ECONOMY MATTERS 2

MAY 20141

FOREWORD

UK’s economy picked up pace in the first quarter of the current year, growing by 3.1 per cent on a y-o-y basis in the first quarter of 2014, as compared to 0.5 per cent in the previous quar-ter. The recovery was mainly attributable to improvement in domestic demand drivers and a low base. IMF in its recent economic update provided a rosy prognosis for UK’s economy. Bank of England too raised its growth forecast for the year. Businesses across the UK are ex-panding and creating jobs, hence increasingly sunny predictions for growth are a testament to that.

Domestically, GDP (at factor cost) for the fourth quarter of last fiscal came in at 4.6 per cent on a y-o-y basis taking the whole year’s growth to 4.7 per cent, lower than the advance es-timates of 4.9 per cent. This is the second consecutive year of sub-5 per cent annual GDP growth. GDP was weighed down by a multi-year low industrial growth to the tune of 0.4 per cent. However, in the current fiscal, we expect GDP to grow in a range of 5.5-6.0 per cent, under business-as-usual scenario. Growth is expected to pick-up aided by implementation of stalled projects, debottlenecking of the mining sector, some recovery in industry on the back of higher external demand, and moderating inflation giving legroom to the RBI to reduce in-terest rates. In some good news for the economy, CPI inflation nudged down to 8.3 per cent in May 2014 from 8.6 per cent in the previous month on the back of moderating food prices. The easing of CPI inflation is in line with the RBI’s projected path, however, with the risks looming large from the El Nino disturbance, upside pressure to CPI in the months to come, cannot be ruled out.

In order to revive growth, strong measures are needed by the policymakers, some of which need to be announced in the forthcoming Union Budget due next month. The important measures needed for reviving growth have been highlighted by CII in its Pre-Budget Memo-randum submitted to the Ministry of Finance. These measures relate to boosting agricultural production, containing fiscal deficit, supporting investment in infrastructure, rejuvenating manufacturing, creating facilitative climate for investments and tax reforms. In the current issue’s Focus of the Month, experts give their viewpoint on some of these critical areas.

Chandrajit BanerjeeDirector-General, CII

MAY 20143

EXECUTIVE SUMMARY

ECONOMY MATTERS 4

Global TrendsThe economic recovery in UK is fast gaining momentum.

UK real GDP grew by 3.1 per cent in y-o-y basis in the first

quarter of 2014 (1Q2014), as compared to 0.5 per cent in the

previous quarter, attributable to improvement in domestic

demand drivers and a low base. In some more good news

for the economy, UK’s 1Q2014 unemployment rate fell to a

five-year low of 6.8 per cent. Moving closer to India, as per

the World Bank’s latest bi-annual report on the South Asian

economies, the overall short and medium term outlook for

South Asia remains cautiously positive. Regional real GDP

growth in South Asia is ex¬pected to gradually increase from

4.8 per cent in 2013 to 5.2 per cent in 2014.

Domestic TrendsGDP (at factor cost) for the fourth quarter of last fiscal came in at 4.6 per cent on a y-o-y basis taking the whole year’s growth to 4.7 per cent, lower than the advance estimates of 4.9 per cent. This is the second consecu-tive year of sub-5 per cent annual GDP growth. GDP is expected to recover to a range of 5.5-6.0 per cent in the current fiscal on the back of expected improvement in the domestic demand drivers. In some positive news for the economy, CPI inflation eased to 8.3 per cent in May 2014 from 8.6 per cent in March 2014, driven by low food prices. Meanwhile, RBI maintained ‘status-quo’ in its monetary policy review held on June 3rd, 2014. It however did reduce the SLR by 50 bps. On the external front meanwhile, for 2013-14 as a whole, CAD narrowed sharply to US$32.4 billion (1.7 per cent of GDP) in 2013-14 from US$87.8 billion (4.7 per cent of GDP) in 2012-13, primarily due to a contraction in merchandise imports coupled with a rise in service exports.

Corporate PerformanceIndian firms showed signs of a recovery, as sales in the fourth quarter of last fiscal (4QFY14) rose at the fastest pace in six quarters and profit growth stabilized, spur-ring investor optimism that the worst is over for corpo-rate earnings. The net sales of companies (manufactur-ing plus services) in the fourth quarter expanded by 9.3 per cent on a y-o-y basis, up from 4.0 per cent in the comparable period last year. Both manufacturing and services sectors have witnessed sharp acceleration in sales growth in the fourth quarter. Our analysis is based on the financial performance of 2250 companies (1507-

Manufacturing and 743 Services and excludes oil & gas companies), using a balanced panel, extracted from the Ace Equity database. The expenditure costs of the firms, on an aggregate basis, moderated by 8.8 per cent in the reporting quarter, as compared to 10.8 per cent in the comparable time period last year. This led to im-provement in the net profit of firms during the report-ing quarter.

Sector in Focus: Ease of Doing Business in IndiaIndia is one of the fastest growing economies in the world. The high potential of the Indian market driven by an emerging middle class, cost competitiveness and a huge pool of talent makes it one of the most attractive investment destinations. Yet, according to the World Bank’s ‘Doing Business 2014’ report, India is ranked 134 out of 189 countries in the overall ease of doing busi-ness. Concerned with India’s dismal rankings in World Bank’s ‘Ease of Doing Business’, a survey-based report on the prevailing business regulatory environment in the country was undertaken by CII with the support of KPMG. The study focused on few key parameters of ‘Doing Business’ such as land acquisition, starting a business, taxation and contract enforcement. In this is-sue’s Sector in Focus, we present the key highlights of the survey findings.

Focus of the Month: Reviving GrowthAfter a dismal performance of economic growth in the last two fiscals, averaging an anemic 4.6 per cent, the election of a new government with a decisive mandate has brought har-binger of hope for the economy. Economic growth slowed down to 4.7 per cent in 2013-14, the second consecutive year of sub-5 per cent annual GDP growth. Inflation remains high along with stress on the fiscal front. Hence, in order to revive growth, strong measures are needed by the policy-makers, some of which need to be announced in the forth-coming Union Budget due next month. The important meas-ures needed for reviving growth have been highlighted by CII in its Pre-Budget Memorandum submitted to the Ministry of Finance. These measures relate to boosting agricultural production, containing fiscal deficit, supporting investment in infrastructure, rejuvenating manufacturing, creating fa-cilitative climate for investments and tax reforms. In the current issue’s Focus of the Month, experts give their view-point on some of these critical areas.

MAY 20145

President Highlights Government’s Agenda in His Address to the Parliament

- Manufacturing growth has been dismal over the last couple of years, hence in order to improve the situation; government will set up world class invest-ment and industrial regions, particularly along the Dedicated Freight Corridors and Industrial Corri-dors spanning the country.

- Containing food inflation will be the topmost prior-ity for the government. There would be an empha-sis on improving the supply side of various agro and agro-based products. Effective steps will be taken to prevent hoarding and black marketing.

- Agriculture sector remains important to our econ-omy given the high share of people dependent on it for livelihood. Government will incentivize the setting up of food processing industries and also revamp the existing cooperative sector laws to remove anomalies and lacunae. Additionally, ‘Pradhan Mantri Krishi Sinchayee Yojana’ with the motto of ‘Har Khet Ko Paani’ will be launched.

- Government will create a policy environment which is predictable, transparent and fair. It will embark on rationalisation and simplification of the tax re-gime to make it non-adversarial and conducive to investment, enterprise and growth. Government will make every effort to introduce the GST while addressing the concerns of States. Reforms will be undertaken to enhance the ease of doing business.

- For infrastructure development, a fast-track invest-ment friendly and predictable PPP mechanism will be put in place. Additionally, a fast, time-bound and well monitored programme for execution of the National Highways programme will be initiated, to overcome the stagnancy of the past few years. De-velopment of ports will also be a priority with the government.

- In order to ease the stress coming on urban infra-structure, government will build 100 Cities focussed on specialized domains and equipped with world class amenities. By the time the nation completes 75 years of its Independence, every family will have a pucca house with water connection, toilet facili-ties, 24x7 electricity supply and access.

- Government will strive to end the rural-urban di-vide guided by the idea of Rurban; providing urban amenities to rural areas while preserving the ethos of the villages.

- Providing adequate jobs to the youth is impor-tant for achieving inclusive growth. In this respect the NDA government would adopt the motto of “Har Haath Ko Hunar”, through which it will strive to break the barriers between formal education and skill development, and put in place a mecha-nism to give academic equivalence to vocational qualifications.

- The country needs a holistic health care system that is universally accessible, affordable and effective. To achieve this objective, government will formulate a New Health Policy and roll out a National Health As-surance Mission.

- Government will come out with a comprehensive National Energy Policy and focus on development of energy related infrastructure, human resource and technology.

- Steps will also be taken to improve the working of the federal structure of India. To achieve this, fora like the National Development Council and the In-ter-State Council will be reinvigorated. The Centre will be an enabler in the rapid progress of States through Cooperative Federalism.

Addressing the joint session of Parliament, President Shri Pranab Mukherjee outlined the agenda of the new government pertaining to the social and eco-nomic sector. The key highlights of his address are as follows:

ECONOMY MATTERS 6

GLOBAL TRENDS

UK Economy on the Mend

UK real GDP grew by 3.1 per cent in y-o-y basis in the first quarter of 2014 (1Q2014), as compared

to 0.5 per cent in the previous quarter, attributable to improvement in domestic demand drivers and a low base. On q-o-q basis, UK real GDP grew by 0.8 per cent in 1Q2014, unchanged from the first estimate which was released in the last week of April 2014. Notably, this was UK’s first fifth consecutive quarterly growth. The economic recovery in UK is fast gaining momentum. In

its latest review released in April 2014, the Internation-al Monetary Fund (IMF) said it expected the UK to be the best-performing of the world’s largest economies in 2014, with growth of 2.9 per cent for the year. The independent Office for Budget Responsibility (OBR) of UK predicts 2.7 per cent growth, and in February 2014 the Bank of England (BoE) raised its 2014 forecast to 3.4 per cent. Businesses across the UK are expanding and creating jobs, hence increasingly sunny predictions for growth are a testament to that. In some more good news for the economy, UK’s 1Q2014 unemployment rate fell to a five-year low of 6.8 per cent. The data print was below the 7 per cent threshold announced by the BoE in the guidance regarding the future path of mon-etary policy it had provided in August 2013.

