moderation of price increases in CPI excluding food and fuel continues, it will contain upside pressures on headline inflation. Third, the international commodity price outlook is fairly sta-ble at the current juncture.

Going forwardFurther rate cuts by the RBI will be contingent upon the incoming data prints. However, as underlined earlier as well, the central bank expects the trajectory of inflation in its baseline projection to rise from its current low lev-els. Hence it maintained its neutral policy stance. CII is hopeful that the rate easing cycle would continue going forward to provide a boost to demand at a time when favourable monsoons augur well for keeping the infla-tion trajectory down.

RBI Bites the Bullet; Pares Interest Rates

22

DOMESTIC TRENDS

ECONOMY MATTERS

Exports show a positive growth, albeit much lower than imports

Merchandise exports moderated for the third consecu-tive month in June 2017 as it grew at a slower rate of 4.4 per cent to US$23.6 billion as compared to 8.3 per cent in the previous month mainly due to lower outward shipments of sectors such as pharmaceuticals, leather and gems & jewellery. In rupee terms, exports regis-tered a contraction of 0.04 per cent during June 2017, reflecting appreciation of domestic currency. Cumula-tive value of exports for the period April-June 2017-18 stood at US$72.2 billion as against US$65.3 billion in the same period last year, thus registering a positive growth of 10.6 per cent in dollar terms during the period.

During June 2017, major commodity groups showing a positive export growth over the corresponding month of last year included engineering goods (14.8 per cent), petroleum products (3.6 per cent), organic & inorganic

Oil imports value rises driven by high crude oil prices

Driven by high global crude oil prices, the oil import bill rose to US$8.1 billion during June 2017 which was 12.0 per cent higher than the oil imports of US$7.3 billion val-ued in June 2016. Oil imports during April-June, 2017-18 were valued at US$23.2 billion which was 23.0 per cent

chemicals (13.2 per cent), rice (27.3 per cent) and marine products (24.3 per cent).

Imports have been escalating causing much concern

Merchandise imports during June 2017 were valued at US$36.5 billion which translates into 19.0 per cent growth in dollar terms on year-on-year basis. This growth was slower than 33.1 per cent print seen in May 2017. Cumulative value of imports for the period April-June 2017-18 stood at US$112.3 billion as against US$84.6 billion, thus registering a huge growth of 32.8 per cent in dollar terms over the same period last year.

Major commodity groups showing high import growth in June 2017 over the corresponding month of last year included petroleum, crude & products (12.0 per cent), electronic goods (24.2 per cent), pearls, precious & semi-precious stones (86.3 per cent), machinery, elec-trical & non-electrical (7.0 per cent) and gold (103.0 per cent).

higher than the oil imports of US$18.9 billion in the cor-responding period last year.

Non-oil imports during June 2017 were estimated at US$28.4 billion which was 21.2 per cent higher than non-oil imports of US$23.4 billion in June 2016. Non-oil im-ports during April-June 2017-18 were valued at US$89.1 billion which was 35.6 per cent higher than the level

Merchandise Trade Sees a Huge Deficit

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DOMESTIC TRENDS

JULY 2017

of such imports valued at US$65.7 billion in April-June, 2016-17.

Trade in Services

Service exports during May 2017 were valued at US$13.4 billion registering a positive growth of 4.1 per cent in dollar terms as compared to a negative growth of 9.0 per cent during April 2017. Service imports during May 2017 were valued at US$7.6 billion registering a positive growth of 5.4 per cent in dollar terms as compared to a contraction of 12.6 per cent during April 2017.

Trade deficit more than triples during Q1FY18

Higher imports widened the trade deficit to US$12.95

billion in June 2016 as compared to a deficit of US$8.1 billion during June 2016. The trade balance in services for May 2017 was estimated at US$5.8 billion. Taking merchandise and services together, overall trade deficit for April-June 2017-18 is estimated at US$28.6 billon as compared to US$8.0 billion during April-June 2016-17.

Going forward

Global merchandise trade is expected to rebound this year, with the World Trade Organization forecasting a growth of 2.4 per cent in 2017 as compared to 1.3 per cent in 2016. This prognosis augurs well for the exports outlook of India, going forward.

25

POLICY FOCUS

POLICY FOCUS

JULY 2017

1. J&K passes bill to implement GST in the state; Lok Sabha also clears 2 bills extend-ing GST to J&K

Goods and service tax (GST) became a fully national tax after the Jammu & Kashmir (J&K) assembly adopt-ed a resolution to implement it. The state would send the bill to the President for concurrence and the 101st amendment would be extended to J&K. Being an active participant in designing the GST architecture, J&K had hosted the 14th meeting of the GST Council, where tax rates for goods and services were fixed. Adopting GST integrates J&K with the rest of the nation in terms of indirect taxes. Further, the Lok Sabha also passed two bills extending Central GST and Integrated GST to J&K on 2nd August, 2017.

2. Government exempts SEZs from inte-grated GST

The government has exempted goods imported by units or developers of special economic zones (SEZs) from in-tegrated goods and services tax (IGST), providing relief

to SEZs. An SEZ area is considered to be a foreign terri-tory for trade operations and duties, and is mainly set up for promoting exports. Exports from SEZs grew by about 12 per cent to Rs. 5.24 lakh crore in 2016-17.

3. GST Council raises cess on cigarettes

The Goods and Services Tax (GST) Council during its 19th meeting held on July 17th, 2017 decided to increase the cess on cigarettes to offset reduced tax revenue from the product following the July 1st, 2017 rollout of the in-direct tax reform.

While the 28 per cent GST rate and 5 per cent ad va-lorem on cigarettes remain, the additional cess will change as per the length of the cigarettes and whether or not they have filters. Compensation cess may be lev-ied on cigarettes at rates equal to 1.05 times the specific excise duty rates.

GST Council meeting was called after an anomaly was detected in the compensation cess on cigarettes. The impact of cascading was not taken into consideration, which resulted in windfall gains for cigarette compa-nies.

The important policy announcements made by the Government in the month of July-August 2017 are covered in this month’s Policy Focus. Our endeavour through this section is to keep our readers abreast of the latest happenings on the policy front so that they can take an informed decision accordingly.

ECONOMY MATTERS 26

POLICY FOCUS

4. RBI makes card, online payments safer; customer liability cut

The Reserve Bank of India (RBI) has made electronic payments safer for consumers by introducing the con-cept of ‘zero liability’ and ‘limited liability’ for bank cus-tomers for any card or online fraud. The central bank has also made it mandatory for banks to register all customers for text message alerts and permit report-ing of unauthorized transactions through a reply to the alert message. The central bank’s circular covers on-line transactions as well as face-to-face transactions in stores using electronic payments. A customer will have zero liability in respect of a fraudulent transaction if there is contributory fraud or negligence on the part of the bank. The customer will also not be liable if there is a third party breach, without bank involvement, which is reported to the bank within three working days. How-ever, a customer will have limited liability for the loss in cases where the loss is due to negligence by a cus-tomer, such as where he has shared the payment cre-dentials; the customer will bear the entire loss until he reports the unauthorised transaction to the bank. The per transaction liability of the customer will be limited to the transaction value or the amount mentioned by the RBI, whichever is lower.

5. IBBI notifies rules for bankruptcy probe

The Insolvency and Bankruptcy Board of India (IBBI) has notified norms for probe against service providers under bankruptcy code. IBBI has powers to start probe against service providers registered with it without inti-mating them, according to new regulations. IBBI, which is implementing the Insolvency and Bankruptcy Code

(IBC), has notified the regulations for inspection and in-vestigation of service providers registered with it. Insol-vency professional agencies, professionals, entities and information utility are considered as service providers under the Code. The Code, which provides for a market-determined and time-bound resolution of insolvency proceedings, became operational in December 2016.

As per the regulations, the investigation authority has to serve a notice intimating the entity concerned about the probe at least ten days in advance. However, the re-quirement could be done away with on grounds such as apprehensions that the records of the particular service provider might be destroyed before the probe starts. Further, the investigating authority has powers to seize records of the service provider being probed through a court order.

6. Cabinet Clears Plan to Pipe Away HPCL Stake to ONGC

The Cabinet has given an in-principle approval to sell the government’s entire 51.11 per cent stake in Hindu-stan Petroleum Corp Ltd (HPCL) to Oil and Natural Gas Corp (ONGC) in a bid to create state-run integrated oil major that can compete with private and foreign play-ers. ONGC will be exempted from making an open offer to other shareholders of HPCL in the transaction, which is expected to be completed in a year.