MAY 20147

GLOBAL TRENDS

Real GDP growth in 1Q2014 was primarily driven by do-mestic demand—personal consumption expenditure (PCE) and investments (Gross Capital Formation, GCF). PCE grew by 2.1 per cent on y-o-y basis in 1Q2014, as against 2.2 per cent in the previous quarter. With this, PCE has now increased for ten consecutive quarters. PCE was supported by the housing market, which has become the prime concern for policymakers recently. Nevertheless, it is important to note that government-

From the supply-side, almost all the components of GDP fared well. Agriculture grew by 1.8 per cent in the 1Q2014 as compared to a contraction to the tune of 2.4 per cent in the previous quarter. Manufacturing put up one of its strongest performance and grew by 3.5 per

run Help-to-Buy (HTB) scheme has not had a significant impact on housing prices, which have grown 13 per cent since the beginning of 2013. GCF grew by a robust 10.4 per cent in 1Q2014 as compared to 4.1 per cent in the previous quarter, helped by fixed investments (Gross Fixed Capital Formation, GFCF) growing at a healthy rate for the second consecutive quarter. GFCF grew by 8.5 per cent as compared to 8.8 per cent in the previous quarter.

cent after moving into the positive territory in 4Q2013 and languishing in the negative territory for many quar-ters before that. Service sector grew by 2.9 per cent, helped by 5.1 per cent growth in its sub sector of ‘distri-bution, hotels & catering’.

ECONOMY MATTERS 8

GLOBAL TRENDS

As far as inflation is concerned, the consumer price in-dex (CPI) in the UK grew by 1.8 per cent on y-o-y basis in April 2014, as against 1.6 per cent in March 2014. The primary driver of higher inflation was ’transport‘—es-pecially air and sea fares—wherein prices grew 1.6 per, following a decline of 1 per cent in March. On the other hand, prices of ‘food, beverages & tobacco (FBT)’ grew at the slowest pace in eight years. Inflation in FBT stood at 1.4 per cent in April 2014, almost half of that in March. The increase in inflation in April 2014 could be attribut-able mainly to rise in air and sea fares; hence this upturn could be temporary, with inflation likely to remain un-der 2 per cent this year, which also happens to be BoE’s annual inflation target.

In its latest bi-annual report on South Asian economies, World Bank, highlighted that the overall short and me-dium term outlook for South Asia remains cautiously positive. The report mentions that the external vulnera-bilities were gradually giving way to domestic downside risks as primary concern for growth and macroeconomic stability. Hence, as previous regional economic updates have argued, any positive development in growth will depend on building buffers for macroeconomic stability, strength¬ening the investment climate, and removing infrastruc¬ture bottlenecks. As per the World Bank, in line with the overall outlook on developing coun¬tries, regional growth in South Asia is projected to gradu-ally increase. As higher import demand and economic growth in developed countries is expected to outweigh adverse effects from potentially lower capital inflows, regional real GDP growth in South Asia is ex¬pected to gradually increase from 4.8 per cent in 2013 to 5.2 per cent in 2014. The main pillars of this growth pro¬jection will be solid pick up in gross fixed investment as well as continued solid export growth.

In the report, World Bank highlights the economic outlook of the key South Asian economies. As per the World Bank, bol¬stered by a permanently more com-petitive exchange rate (hence solid export growth) and

BoE in its monetary policy review held on 5th June 2014, held the policy rates unchanged at 0.5 per cent, with the expectation of raising the rates only gradually. In the same vein, it may be worth adding that, productivity (both per person and per hour worked) declined by 0.1 per cent on q-o-q basis in 1Q2014, which does not bode well from long-term prospects. This is increasingly be-coming a concern for the Monetary Policy Committee. BoE assumes productivity to pick up soon, or else wage growth, which is also expected to pick up, could be-come inflationary. If so, the Bank might have to tighten its monetary policy before 3Q2015, which is the market consensus for the first rate hike.

progress towards clear¬ance of important investment projects (hence continuing investment recovery), India may see an acceleration of growth (in factor costs) in FY2014 to 4.8 per cent, further to increase to 5.7 per cent in FY2015 (or an equivalent of 5.6 percent in cal-endar year 2014, at market prices). Pakistan is also ex-pected to build further momentum to projected FY2014 growth of 4 per cent supported by less load shedding, resilient remittance flows, manufacturing export per-formance and a dynamic service sector, the multilateral bank elucidates. In its report, World Bank further points out that, Nepal will recover from a bad year (FY2013) in terms of ag¬ricultural growth and budget execution, and likely grow at around 4.5 per cent with strong re-mittances addition-ally boosting consumption and ser-vice sector growth. Sri Lankan real GDP growth too is forecast to benefit from an increase in potential capac-ity from new infrastructure investments and rebuilding, hence potentially continuing to grow at 7.3 per cent of GDP in 2014. Bhutan, as per the report, is expected to grow at an impressive rate of 7.3 per cent in 2014 from 6.5 per cent in 2013 supported by ongo¬ing hydro and industrial construction and commission¬ing, possible lifting of the bans on imports, disbursements from India to finance the 11th Five-Year-Plan, expansion in tourism activities. In Maldives, real GDP growth stood at 3.7 per

Outlook for South Asia Remains on the Upside: World Bank Report

MAY 20149

GLOBAL TRENDS

cent in 2013 and the outlook is positive, at 4.5 per cent for 2014. Tourism demand is slowly picking up having a positive impact on growth in the non- tourism sectors too.

However, as per the World Bank report, two excep-tions stick out: Afghanistan is expected to suffer from con¬tinued uncertainty regarding transition as well as lower agricultural output, hence, only projected to grow at 3.2 per cent in 2014. However, in the medium term, post tran¬sition growth may reach around 5 per

The World Bank report further highlights that despite improvement in growth momentum across most of the South Asian economies, there are formidable domestic challenges in the form of financial sector vulnerabilities and continued weakness in revenue collection. In other words, to provide incentives for efficient invest¬ment – both private and public – remains a necessary condition for achieving faster and sustained growth in South Asia. As the effects from external tapering grad¬ually wear off, potential pressures that have built up in the finan-

cent during 2015 and 2016, conditional upon a relatively stable security environment and agriculture as well as mining driving the acceleration. Bangladesh is set to pay the bill of political turmoil in terms of stagnating private investment paired with lower consumption due to decreasing remittance flows. Ultimately this leads to subdued service sector and industrial activity, with real GDP growth projected to come down to 5.4 per cent in FY2014.

cial sectors in the recent past may threaten fi¬nancial sector stability or prevent banks from efficiently inter-mediating and boosting private investment and growth. In addition, as inflation remains high, although with a likely easing of pressures in the medium term, monetary policy space remains constrained. Under this backdrop, the South Asian economies would have to tread with caution and should try to remove the internal domestic constraints for giving a boost to economic growth as external environment slowly starts turning favourable.

ECONOMY MATTERS 10

GLOBAL TRENDS

Other Global Developments During the Month• Euro Zone GDP in the 1Q2014 grew by 0.9 per cent on y-o-y basis as compared to 0.5 per cent in the previous

quarter. The improved performance of the cohort was led by Germany. Elsewhere, economies were either stagnant or continue to contract. The French economy has stagnated in recent quarters. In Italy and Nether-lands, GDP in the opening quarter of 2014 was 0.5 per cent lower than a year ago. There are signs the Spanish economy is beginning to improve, but it is a slow recovery, with GDP up by just 0.6 per cent in the first quarter on year-earlier levels. There were significant falls in GDP in Portugal and Finland in the first quarter of the cur-rent year.

• German real GDP grew by 2.3 per cent on y-o-y basis in Q1 2014, following 1.4 per cent growth in Q4—mark-ing its highest growth in three years. The press statement released by Destatis (the official statistics agency) states that one of the reasons for strong growth was extremely mild weather, which supported investment in general and construction, in particular. The entire growth in real GDP in Q1 2014 was driven by domestic demand, which was partly offset by negative contribution from net exports. The leading indicators, such as PMIs, point to continued growth in Germany in Q2 2014.

• China’s factory sector turned in its best performance in five months in May 2014. The HSBC Flash China Manu-facturing Purchasing Managers’ Index (PMI) recovered to 49.7 in May 2014 from April’s final reading of 48.1. But the data is a touch below the 50-point level that separates a monthly growth in activity from a contrac-tion, indicating that manufacturers actually experienced a slight drop in business.

• US non-farm payrolls (NFP) increased by 217K in May 2014, broadly in line with market consensus of 215K increase. Although job addition in May 2014 was lower than in April (282K), the outcome was largely along expected lines as April’s high reading was considered to partially reflect delayed hiring after a severe winter. Thus, NFP has increased by an average of 214K in 2014 so far, compared to 2013’s average of 194K.

• As per the household survey, the unemployment rate in US remained flat at 6.3 per cent in May 2014, defying market expectation of a rise to 6.4 per cent. However, the recent decline in the unemployment rate is partially attributable to the persistent fall in the labour force participation rate (LFPR). The LFPR remained flat at a 35-year low of 62.8 per cent in May.