In a separate decision, the cabinet also approved crea-tion of a new exchange-traded fund (ETF) for mon-etizing its stake in state-owned companies, banks and insurance firms without losing management control. While the government will retain only 51 per cent in dis-invested companies, it will retain 52 per cent in financial institutions.

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POLICY FOCUS

JULY 2017

7. The Union Cabinet has approved the disinvestment of Air India stake sale

The Union Cabinet has accepted the recommendations of the NITI Aayog and has formally approved the pri-vatisation of national airline Air India Ltd and five of its subsidiaries. A Group of Ministers (GoM) will be formed which will decide on the quantum of disinvestment. The GoM will decide on the treatment of unsustainable debt of Air India, hiving off certain assets to a shell company, spinning off and selling stakes in three profit-making subsidiaries, the quantum of disinvestment, and the eli-gibility criteria for the bidders. This group will then re-port back to the Union cabinet for final approvals.

8. The Union Cabinet has approved the recommendation of 7th Pay Commission

The Union Cabinet has approved the recommendation of 7th Pay Commission on allowances with 34 modifica-tions. The revised rates will be effective from July 1st, 2017. The revised allowances will benefit at least 47 lakh employees. The 7th Pay Commission suggested abolition of 53 allowances. Of these, the government decided not to do away with 12 allowances. This will benefit over one lakh employees belonging to specific categories in railways, posts, defence and scientific departments. The modifications approved were finalised by the Em-powered Committee of Secretaries based on the rec-ommendations of the Committee on Allowances (CoA).

9. SEBI notifies rules to levy fee on participatory notes

Markets regulator Securities and Exchange Board of India (SEBI) has notified stricter participatory notes (P-Notes) norms stipulating a fee of US$1,000 that will be levied on each instrument to check any misuse for chan-nelising black money. The new measures, which follow a slew of other steps taken by SEBI in the recent past, come at a time when the value of foreign investments through participatory notes or offshore derivative in-struments (ODIs) has surged to a seven- month high of about Rs 1.81 trillion in May-end 2017. While such in-vestments used to account for more than half of overall foreign portfolio investments (FPI) at one point, their share has now fallen to just a little over 6 per cent.

The regulator will levy a “regulatory fee” of US$1,000 on each ODI subscriber, to be collected and deposited by the issuing foreign portfolio investor (FPI) once eve-ry three years, starting from 1st April 2017. The regula-tory fee would be deposited once every three years. It has been provided that for the block of three years beginning 1st April 2017, an FPI shall collect and deposit the regulatory fee within two months from the date of notification.

10. Cabinet clears minimum wage code bill

The Union Cabinet has approved the wage code bill which will ensure a national minimum wage floor across all sectors by integrating four wage-related labour laws. The cabinet nod in a way signals the formal start of the process of consolidating 44 labour laws into four codes that the government has been talking about for the past three years. The proposed legislation is expected to benefit over 4 crore employees across the country. The wage code bill seeks to merge the Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act and Equal Remuneration Act. The bill, once approved by Parliament, will also put in place a national minimum wage. The new minimum wage norms would be appli-cable for all workers irrespective of their pay.

11. Lok Sabha passes bill to amend Companies Act

The Lok Sabha has passed the Companies Act (Amend-ment) Bill, 2016 that seeks to make significant changes to the 2013 law. The move was taken in an attempt to remove complexities and improve ease of doing busi-ness, strengthen corporate governance standards and to take stringent action against defaulting companies. The bill, which was passed by a voice vote in the lower house of the Parliament, provides for more than 40 amendments to the Companies Act, 2013. The passage of this bill will help in increasing the size of the coun-try’s economy. The amendments raise the threshold for the easy compliance scheme to Rs 100 crore from Rs 20 crore, making more companies eligible for the sim-ple compliance regime. The bill also seeks to ease rules for private placement of securities and fix an eight-year limit on reopening of past accounts against no limit in the earlier regime.

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GLOBAL TRENDS

Global Growth on a Path to Recovery, Albeit on Tenterhooks

ECONOMY MATTERS

World Bank released its latest issue of Global Economic Prospects in June 2017. This article summarises its key findings and forecast. As

per the World Bank, global growth is firming up, con-tributing to an improvement in confidence. A recov-

ery in industrial activity has coincided with a pickup in global trade, after two years of marked weakness. In emerging market and developing economies (EMDEs), obstacles to growth among commodity-exporters are diminishing, while activity among commodity-importers remains robust. Despite substantial policy uncertainty, global growth is projected to accelerate to 2.7 per cent in 2017, up from a post-crisis low of 2.4 per cent in 2016, before strengthening further to 2.9 per cent in 2018-19.