• The unemployment rate in the UK fell to 6.6 per cent in the three months ending April 2014, as against 6.8 per cent in the previous rolling quarter (ending March 2014). Importantly, the number of unemployed people declined 161K QoQ (346K YoY), as employment gained 350K QoQ (784K YoY) in the quarter ending April 2014. For the first time in at least the past four decades, employment added more than 300K in a quarter. Conse-quently, economic active population (or labour force participation) rate continued to rise.

MAY 201411

DOMESTIC TRENDS

GDP Remains Sluggish in FY14; Recovery on Cards in FY15

GDP (at factor cost) for the fourth quarter of last fis-cal came in at 4.6 per cent on a y-o-y basis taking

the whole year’s growth to 4.7 per cent, lower than the advance estimates of 4.9 per cent. This is the second consecutive year of sub-5 per cent annual GDP growth. GDP was weighed down by a multi-year low industrial growth to the tune of 0.4 per cent. Healthy agriculture performance was the only bright spot. At market pric-

es, GDP came at 5.0 per cent in 2013-14 as compared to 4.7 per cent in the previous year. Private consumption growth grew at respectable rate despite high interest rates. Gross fixed capital formation contracted in the fiscal while exports grew at a healthy rate. However, in the current fiscal, we expect GDP to grow in a range of 5.5-6.0 per cent, under business-as-usual scenario. Growth is expected to pick-up aided by implementa-tion of stalled projects, debottlenecking of the mining sector, some recovery in industry on the back of higher external demand, and moderating inflation giving leg-room to the RBI to reduce interest rates.

ECONOMY MATTERS 12

DOMESTIC TRENDS

From the supply-side, agriculture grew at a robust 4.7 per cent in 2013-14 as compared to 4.5 per cent in the previous fiscal on the back of good rainfall received last year. However, as there are risks to rainfall this year on account of El Nino concerns, agriculture growth will be much lower in the current fiscal. Industrial growth dis-appointed at a lacklustre 0.4 per cent in 2013-14 under-

From the supply-side, agriculture grew at a robust 4.7 per cent in 2013-14 as compared to 4.5 per cent in the previous fiscal on the back of good rainfall received last year. However, as there are risks to rainfall this year on account of El Nino concerns, agriculture growth will be much lower in the current fiscal. Industrial growth dis-appointed at a lacklustre 0.4 per cent in 2013-14 under-

pinned by contraction in manufacturing and mining sec-tor growth, keeping with the trend seen in the IIP index as well. Construction growth was dismal at a mere 1.6 per cent in 2013-14. Services grew at a respectable 6.8 per cent in 2013-14 mainly on the back of healthy growth in its sub category ‘financing, insurance, real estate & business service’.

pinned by contraction in manufacturing and mining sec-tor growth, keeping with the trend seen in the IIP index as well. Construction growth was dismal at a mere 1.6 per cent in 2013-14. Services grew at a respectable 6.8 per cent in 2013-14 mainly on the back of healthy growth in its sub category ‘financing, insurance, real estate & business service’.

MAY 201413

DOMESTIC TRENDS

The results of the recently concluded 16th Lok Sabha saw the Bharatiya Janata Party (BJP) winning absolute majority, the first national party in the last 30 years to do so. Along with its alliance partners, the National Democratic Alliance (NDA) won a record 336 Lok Sabha seats. This is the first time since 2004 that the ruling coalition will command a majority in the Lok Sabha. At a time when the economy has been struggling to come out of the onslaught of slowdown, the absolute major-ity which has been secured by the BJP under the leader-ship of Shri Narendra Modi, will come in handy for tak-ing bold policy decisions and ushering in a new era of economic reforms in the country. Reforms are urgently required to address investment revival and improve the conditions for doing business across all major sectors such as agriculture, manufacturing, mining, services and infrastructure, to name a few. At the same time, reforms are also required for strengthening social sec-tors such as education, health, skill development and governance.

With a decisive mandate that the BJP has achieved, the new Government would be in a position to take tough decisions that are urgently needed to revive economic growth and create employment. Prudent macroeco-nomic management, backed by a strong majority in the Parliament, would help economy recover to at least 6.5 per cent GDP growth rate in 2014-15 as against an esti-mated growth of 4.9 per cent in 2013-14. With a strong thrust on economic reforms, it is possible for the GDP growth rate to gallop back to around 8 per cent level in the next two to three years. CII would partner with policymakers for action on top issues:

• Introduction of GST – CII has suggested a compre-hensive GST with a low rate and covering all goods and services that would boost industry.

• Fiscal consolidation and containment of subsidies – Industry would expect the Government to adhere to fiscal deficit targets and bring out a roadmap for achieving them.

• Containing inflation by addressing supply-side bot-tlenecks – CII has called for better laws governing marketing of perishables and other agricultural products and greater investment by the private sec-tor in cold chain, storage and marketing infrastruc-ture in PPP mode.

• Promoting investment- From the point of view of sending a clear message to the investor commu-nity at large, CII recommends that the Government should give an urgent attention to issues arising out of the Land Acquisition Act and the new Companies Act

• Monetary easing – CII strongly calls for reduction in the repo rate by 100 bps during the current year.

• Stable and competitive exchange rate – India needs to guard against volatile short-term flows and pro-tect its currency to promote exports.

• Mining – CII expects a strong intervention and co-ordination to resolve multiple issues in the mining sector relating to allocation of natural resources, in-volvement of private sector and availability of fuel for power sector.

OutlookWe expect GDP to recover to a range of 5.5-6.0 per cent in the current fiscal on the back of improvement in the domestic demand drivers. With a stable government at the centre, growth is expected to receive an upshot. On the policy front, we expect the Government to focus primarily on infrastructure investment, tackling high inflation es-pecially for food and presenting a credible fiscal roadmap However, first half growth may still be slightly muted and substantial recovery is only expected in the second half when the capex cycle is likely to show some improvement.

New Government at the Helm

ECONOMY MATTERS 14

DOMESTIC TRENDS

• PPP - An institutional mechanism to renegotiate the terms of concession in Public Private Partnership contracts in infrastructure could help resolve stuck funds.

• Governance and administrative reforms – CII rec-ommends expansion of e-governance to simplify administrative processes and clearances. These should help to improve and facilitate the environ-ment for doing business.

• Promoting employment - Restructuring labour laws including introduction of Fixed Term Employment for industry to hire manpower on short term as-

Industrial production growth returned to the positive terrain in April 2014 after remaining in the negative territory for two consecutive months. In April 2014, it stood at 3.4 per cent after contracting by 0.5 per cent in the month before. The main drivers of growth were electricity and capital goods sector. Manufacturing also posted respectable growth rate, given its dismal per-formance for most period last year. The improvement in industrial output in April was expected as core sec-tor output, which has a weight of 37.90 per cent in the Index of Industrial Production (IIP), recorded a 4.2 per cent increase in output during April 2014 as compared to 2.5 per cent in the previous month. Coal production increased 3.3 per cent, while the electricity generation

signments would help to create new jobs on a large scale.

• Ease of Doing Business: CII is of the opinion that India needs to move up significantly on the ease of doing business index, on which India is ranked 134 out of 189 countries assessed by the World Bank. The time bound target should be to reach top 10.

• One of the biggest issues that industry has had to

grapple with in the recent past has been retrospec-

tive taxation. CII would urge the new government to ensure that no retrospective changes are made to tax policies in the future

increased 11.2 per cent in April 2014 over April 2013. The production of fertilizer increased 11.1 per cent, while that of steel and cement also galloped 3.1 per cent and 6.7 per cent in April 2014. However, the output of crude oil declined 0.1 per cent, while that of the natural gas and petroleum refinery also dipped 7.7 per cent and 2.2 per cent in the reporting month. The sequential momentum as indicated by the movement in the seasonally-adjust-ed month-on-month series, too, showed that industrial output growth accelerated in April 2014. For 2013-14 as a whole industrial production had declined by 0.1 per cent as compared to 1.1 per cent growth recorded in 2012-13

Industrial Output Grows at Fastest Pace in 13 Months

MAY 201415

DOMESTIC TRENDS

On the sectoral front, output of the manufacturing sec-tor, which constitutes over 75 per cent of the index, grew by 2.6 per cent in April 2014 as compared to de-cline of 1.3 per cent in the previous month. In terms of industries, fourteen (14) out of the twenty two (22) in-dustry groups (as per 2-digit NIC-2004) in the manufac-turing sector showed positive growth during the month of April 2014 as compared to the corresponding month of the previous year. The industry group ‘Electrical ma-chinery and apparatus n.e.c.’ showed the highest posi-tive growth of 66.0 per cent, followed by 9.6 per cent in ‘Machinery and equipment n.e.c.’ and 9.1 per cent in ‘To-bacco products’. On the other hand, the industry group ‘Radio, TV and communication equipment & apparatus’ posted the highest negative growth of (-) 31.6 per cent, followed by (-) 22.1 per cent in ‘Wearing apparel; dress-ing and dyeing of fur’ and (-) 14.6 per cent in ‘Motor ve-hicles, trailers & semi-trailers’. Mining sector, which had turned the corner in the last couple of months, grew by 1.2 per cent in April 2014 as compared to 0.3 per cent growth in the previous month. Electricity sector output grew at a spectacular rate of 11.9 per cent in the first

month of the fiscal as compared to 5.4 per cent in the previous month.

On the use based front, volatile capital goods segment output, grew at a double-digit rate of 15.7 per cent in April 2014 after remaining in the negative territory for the last four months. The sector’s highest growth in the last 9 months was partly attributable to a favourable base effect of last year. Intermediate goods which reg-istered steady growth for most part of last fiscal, con-tinued its good performance in April 2014 too, growing by 4.4 per cent. Basic goods too performed well and grew by 6.8 per cent in April 2014. In contrast, consumer goods, continued its dismal performance, contracting for the seventh consecutive month in April 2014. Both its sub-sectors- durables and non-durables contracted in the reporting month. Consumer durables output contracted in all the months of last fiscal, signalling the depressed consumption demand in the economy. Con-sumer non-durables, in contrast, posted steady growth last year. Hence, its contraction in the first month of the fiscal is a worrying trend.