Advanced economies adopt an expansionary stanceActivity in advanced economies (AEs) is expected to gain momentum in 2017, supported by an upturn in the US economy, as previously anticipated. In the Euro Area and Japan, growth forecasts have been upgraded, re-flecting strengthening domestic demand, investment

and exports after subdued growth in 2016. As actual growth continues to exceed potential growth, the re-sulting increase in inflation and the narrowing of output gaps have raised the prospect of a less accommoda-tive monetary policy. Growth in advanced economies is hence expected to accelerate to 1.9 per cent in 2017, before moderating gradually in 2018-19.

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GLOBAL TRENDS

JULY 2017

United States

In the US, following a slowdown in 2016 that reflected investment and export weakness, growth is expected to recover this year. In early 2017, activity was tempo-rarily held back by deceleration in consumer spending, largely due to one-off factors and despite high consum-er confidence. This was partly offset by an appreciable

Euro Area

In the Euro Area, growth was robust in 2016 and started at sustained pace in 2017. Manufacturing activity and goods exports have been lifted by strengthening global trade and investment. However, headline inflation has risen as the energy price decline of early 2016 has un-wound, but core inflation and inflation expectations re-

pickup in private investment, after subdued gains in 2016. Labor market conditions have continued to im-prove in 2017, but wage and productivity growth remain sluggish. Overall, a moderate expansion in activity is ex-pected to continue. Growth is projected to rise from 1.6 per cent in 2016 to 2.1 per cent in 2017 and 2.2 per cent in 2018, before slowing to 1.9 per cent in 2019 as it moves closer to potential.

main below the European Central Bank’s (ECB) target. Growth is projected to remain at 1.7 per cent in 2017. In 2018-19, growth is expected to moderate to 1.5 per cent as the ECB unwinds exceptional policy measures such as negative interest rates and asset purchase amongst others. Prospects remain clouded by elevated policy uncertainties, election outcomes, Brexit negotiations, financial sector fragilities and policy changes in the US.

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GLOBAL TRENDS

ECONOMY MATTERS

Japan

In Japan, growth has picked up in 2017, supported by recovery in external demand. Exports have strength-ened, especially for IT and capital goods. Business in-vestment has gained momentum, reflected by a gradual shift from foreign to domestic machinery orders. While headline inflation has been positive in 2017, inflation ex-

Emerging markets and developing econo-mies recover amidst challenges

Growth in EMDEs reached a post-crisis low of 3.5 per cent in 2016, as commodity-exporters continued to stagnate and country-specific factors held back growth in some large commodity-importing EMDEs (India, Tur-key). Economic activity accelerated towards the end of 2016 and into 2017, reflecting a recovery in commodity-exporting countries due to a rebound in commodity

China

In China, GDP growth expanded to 6.7 per cent in 2016. Domestic rebalancing from investment to consumption slowed towards 2016 end, as infrastructure spending by state-owned companies and public sector accelerated, offsetting slowdown in private sector investment. How-ever, rebalancing from industry to services and from

pectations remain low, despite a steady increase in pric-es since the introduction of quantitative easing in 2013. Continued accommodative monetary and fiscal policies should support growth, which is projected to edge up to 1.5 per cent in 2017. Growth is expected to moder-ate to 1.0 per cent in 2018. In 2019, growth is forecast to slow to 0.6 percent, as a planned consumption tax hike is implemented.

prices. Domestic demand is leading the upturn in 2017, amid improving confidence and, in a number of com-modity-exporters, diminishing hindrance from earlier policy tightening. This is mirrored in rising import de-mand, which had bottomed out in late 2016. Stronger external demand is also supporting the recent improve-ment in EMDE conditions, albeit unevenly. Against an improving international backdrop, growth in EMDEs is projected to reach 4.1 per cent in 2017 and 4.5 per cent in 2018.

exports to domestic demand continued. Steady growth continued in early 2017. While consumer price inflation remains below target, producer price inflation has in-creased sharply. Growth is projected to slow to 6.5 per cent in 2017. Intermittent fiscal support will continue to calibrate growth as monetary policy tightens further. Growth is expected to moderate to 6.3 per cent in 2018 – 19, as simulative policies are slowly withdrawn.