OutlookThe return of industrial growth to the positive terrain is noteworthy and has rekindled the hope of industrial re-covery which is critical to lift the economy and mark a return to the path of growth. What is encouraging is that all the three major segments of industry viz mining, manufacturing and electricity posted positive growth. The double digit growth of capital goods could mark a beginning of an upturn in investments backed by an improvement in business sentiments and fast clearances of stalled projects. Going forward, CII expects that quick and proactive government policies would return the ‘feel good’ factor and firm up growth.

ECONOMY MATTERS 16

DOMESTIC TRENDS

Wholesale prices-based inflation in May 2014 acceler-ated to a five-month high of 6.0 per cent, driven up by high food and fuel cost. The reading for March 2014 WPI inflation was revised to 6.0 per cent from 5.7 per cent earlier. Total food inflation (primary and manufacturing) accelerated to 7.0 per cent in the May 2014 as compared to 6.3 per cent in the previous month. In contrast, CPI inflation eased to 8.3 per cent in May 2014 from 8.6 per cent in April 2014. While rise in food inflation was one of the reasons behind jump in WPI inflation, CPI infla-tion eased due to moderation in its food inflation com-ponent. To be sure, a drop in food inflation to 9.3 per

Primary inflation jumped to a five-month high of 8.6 per cent in May 2014 from 7.1 per cent in the previous month. This was mainly attributable to an uptick of in-flationary pressures in both its food and non-food com-ponents. Primary food inflation accelerated to 9.5 per cent from 8.6 per cent in April 2014. The volatility seen in food inflation in the last couple of months is a matter of concern as going forward, the prospects of El Nino weather event occurring this monsoon season, threat-ens to trigger lower production of summer crops such as rice, sugarcane and oilseeds. Primary non-food infla-tion too inched up to 4.9 per cent in May 2014 as against 3.1 per cent in the previous month. Likewise, inflation in minerals jumped to twenty-month high of 8.8 per cent, partly due to a low base effect of last year.

cent from 9.6 per cent earlier supported the drop in CPI. Within food, cereal inflation fell to a 21-month low of 8.8 per cent. Meanwhile, fuel inflation dropped to a fresh record low of 5.1 per cent. Core CPI inflation too decel-erated to 11-month low of 7.7 per cent and is likely to be a source of relief for the RBI. However, an enhanced possibility of an El Niño in 2014 could push up CPI infla-tion with the weight of agriculture-related articles ac-counting for 50 per cent of the CPI. However, on the up-side, inflation is likely to be capped as the lagged impact of previous rate hikes seeps through and a strong base effect from last year lowers headline inflation.

Fuel inflation accelerated to 10.5 per cent in May 2014 as compared to 8.9 per cent in the previous month. In-flation in high-speed diesel moved up to 14.2 per cent in May 2014 from 13.7 per cent in the previous month. Inflation in petrol also galloped to twenty-eight month high of 12.3 per cent in the reporting month. Going for-ward, there is an impending threat of further increase in fuel prices, if the government accepts recommenda-tions of the Saumitra Chaudhuri Committee on Auto Fuel Vision & Policy 2025, which has recommended that the petrol and diesel prices be hiked by 75 paise a litre each to upgrade fuel standards in the economy.

Manufacturing inflation increased marginally to 3.5 per cent in May 2014 as compared to 3.2 per cent in the previous month. Worryingly, non-food manufacturing

CPI Inflation Eases in May 2014, while WPI Inflation Rises

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DOMESTIC TRENDS

A considerably ‘dovish’ RBI in its second bi-monthly monetary policy review held on June 3rd, 2014 Reserve Bank of India (RBI) chose to keep the repo rate and cash reserve ratio (CRR) unchanged at 8.00 per cent and 4.0 per cent respectively, however it did signal the possi-bility of reduction in interest rates if the fall in inflation amplifies during the year. Additionally, RBI reduced the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 23.0 per cent to 22.5 per cent of their NDTL with effect from the fortnight begin-

ning June 14, 2014 apart from reducing the liquidity pro-vided under the export credit refinance (ECR) facility from 50 per cent of eligible export credit outstanding to 32 per cent with immediate effect. The reduction in SLR is meant to free more resources of the banking sector for onward lending which in turn will spur investment and growth. But in the current scenario, when banks are already investing in excess of the mandated SLR, will this move help the markets, is a moot question to ask (see Box I).

RBI in ‘Wait-and-Watch’ Mode; Keeps Policy Rates Unchanged

OutlookThe easing of CPI inflation in May 2014 on the back of lower food prices is a great relief for the policymakers. Core CPI inflation has also now decelerated to its 11-month low. However, with the danger of El Nino looming large over the economy this year, a rise in food inflation in the latter part of the year cannot be ruled out. With the RBI recently re-emphasising its intent to lower CPI inflation to 8 per cent by January 2015 and to 6 per cent by January 2016, RBI is expected to remain in a wait-and-watch mode for few more quarters.

or core inflation, which is widely regarded as the proxy for demand-side pressures in the economy, inched up to to 3.8 per cent during the month as compared to 3.4 per cent in April 2014. In the coming months, we expect

core WPI to hover around 3.0-3.5 per cent, RBI’s comfort level for this inflation measure. Manufacturing food in-flation showed a marginal uptick during the month.

ECONOMY MATTERS 18

DOMESTIC TRENDS

RBI in its policy mentioned that the lead indicators sig-nal the continuation of sluggish economic activity in the first quarter of the current fiscal. However, in view of the decisive mandate obtained by the new govern-ment, the hopes of implementation of some concrete policy measures has risen, which in turn will aid the uptick in aggregate demand during the course of the year. In view of the evolving situation, RBI maintained its growth forecast in a range of 5-6 per cent for 2014-15 with risks evenly balanced around the central estimate of 5.5 per cent. Retail inflation measures by CPI on the other hand still remains elevated due to high food pric-es. CPI inflation excluding food and fuel has moderated gradually since September 2013 although it is still ele-vated. “El Nino effects, geo-political tensions and their impact on fuel prices, and uncertainties surrounding the setting of administered prices appear at this stage to be balanced by the possibility of stronger government action on food supply and better fiscal consolidation as well as the pass through of recent exchange rate appre-ciation”, RBI emphasised in the policy statement. RBI also reiterated its commitment to keep the economy on a disinflationary course, taking CPI inflation to 8 per cent by January 2015 and 6 per cent by January 2016 .

Apart from stating its decision on the key interest rates, the Central Bank announced the following policy meas-ures as well:

- With a view to improving the depth and liquidity

in the domestic foreign exchange market, it was decided to allow foreign portfolio investors to par-ticipate in the domestic exchange traded currency derivatives market to the extent of their underlying exposures plus an additional US$10 million. Further-more, it was also been decided to allow domestic entities similar access to the exchange traded cur-rency derivatives market.

- As a prudential measure, the eligibility limit for for-eign exchange remittances under the Liberalised Remittance Scheme (LRS) had been reduced to US$ 75,000 last year. In view of the recent stability in the foreign exchange market, it has been decided to enhance the eligible limit to US$125,000 without end use restrictions except for prohibited foreign exchange transactions such as margin trading, lot-tery and the like.

- At present, only Indian residents are allowed to take Indian currency notes up to Rs 10,000 out of the country. Non-residents visiting India are not permitted to take out any Indian currency notes while leaving the country. With a view to facilitat-ing travel requirements of non-residents visiting India, it has been decided to allow all residents and non-residents except citizens of Pakistan and Bang-ladesh to take out Indian currency notes up to Rs 25,000 while leaving the country.

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DOMESTIC TRENDS

The Reserve Bank of India’s move to reduce the Statu-tory Liquidity Ratio (SLR) by 50 bps to 22.5 per cent in its second bi-monthly review of monetary policy held on June 3rd, 2014 caught many people by surprise. It was purported to be a clear message by the RBI that growth is a priority and this move would help availabil-ity of capital, when credit demand recovers. The last time, RBI tinkered with SLR was in July 2012, when it was reduced by full 1 percentage points. But will this SLR reduction really help in freeing up the commercial bank’s money for lending to the productive sector? This question particularly gains significance in the cur-rent scenario, given that the commercial banks are al-ready investing in government securities in excess of the mandated SLR requirement and growth prospects

continue to remain subdued. Let us analyse this issue in detail.

By definition, SLR is defined as the amount that the commercial banks are required to invest in govern-ment securities as a proportion of their net demand and time liabilities. Chart-1 clearly shows that in the charted time period, the actual SLR has always been higher then the mandated requirement. The current SLR in the banking system is already above 26 per cent as of March 2014 as compared to the revised mandat-ed requirement of 22.5 per cent. The main reason for this is that banks are currently risk averse to lend to the private sector, given sizeable jump in bank’s rising non-performing loans (NPAs).

OutlookRBI chose to increase the SLR in its second mid-quarter monetary policy review held on 3rd June, 2014. This move of the RBI amply demonstrates that the spotlight has shifted back to growth while restraining inflationary pres-sures in the economy. The announcement heralds a new beginning in which both the RBI and the government would work in concert to push the growth agenda forward.

Going forward, CII advocates urgent supply-side responses which would improve the productivity of agriculture and reduce the supply side bottlenecks in production and distribution. This would entail timely intervention to release excess food stocks in the market, permit key food imports, dismantle the system of administered prices, delisting perishables from APMC Act and creation of a Common Market for agricultural produce which would con-tain inflation within the comfort zone of the RBI and help reduce policy rates.

Box I : RBI Reduces SLR- Will it Help the Market Now?

ECONOMY MATTERS 20

DOMESTIC TRENDS

India’s current account deficit (CAD) narrowed sharply to US$1.2 billion (0.2 per cent of GDP) in fourth quarter of 2013-14 from US$18.1 billion (3.6 per cent of GDP) in same quarter of 2012-13 which was also lower than US$4.2 billion (0.9 per cent of GDP) in Q3 of 2013-14. The lower CAD was primarily on account of a decline in the trade deficit as decline in imports was sharper than that in exports. For 2013-14 as a whole, CAD narrowed sharply to US$32.4 billion (1.7 per cent of GDP) in 2013-

To be sure, this move of RBI is expected to release around Rs 40,000 crores into the system and ensure that the liquidity pressures do not constrain the flow of credit to the productive sectors of the economy. Net li-quidity deficit (repo less reverse repo balance) remained

Under the current backdrop, therefore, CII is of the view that to release additional liquidity in the market through SLR route, only reduction in SLR rate is not suf-ficient. What also needs to be done is that the commer-cial banks should be discouraged to park their liquidity with RBI beyond a prescribed limit. A cap on SLR should

14 from US$87.8 billion (4.7 per cent of GDP) in 2012-13, primarily due to a contraction in merchandise imports coupled with a rise in service exports. Capital inflows at US$48.8 billion – buffered by a surge in inflows under foreign currency non-resident (FCNR) deposits - were more than sufficient to finance the CAD, resulting in a US$15.5 billion accretion to India’s foreign exchange re-serves in 2013-14.

high, averaging Rs 42000 crore in 2013-14. However, in the current fiscal, the deficit has narrowed sharply to only Rs 8000 crore (till 5th June, 2014). Hence, the re-lease of liquidity by reduction in SLR won’t be of much help in the current scenario, when the liquidity deficit has already declined sharply.

be fixed and the banks should be allowed to park only up to 2 per cent higher than the prescribed rate. This will help in freeing up more resources for the private sector and address the problem of crowding out of pri-vate borrowing by large government borrowings.

Current Account Deficit at 1.7% of GDP in 2013-14

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DOMESTIC TRENDS

On a BoP basis, merchandise exports declined by 1.3 per cent to US$83.7 billion in Q4 of 2013-14 as against an increase of 5.9 per cent in Q4 of 2012-13. On the other hand, declining trend in merchandise imports (on BoP basis) continued in Q4 of 2013-14. Imports at US$114.3 billion moderated by 12.3 per cent in Q4 of 2013-14 as compared with a decline of 1.0 per cent in Q4 of 2012-13. Decline in imports was primarily led by a steep decline in gold imports, which amounted to US$5.3 billion, sig-nificantly lower than US$15.8 billion in Q4 of 2012-13. As a result, the merchandise trade deficit (BoP basis) con-tracted by about 33 per cent to US$30.7 billion in Q4 of 2013-14 from US$45.6 billion in the corresponding quar-ter a year ago.

On a full year basis, merchandise exports grew by 3.9 per cent as compared to contraction to the tune of 7.2 per cent in imports in 2013-14. Export recovery and mod-eration in imports led to a sharp improvement in the trade deficit to US$147.6 billion in 2013-14 from US$195.7 billion in 2012-13. Services exports remained supportive. After a muted 2012-13, services exports grew by 12 per cent in 2013-14 led by the pickup in demand from US and Euro zone, two of the largest market for India’s soft-ware services. Hence, contraction in the trade deficit, coupled with a rise in net invisibles receipts, resulted in a sharp reduction of the CAD in 2013-14 as compared to 2012-13.

ECONOMY MATTERS 22

DOMESTIC TRENDS

The other twin deficit, fiscal deficit, stood at 4.5 per cent of GDP in 2013-14, a tad lower than the interim budget es-timates of 4.6 per cent. In actual terms, the fiscal deficit stood at Rs 5.08 lakh crore in 2013-14 as against Rs 5.24 lakh crore projected in the revised estimate. Although the deficit was contained at 4.5 per cent, the credibil-ity of the numbers is questionable. Moreover, interest-ingly, in the first 11 months of the last fiscal, government was incurring an average monthly deficit of Rs 54,482

crore, however, in March 2014, it was able to notch up a surplus of Rs 91,150 crore. Revenue deficit stood at 3.2 per cent of GDP in 2013-14. In order to impart credence to the reduction of fiscal deficit, the incumbent govern-ment would need to undertake numerous measures in the form of fast tracking implementation of GST, imple-menting PSU disinvestment and, addressing the sub-sidy situation, amongst other measures.

Fiscal Deficit Stood at 4.5% of GDP in FY14

In the financial account, on net basis, both foreign di-rect investment and portfolio investment recorded in-flows in Q4 of 2013-14. While net inflow on account of portfolio investment was US$9.3 billion, net FDI flow was lower at US$0.9 billion. In contrast, on a full year basis, net inflows under the capital and financial ac-count (excluding change in foreign exchange reserves) declined to US$48.8 billion in 2013-14 from US$89.0 bil-lion in corresponding period of 2012-13 owing to lower

net FDI and portfolio flows, net repayment of loans and trade credit & advances. Net FII inflows fell to US$5 bil-lion (5-year low) in 2013-14 from US$27.6 billion in 2012-13 and there were net outflows of US$5 billion on trade credit and advances in last fiscal as compared to net in-flows of $21.7 billion in the previous year. The decline in trade credit was mainly due to lower inflows on account of a sharp decline in merchandise imports in fiscal 2014.

OutlookIn the current fiscal, we expect the CAD to widen from its level seen in the previous year as restrictions on gold im-ports, imposed since July 2013, are gradually withdrawn. The Reserve Bank of India (RBI) has already begun to take steps in this direction by allowing large private gold importers to resume importing gold and permitting nominated banks to give gold metal loans to jewellery manufacturers. Import of capital and consumption goods (non-oil, non-gold imports) are also expected to rise this year as GDP growth picks up. Despite pressure from rising imports, the upside to CAD is likely to be capped due to faster growth in exports led by a global recovery.

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DOMESTIC TRENDS

Total expenditure stood at Rs 15.63 lakh crore in 2013-14 as against the original budget estimate Rs 16.65 lakh crore. The expenditure estimate was later revised down-wards to Rs 15.90 lakh crore in the interim budget which was presented in February 2014. There was squeezing of both plan and non-plan expenditure in March 2014 number, which helped to contain fiscal deficit below the revised estimates set out in the interim budget. But the nature of expenditure compression would have to be analysed in detail in order to pass any concrete judge-ment about its durability. On the revenue side, revenue

collection stood at Rs 10.55 lakh crore in 2013-14, lower than the revised estimates of Rs 10.65 lakh crore.

The government has chalked out a fiscal consolidation roadmap under which the fiscal deficit needs to be brought down 3 per cent of GDP by 2016—17. But in or-der to achieve this target significant policy reforms are needed in the forthcoming budget to be presented by the new government in July 2014 in the form of imple-mentation of GST, reducing subsides, propelling disin-vestment etc.

ECONOMY MATTERS 24

CORPORATE PEFORMANCE

Net Sales Foretell a Recovery

Indian firms showed signs of a recovery, as sales in the fourth quarter of last fiscal (4QFY14) rose at the fast-

est pace in six quarters and profit growth stabilized, spurring investor optimism that the worst is over for corporate earnings. The net sales of companies (manu-facturing plus services) in the fourth quarter expanded by 9.3 per cent on a y-o-y basis, up from 4.0 per cent in the comparable period last year. The same on yearly basis, however, witnessed only a marginal improve-ment in the performance in FY14 when y-o-y growth in-creased to 13.8 per cent from 13.4 per cent in FY13. Our analysis is based on the financial performance of 2250

companies (1507- Manufacturing and 743 Services and excludes oil & gas companies), using a balanced panel, extracted from the Ace Equity database.

It is encouraging to note that both manufacturing and services sectors have witnessed sharp acceleration in sales growth in the fourth quarter. Manufacturing sec-tor in the fourth quarter grew by 6.4 per cent as com-pared 0.8 per cent in the same period last year, indicat-ing that the downtrend is over. In yearly terms, the net sales in manufacturing sector grew by 6.5 per cent in FY14, down from 10.5 per cent. We expect further im-provement in growth performance during the current fiscal on the back of expectations that the new govern-ment would introduce significant policy changes in or-der to spur investment and revive growth.

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CORPORATE PEFORMANCE

The net sales of services sector in the fourth quarter grew by 14.5 per cent, up from 10.4 per cent in the same quarter previous year. Sustaining this momentum is important even as the rupee has assumed an upward trend against the US dollar and economic growth con-tinues to remain restrained. On yearly basis, the servic-es sector in FY14 registered a sharp increase in growth of net sales to 22.7 per cent from 17 per cent in previous year. Even though the growth of net sales of services has been relatively impressive, the sector has shown a sharp deterioration in expansion rate in last few years and its revival is critical for facilitating the overall accel-eration in economic growth.

The expenditure costs of the firms, on an aggregate ba-sis, moderated by 8.8 per cent in the reporting quarter, as compared to 10.8 per cent in the comparable time period last year. Under its various heads, growth of raw materials cost decelerated to 3.6 per cent over 4.5 per cent in the same period last year. Growth in wages & salaries showed an uptick. Total expenditure costs for manufacturing sector also moderated to 4.1 per cent

in the fourth quarter of 2013-14 as compared to 6.0 per cent in the same quarter last year. All the heads of ex-penditure for manufacturing moderated during the quarter. Total aggregate expenditure costs for services sector decelerated sharply to 0.9 per cent in the report-ing quarter as compared to 17.8 per cent in the same quarter a year ago.