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GLOBAL TRENDS

JULY 2017

Low-income countries

In low-income countries, growth is rebounding, as rising metal prices lift production among metal exporters and infrastructure investment continues in non-resource-intensive economies. However, some low-income

Challenges and way forward

Global activity is firming broadly as expected. Manufac-turing and trade are picking up, confidence is improving and international financing conditions remain benign while activity among commodity-importers continues to be robust. Risks to the global outlook remain tilted to the downside. These include increased trade pro-tectionism, elevated economic policy uncertainty, the possibility of financial market disruptions and over the longer term, weaker potential growth. A policy priority for EMDEs is to rebuild monetary and fiscal space that could be drawn on were such risks to materialize. Over the longer term, structural policies that support invest-ment and trade are critical to boost productivity and potential growth.

AEs have begun to shift away from a mix of exception-ally supportive monetary policy and restrictive fiscal policy. Central banks in major AEs face the challenge

countries are still struggling with declining oil produc-tion, conflict, drought and security and political chal-lenges. Growth in low-income countries is expected to strengthen during 2017-19, as activity firms up among commodity exporters.

of normalizing monetary policy without disrupting a fragile recovery or triggering financing market disrup-tions. Expansionary fiscal policy would be appropriate in a number of economies, provided it is complemented with measures to bolster medium-term fiscal sustain-ability. In China, avoiding a sharp slowdown and a disor-derly unwinding of financial vulnerabilities will require a careful balancing of policy objectives.

Inflation rates in commodity exporters and importers are converging. Easing inflation is allowing policymak-ers in some commodity exporting countries to adopt a more accommodative policy stance. Although the impact of the drop in commodity prices on govern-ment revenues in commodity exporters is beginning to wane, fiscal space remains generally constrained across EMDEs. Policies that improve the business climate and support investment are critical to boosting long-term growth.

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GLOBAL TRENDS

ECONOMY MATTERS

Acting on expected lines, US Federal Reserve main-tained the fed funds target in a range of 1.00-1.25 per cent in its meeting held in the last week of July 2017. The stance of monetary policy continued to remain accom-modative, thereby supporting some further strength-ening in labor market conditions and a sustained return to 2 per cent inflation. The Fed flagged a strengthening labour market, while sounding cautiously optimistic on economic activity. Solid job gains, as well as the decline in the unemployment rate were highlighted as posi-tive developments. To be sure, non-farm payrolls (NFP)

Inflation running below Fed’s target

The Fed acknowledged that both headline and core inflation measures have declined recently, and were running below their target rate of 2 per cent. Going

rose by 222,000 in June 2017, considerably exceeding the data for May 2017, which was revised upwards to 152,000. Unemployment rate also remained low at 4.4 per cent in June 2017.

Going forward, economic activity is likely to be driven by consumption and expanding business investment. However, the near-term risks to the economic outlook appeared roughly balanced, with the Federal Open Mar-ket Committee (FOMC) monitoring inflation develop-ments closely.

forward, as per Fed, inflation on a 12-month basis was expected to remain somewhat below 2 per cent in the near-term and stabilize around the Committee’s 2 per cent objective over the medium-term.

US Federal Reserve Stays Pat; Tapering to Start Soon

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GLOBAL TRENDS

JULY 2017

Tapering to begin “relatively soon”

The Fed indicated its intention to commence tapering its balance sheet “relatively soon”. According to the post-hike statement, “The FOMC currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.” The lack of mention of a date at this meeting was because members were in disagreement regarding the appropriate time to commence tapering, as indicated by the minutes of the June 2017 policy. The Fed’s balance sheet currently stands at around US$4.5 trillion and it’s possible that by re-injecting some of those funds back into the market, the Fed could cause

borrowing costs to rise even if it doesn’t execute fur-ther rate hikes.

Going forward

The central bank had indicated earlier that it would raise interest rates at least three times this year, and we al-ready have seen two rate hikes. The third rate hike this year will be contingent on the following two factors: Firstly, the Fed will watch for a pickup in inflation over the next few months, as they have credited the current slowdown to temporary factors. Secondly, the Fed will also closely monitor the market reaction to its balance sheet tapering process, as this is likely to start before another rate hike this year.

ECONOMY MONITOR

34ECONOMY MATTERS

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ECONOMY MONITOR

JULY 2017