The performance analyzed in terms of Profit after Tax (PAT) exhibits a sharp improvement in financial results of companies at aggregate level in the fourth quarter of the previous financial year. On an aggregate basis, growth in PAT improved significantly to 11.7 per cent in the fourth quarter as compared to contraction to the tune of 10.3 per cent growth in the same quarter of last year. This has been driven by sharp improvement in PAT growth of services sector to 18.7 per cent as compared to decline of 4.6 per cent in the same quarter previous fiscal. PAT growth across the manufacturing sector firms, however, was more subdued, standing at 5.8 per cent in the fourth quarter of last fiscal as compared to decline of 14.7 in the same quarter of previous year.

Healthy growth of PAT in the services sector during all the four quarters of previous financial year helped the sector to record 25.7 per cent growth in PAT on yearly basis in FY14, compared to 15.3 per cent in FY13. How-ever, manufacturing remains a major concern, which saw its PAT growing merely by 3.4 per cent in FY14, down from 8 per cent in FY13. Shrinking profit margin in manufacturing, at a time when sector requires massive investment for revival of growth, is not a good sign.

In sum, the performance of companies in terms of net sales in both manufacturing as well as services sectors showed an improvement in the fourth quarter of the previous fiscal. However, how far this recovery will be sustained remains to be watched. Further, while firms at aggregate level have shown sharp improvement in PAT in the fourth quarter as total expenditure costs moderated.

ECONOMY MATTERS 26

SECTOR IN FOCUS

Ease of Doing Business in India

Introduction India is one of the fastest growing economies in the world. The high potential of the Indian market driven by an emerging middle class, cost competitiveness and a huge pool of talent makes it one of the most attractive investment destinations. Yet, according to the World Bank’s ‘Doing Business 2014’ report, India is ranked 134 out of 189 countries in the overall ease of doing business. This places India lower than the other BRICS (Brazil, Russia, India, China and South Africa) members and highlights its relatively dismal performance among other South Asian countries. In the World Bank survey, India ranks lowly on most of the determinants of invest-ment attractiveness — especially starting a business,

enforcing contracts, dealing with construction permits and paying taxes. Problems in securing land, inadequate infrastructure, power shortages, stringent labour laws, tax regulations, lack of governance and transparency and approval processes are critical issues in the country that need to be addressed.

Concerned with India’s dismal rankings in World Bank’s ‘Ease of Doing Business’, a survey-based report on the prevailing business regulatory environment in the coun-try was undertaken by CII with the support of KPMG. The study focused on few key parameters of ‘Doing Business’ such as land acquisition, starting a business, taxation and contract enforcement. The survey re-sponses were elicited from 120+ executives, over half of whom were business heads or higher. The respond-ents were identified from across industries and states to give an overall picture of business climate in India. In this article, we present the key highlights of the survey findings with regards to the key parameters outlined before, viz, land acquisition, starting a business, taxa-tion and contract enforcement.

MAY 201427

SECTOR IN FOCUS

A. Land AcquisitionLand acquisition is one of the critical aspects of doing business. As per the findings of the survey, the lack of an effective process has made land acquisition a com-plex and time consuming procedure. Investors and manufacturers need timely acquisition of contiguous

land to contain project cost escalation and project time-lines. However, landowners are often wary of selling — given the potential future price appreciation and non-transparent price benchmarks. As a consequence, land for industrial development is not as easily available as it used to be earlier.

ECONOMY MATTERS 28

SECTOR IN FOCUS

The time taken for land acquisition is one of the major obstacles. As per the survey, average time taken to ac-quire land is 14 months although it is much more in sev-eral cases. In addition, the number of departments to

be visited as well as the number of visits to each depart-ment make the land acquisition process complex. High costs and transaction fees add to the overall costs of the land acquisition process.

MAY 201429

SECTOR IN FOCUS

Land Acquisition- Key Recommendations

1). Need for Simplification and Transparency

• Simplicity, transparency and speed should be intro-duced in the land acquisition process. The delays caused by bureaucracy need to be reduced

• Simplify administrative procedures by facilitating single-window clearances, standardised documen-tation and timely approvals. Failure to do so would be automatically escalated to the industry minister within a week of the lapse of the due date

• E-procedures will help improve land acquisition as it aims to curb unethical practices and and complete work within agreed timelines

• Lengthy land mutation and conversion processes need to be simplified

• Government machinery needs to be more proactive in handling land acquisition disputes

2). Promote Industrial Clusters

• Encourage the establishment of industrial clusters of related industries, including large and small units

• Location viability in terms of infrastructure of the industrial land should be studied before its acquisi-tion

• Promote industry clusters through a well-defined and targeted cluster development policy, owned and driven by state and local governments:

- Identify suitable sectors for promoting clusters based on the study of existing industries in the state

- Industry centric infrastructure master plan should be put in place. Ring roads with dry ports and rail heads must be created to link to the industrial corridors

- Simplify regulatory requirements, including elimination of several compliances and intro-duction of self-certifications

- State government can assume leadership role in creating clusters and building capacity for sustained development

- Draft sector-specific policies with input from experts and industry leaders, to help create a sound ecosystem

• Develop short-term fiscal incentives and ease tax requirements to encourage rapid cluster develop-ment

• Benchmark clusters and survey industry members to understand critical infrastructure and facilities required

• Facilitate access to funds by promoting linkages be-tween industry and lending institutions

• Ensure access to quality and skilled manpower through improved curriculum and university col-laborations

• Create a government task force/ department for overseeing cluster development

2). Land Value

• With respect to the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, a major concern with the landowners is the possible undervaluation of their land that might be below market rate. There is a need to bring assurance in this regard.

• Introduce a market price-based pricing mechanism:

- Make landowners partners and share with them the resources generated by projects from the allocations

• Encourage partial or complete leasing of land (from landowners) as opposed to an outright sale to sup-plement acquisition efforts

ECONOMY MATTERS 30

SECTOR IN FOCUS

B. Starting a BusinessThe ease of starting a business is determined by how easily the entrepreneur can comply with various proce-dures required upon stat up. Starting a business in In-dia requires a host of clearances & permits. The World Bank’s ‘Doing Business 2014’ report ranks India as 179 among 189 countries on the ease of starting a business; lower than other BRIC and MINT countries. Cumber-some regulations can act as a curb on entrepreneurship

Obtaining business approvals and clearances is a time-consuming procedure involving multiple procedures and the cost incurred in the process is significantly high.

that may lead to increased informality and a smaller tax base.

Approvals related to environment clearances, land procurement, construction permits, industrial safety permits and power connection are top five obstacles in starting a business in India. As per the survey results, about 50 per cent of the respondents have highlighted major challenges in obtaining environmental clearanc-es. More than one-third of the respondents rated land approvals as the major obstacle in starting a business.

The survey showed that 85 per cent of respondents were of the view that the time required for such clear-ances is not reasonable.

MAY 201431

SECTOR IN FOCUS

Infrastructure is a key driver enabling investments, growth and improving quality of life. Inadequate infra-structure creates obstacles in starting a business. Mul-

A Comparison with Select Countries Highlights the Need for an Ease in Proce-dures when Starting a Business

A closer look at the ease of starting a business in India in comparison to other countries suggests that the number of procedures, time taken plus the cost incurred is significantly higher than other countries.

tiple visits to various departments and time taken for getting approvals for new connections (water, sewer-age and power) also pose major obstacles.

ECONOMY MATTERS 32

SECTOR IN FOCUS

C. TaxationIndia fares poorly on the ‘Doing Business 2014’ paying taxes indicators — total tax rate, the time to comply

and the number of payments. Of the 189 countries studied, India ranks 158 in terms of overall ease in tax payment. High tax rates emerged as one of the major obstacles to operating and growing a business in India.

To encourage business start-ups, the process of obtain-ing approvals and clearances should be expedited by effectively implementing the single-window clearance mechanism. In this respect, the following measures are recommended for faster and simplified clearances and approvals.

• Effective implementation of the single-window clearance system for approvals related to starting a business

• Single window agency should aim to co-ordinate all legal approvals necessary for the setting up of a business

• Decrease the time taken to grant approval. Escala-tion to be done by a single-window clearance agen-cy to the concerned authorities in case of delays

• Enforce time-bound approvals by introducing ‘deemed approvals’ in case of delays beyond pre-scribed limit; investor may proceed with the imple-mentation of the project

• Eliminate multiple processes and remove the need to maintain several documents

• Make processes and approvals online. Introduce the provision of online monitoring of application forms to help applicants monitor their status at various departments

• A single-window clearance from the Ministry of Environment and Forests (MoEF) covering environ-ment, CRZ, forest and wildlife to replace the cur-rent system of separate clearances

• Strengthen coordination between Central Pollution Control Board (CPCB)and the State Pollution Con-trol Board (SPCB)

• Environment norms should be clearly defined and implemented in a time bound manner

• Introduce e-governance and technology-based ini-tiatives to simplify processes for industries

• Establish an Environment Compliance Assistance Center (ECAC) in states to facilitate information ex-change between regulators and industry and pro-vide technical assistance to industries for fulfilling compliance requirements

Recommendations for Faster and Simplified Clearances and Approvals

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SECTOR IN FOCUS

As per the survey findings with respect to challenges in the direct tax regime, 90 per cent respondents believe that the tax authorities are not proactive in promot-ing investments. 60 per cent respondents feel that the neutralisation of the tax decision by the Supreme Court through a retrospective amendment is likely to have damaging effect on investment sentiments. 92 per cent

As regards to the issues pertaining to indirect tax re-gime, around 2/3rd of respondents find time taken for

respondents feel that there are challenges in transfer pricing audit/assessment relating to distribution /agen-cy and 85 per cent respondents find challenges relat-ing to rendering of services including management and other cross charges. 65 per cent respondents agreed that companies are now willing to enter an advance pricing agreement.

clearance and tax disputes resolution to be significant

ECONOMY MATTERS 34

SECTOR IN FOCUS

MAY 201435

SECTOR IN FOCUS

Taxation in India needs structural, operational and ad-ministrative reforms; the burden of tax compliance should be reduced besides enabling e-filing of all taxes.

• Enable e-filing of all taxes with uninterrupted ac-cess to online services especially in rural areas

• Time-bound subsidies and tax exemptions should be given to the units located in industrial areas, food parks and agro-export zones

• The Goods and Services Tax (GST) proposes to sub-sume all indirect taxes levied in the country but is yet to be implemented. It could help address the shortcomings in the existing indirect tax system like tax cascading complexity and poor technological infrastructure along with high cost of compliance

• Refund of VAT should occur automatically and in a time-bound manner

• Clarify the non-availability of MAT for foreign com-panies – need for certainty post-AAR rulings

• Introduce a feedback mechanism to obtain input

Taxation – Recommendations

from taxpayers on the tax regime

• There is a need for consistency in approach — uni-form interpretation and application of the law and judicial pronouncements

• There is a need to adopt a trust based approach — avoid not well defined and onerous information requests during assessments

• Increase stability in reporting —Avoid frequent changes in the return format/other forms

• Development of a strong IT backbone

• Provide certainty and clarity on clauses. For exam-ple, the tax holiday for the IT sector faces issues while implementation due to ambiguity

• The function of tax administration should be dis-tinct from that of an SBU, any ambiguity could lead to undue arbitrary taxation claims

• The administration, for taxes, should adopt a con-centrated, rather than fragmented, approach

ECONOMY MATTERS 36

SECTOR IN FOCUS

D. Contract EnforcementFair, speedy trials are essential for small enterprises embroiled in disputes. If courts take a long time in re-solving such disputes, small firms may not be left with enough finances to continue doing business for a long time. In such cases justice delayed may translate into justice denied. At present, it could take several years for a commercial litigation to get resolved. If a lawsuit aims at seeking damages, it may stretch for 15 years to reach resolution. There is a need to address such a pressing issue. Though arbitration was proposed as a good and

Other Issues in Contract Enforcement

• Legal processes around foreign judgements

A judgement/decree passed by a court of a country which is not a ‘reciprocating territory , cannot be enforced in India per se. A fresh suit has to be filed in a high court that has jurisdiction over the Indian judgement-debtor. Even for reciprocating territo-ries, a foreign judgment/decree will not be enforce-able in India if the court in India determines that:

- it has not been pronounced by a court of com-petent jurisdiction;

- it has not been given on the merits of the case;

- it appears on the face of the proceedings to be

effective alternative to litigation, it has ended up being more expensive and almost equally time consuming.

The time taken from filing a case to the final judgement seems unreasonable to most respondents and poses major obstacles. Also, a majority of respondents indi-cated that the enforcement of judgements are not en-forced as smoothly as the existing procedures assure.

Moreover, costs for engaging and retaining lawyers along with other costs, during the interim stage and en-forcement costs also pose significant challenges.

founded on an incorrect view of international law or a refusal to recognise the law of India in cases in which such law is applicable;

- the proceedings in which the judgment was obtained are opposed to natural justice;

- it has been obtained by fraud;

- it sustains a claim founded on a breach of any law in force in India.

• Reconstruction, mergers and amalgamations

The process of reconstruction, mergers and amal-gamations of companies has been cumbersome and time consuming. Though the Companies Act, 2013, has sought to rationalise it, the process re-quires further streamlining to be more effective.

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In some cases where it was felt that justice could have been served in a better way, courts in India have intervened and provided relief to the Indian contracting party, even where the parties to the contract had agreed to have a provision for exclu-sive non- India jurisdiction. As far as possible, this should be avoided in order to retain the faith of foreign contracting parties in the Indian judicial sys-tem.

Contract Enforcement – Recom-mendationsReforms at all levels may be required for the enforce-ment of contracts to be effective and efficacious

• Effectively implement an electronic case filing sys-tem

• IT-intensive productivity improvement programmes can be implemented, in courts at all the levels, in-cluding district courts. Though the process of e-fil-ing of proceedings has been initiated in some high courts, this could be the norm, instead of an excep-tion. The process of e-court service of proceedings has been initiated by the Supreme Court, however it has yet to permeate to courts at all levels

• Savings from the implementation of e-court sys-tems can be substantial and result from a reduction in the use of paper, time spent in court, need for storage space, as well as easy archiving of docu-ments and a general streamlining of processes and services

• Globally, the pace of contract enforcement is high in economies that have e-filing facility

• Increasing the number of courts along won’t expe-dite proceedings. There is also a need to establish special tribunals for resolving commercial cases un-der various acts for various levels of monetary lim-its

• Moreover, the number of judges/ presiding officers should be increased and they should be provided with adequate infrastructure and manpower to fa-cilitate effective functioning

• Instead of filing proceedings in court, alternative dispute resolution (ADR) processes should be con-sidered. ADR processes may require further stream-lining and they should adhere to the specified time-lines as far as possible.

ConclusionThe survey conducted across respondents in various business segments has highlighted a number of areas to im-prove the business climate in India – particularly around land acquisition, starting a business, taxation and contract enforcement. The recommendations presented in this report highlight the need for:

• Reform in Policy & Regulation

– Enhanced transparency in rules and processes around land acquisition, business approvals and taxation

– Simplification and clarification of rules and processes pertaining to taxation and business approvals

– Structural reform in the taxation system to reduce the number of levies, while simplifying them

– More flexible labour policy

– Creation of independent grievance redressal mechanisms

– Establishment of skill development centres in partnership with industry to develop relevant curriculum and courses to enhance employability

– Promotion of industrial clusters for ease in land acquisition and business start-up

• Reform in Administration and Execution of policy

– Increased online processes for registrations and clearances

– Introduction of single window clearance systems with time bound decision making for business approvals

– Introduction of coordinated clearance systems e.g. for environmental clearances, to facilitate information exchange between various ministry departments, regulators and industry

– Increasing number of courts & tribunals as well as alternative dispute resolution to enhance the ease of con-tract enforcement

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Reviving Growth

Economic growth slowed down to 4.7 per cent in 2013-14, the second consecutive year of sub-5 per cent

annual GDP growth. This was led by the slowdown in industrial production, which contracted by 0.1 per cent in 2013-14 as compared to 1.1 per cent growth in 2012-13, attributed to sluggish performance by manufacturing, mining, capital and consumer goods. Industrial produc-tion has been adversely impacted by slowing demand - consumption as well as investment. In contrast to the subdued growth scenario, inflation has remained above the comfort level of RBI, though in the recent months, some moderation has been witnessed, especially in WPI inflation. In 2013-14, WPI inflation moderated to 6.0 per cent as compared to 7.4 per cent in the previous fiscal, while CPI inflation stood at 9.5 per cent as compared to 10.2 per cent in the previous fiscal.

On the external front, in 2013-14, the trade deficit nar-rowed sharply, mainly attributable to the pace of ex-ports outpacing imports during the year. In 2013-14, merchandise exports grew by 4 per cent, while mer-chandise imports contracted by 8.1 per cent. Mirroring the sharp improvement in exports growth, India’s cur-

rent account deficit (CAD) narrowed sharply to US$32.4 billion (1.7 per cent of GDP) in 2013-14 from US$87.8 bil-lion (4.7 per cent of GDP) in 2012-13. The other twin defi-cit, fiscal deficit, stood at 4.5 per cent of GDP in 2013-14, a tad lower than the interim budget estimates of 4.6 per cent.

In sum, the economic recovery remains fragile due to combination of domestic and external factors. Strong measures are needed by the policymakers for reviv-ing growth, some of which need to be announced in the forthcoming Union Budget due next month. The important measures needed for reviving growth have been highlighted by CII in its Pre-Budget Memorandum submitted to the Ministry of Finance. These measures relate to boosting agricultural production, containing fiscal deficit, supporting investment in infrastructure, rejuvenating manufacturing, creating facilitative cli-mate for investments and tax reforms. In this article, we provide the key CII recommendations to boost each of these areas.

(A). Boosting Agriculture Production

While agriculture’s share in India’s economy has pro-gressively declined to less than 15 per cent due to the high growth rates of the industrial and services sectors, the sector’s importance in India’s economic and social

CII’s Key Recommendations

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fabric goes well beyond this indicator. Nearly, three-quarters of India’s families depend on rural incomes and majority of India’s poor are found in rural areas. In-dia’s food security depends on producing cereal crops, as well as increasing its production of fruits, vegetables and milk to meet the demands of a growing population with rising incomes. To do so, a productive, competi-tive, diversified and sustainable agricultural sector will need to emerge at an accelerated pace.

In the last fiscal, agriculture grew at an impressive rate of 4.7 per cent backed by good monsoons. The impact of monsoons on agricultural production is enormous as despite a significant increase in area under irrigation over the years, almost 55 per cent of total cultivable land is still un-irrigated. The drought years of 2002-03 and 2009-10 saw food-grains production declining by 15 per cent and 7 per cent respectively. Additionally, growth in food-grain production has lagged behind population growth for the past 20 years. Over 1990 to 2010, food-grain production grew annually by 1.6 per cent compared to an average annual population growth of 1.9 per cent. Deficient monsoons tend to exacerbate this demand-supply mis-match further. CII suggests the following urgent measures to be taken in the short, me-dium and long run in order to boost agriculture produc-tion.

Short-term measures

• It is time to de-list fruits and vegetables from APMC list to enable direct marketing of these commodi-ties. Reforming Essential Commodities Act (ECA) to enable free movement of agricultural commodi-ties will help smoothen regional supply shortages. These reforms are long overdue and only a strong political will can help bring about these reforms, which will be instrumental in reducing price spikes and also bridging the gap between wholesale and retail prices.

• Restrict procurement of buffer stock to meet emer-gency and PDS requirements

• Simplify movement of grains by reducing the num-ber of licenses required for movement of grain across states

Medium and long-term measures

• Encourage Private sector participation through partnerships. Private sector can play a meaningful

role in food grain management by partnering with the public sector in procurement and storage of grain.

• Create a “National Agriculture and Food Export Mission” in select categories to actively promote the export of select crops

• Impose stringent regulation and control on extrac-tion of ground water

• Implement the Model Act (amended APMC Act) in its true spirit across states

• Implement policy reforms to allow individuals / co-operatives / industry to consolidate sizeable farm lands by way of leasing to benefit from economies of scale

• Formulate permissible leasing period and other provisions such that these serve to incentivise the lessee to invest in technology and other areas that help improve the land

• Develop a national unified market for agricultural commodities

• Develop Mega demand servicing and export hubs to allow companies to procure, store, process and export from a single location

(B). Containing Fiscal Deficit

Fiscal deficit stood at 4.5 per cent of GDP in 2013-14, a tad lower than the interim budget estimates of 4.6 per cent. In actual terms, the fiscal deficit stood at Rs 5.08 lakh crore in 2013-14 as against Rs 5.24 lakh crore pro-jected in the revised estimate. Interestingly, the govern-ment which incurred an average monthly deficit of Rs 54,482 crore in the first 11 months of last fiscal, could notch up a surplus of Rs 91,150 crore in the last month (March) of the fiscal. In order to adhere to the task of reduction in fiscal deficit, the new government at the Centre would need to undertake numerous measures in form of fast tracking implementation of GST, imple-menting PSU disinvestment and, addressing the sub-sidy situation, amongst other measures.

The government has chalked out a fiscal consolidation roadmap under which the fiscal deficit needs to be brought down 3 per cent of GDP by 2016—17. But in or-der to achieve this target, significant policy reforms are needed in the forthcoming budget to be presented by the new government in July 2014.

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CII suggests the following policy recommendation for fiscal consolidation.

• Draft a white paper on fiscal situation that will out-line a roadmap for achieving FRBM targets after ac-counting for one-off expenditure

• Address the subsidies situation. Make one-off pay-ments. End the practice of rolling over subsidy pay-ments

• Norms on sharing of fuel subsidies between gov-ernment and upstream oil companies should be clearly stated

• Restore quality of fiscal consolidation by boosting capital expenditure Fast-track introduction of GST. Center and state governments should work to-wards introduction of legislation and institution of IT platform so that GST can be introduced as early as possible. CII believes that implementation of GST would increase the GDP growth by 1.5-2.0 per cent annually by way of simplifying compliance,, enhanc-ing free flow of goods and services across states and removing trade biases against Indian manufac-tured products

• Implement PSU disinvestment systematically; strat-egy required on restructuring/ privatization of loss-making PSUs (Centre & state). At least Rs 50000 crores should be targeted in the balance part of the fiscal.

• There are 67 sick PSUs, whose rehabilitation or winding up proposals has been referred to the Board of Reconstruction of Public Sector Enter-

prises. It is recommended that the government un-locks the assets of these PSUs by monetizing land, plant & machinery etc.

(C). Support Investment in Infrastructure

Infrastructure development is a critical precursor for facilitating higher overall investment. While infrastruc-ture investment has gained significant momentum over the last few years, the deficit continues to remain large. Acceleration in infrastructure investment has signifi-cant multiplier effect on the whole economy. Based on projections provided in the Mid-Term Appraisal of the Twelfth Plan, in order to attain a 9 per cent real Gross Domestic Product (GDP) growth rate, infrastructure in-vestment should be on average almost 10 per cent of GDP (translating roughly into US$1 trillion) during the 12th Five Year Plan.

Availability of finances for such huge investment would largely depend on the government’s ability to success-fully increase reliance on the bond market as an alterna-tive source of financing to bank loans and their ability to implement fiscal consolidation as a means of freeing up bank lending and reducing upward pressure on inter-est rates. Emphasis on private sector participation and policy / regulatory measures to attract private capital cannot be undermined given the huge pressure on capi-tal rationing and funding requirements. With this over-view, we present the key measures suggested by CII in order to boost investment in infrastructure.

• Fast-tracking clearance of stalled/stuck projects. The agenda of the Cabinet Committee of Invest-ment (CCI) which was formed during the tenure of

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the previous government to unlock stalled infra-structure projects needs to be carried further by the new government. In this aspect, the following measures are noteworthy:

- Fast-track stuck projects of greater than Rs 500 crore

- Identify 100 must do infrastructure projects e.g. DMIC, Dedicated freight corridor, roads, rail, airport modernization, high speed rail, ir-rigation, housing and construction etc

- Leverage PPP opportunity in railways

- Ensure that projects are awarded to private sector by first securing the key sovereign clear-ances

- Set-up state level mechanisms similar to Pro-ject Monitoring Group which would review and monitor projects. Identify high impact projects

• Encourage PPP/private sector participation in In-frastructure. The share of private investment in the total investment in infrastructure rose from 22 per cent in the 10th Plan (2002-2007) to 38 per cent in the 11th Plan. The 12th Plan aims to raise it further to 9 per cent by FY17. In order to meet this ambitious target, it’s pivotal to encourage PPP and private sector participation in infrastructure. In this regard, following measures are suggested:

- Set up an institutional mechanism to renegoti-ate the terms of concession in PPP contracts to salvage stranded investments through options like re-bid, restructuring, renegotiation of con-tracts, expropriation, et al

- Make provisions for award of Rs. 2 lakh crore worth of projects on annuity basis to encour-age private sector participation in infrastruc-ture

- Under JNNURM – Phase II, create a framework for facilitating investments through PPP across urban infrastructure verticals, especially in Tier – II & III cities

• Encourage investments in Infrastructure funds /trusts. This will help in making the infrastructure

projects viable. In this regard, the following meas-ures are suggested:

- Encourage investments in Infrastructure Debt Funds (IDFs)

- Create an investment fund from cash surpluses of PSUs for funding infrastructure

- Set up Tourism Infrastructure Fund with con-tributions from central and state governments to upgrade infrastructure, skills, transport con-nectivity, etc

- Encourage promoters to convert debt into eq-uity after ensuring project viability.

- Raise funds through issue of both dollar and rupee denominated sovereign bonds from overseas market and use it for financing infra-structure

(D). Rejuvenating Manufacturing

Manufacturing sector in India has exhibited a sluggish output growth. As against a desired growth of 12-14 per cent, it has been able to record a growth of merely 6.5 per cent per annum since 1991, even in the backdrop of several initiatives on economic reforms. This has limited the capacity of the country to reach on to the double-digit growth trajectory (in GDP) and unshackle the employment potential. It is in this backdrop that the previous government introduced the National Manu-facturing Policy (NMP) with the primary aim of raising the manufacturing share in GDP to 25 percent and fa-cilitating generation of 100 million additional jobs in the sector by 2022. Even as the NMP has not been imple-mented in its true letter and spirit, the challenges to the sector have been escalating by deepening slowdown of the economy led by industrial production. In 2013-14, manufacturing output contracted by 0.7 per cent as against growth of 1.1 per cent in the year before. In this regard, following measures are recommended for the immediate recovery of the ailing sector.

• Address policy constraints to support investments in manufacturing. Investment in manufacturing sector has seen a secular decline for the last couple of years. For the sector to see any meaningful up-tick, the rate of investment in the sector needs to

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improve. In this regard, the following measures are recommended:

- Implement NMP on priority – set up a dedicat-ed group to look into different aspects of NMP and coordinate with ministries, state govern-ments, and industry for each

- Push for policies like MMDR, National Steel Policy, National Chemicals Policy etc to provide an enabling framework for the sectors

- Encourage value addition in sectors such as electronics, defence and capital goods.

- Incentivise indigenous technology. Examine FTAs

- Continue eliminating pending structural / regu-latory hurdles in the coal, iron-ore and fertilizer sectors to reduce dependency on imports in the medium and long term

- Assure fuel supply linkages to the power sec-tor. Reserve coal block for the power sector. Infuse competition in coal sector. Work on a policy framework for fixing power tariffs

- Allow 25 per cent accelerated depreciation for investments in plant and machinery for a pe-riod of 3–5 years. This will help pre-pone invest-ments without affecting revenues in the long term

- Bring down the general rate of excise duty from 12 per cent to 10 per cent across the board. This can be reviewed when IIP for man-ufacturing moves beyond 6 per cent consist-ently for 3 months

- Extend short term stimulus provided in inter-im budget 2014-15 to capital goods, consumer goods etc to 31st March 2015

• Invite Foreign Capital to Set up Manufacturing for Global Demand. For the manufacturing sector to widen its horizon and cater to the foreign market, it’s pivotal that the sector find alternative sources of funds apart from domestic. In this regard, be-sides attracting FDI, following measures are sug-gested:

- Scale up expenditure on road shows and pro-motional activities to showcase investment opportunities in NIMZs

- Set up single national-level export promo-tion agency for double-pronged strategy of intensive marketing overseas and extensive assistance to domestic exporters in market de-velopment, information dissemination, FTAs, competitiveness etc

- Offer Tax incentives for manufacturing sector – on par with domestic companies

(E). Improving Investment Climate and Ease of Doing Business

As has been discussed in the Sector in Focus too, India’s ranks very low in the ease of doing business. Much of the details have been discussed, hence we straight away highlight CII’s key recommendations to improve the investment climate.

• Streamlining the complex compliance process af-fecting the ease of doing business

- Effect simplification of laws/procedures /main-tain clarity and transparency around processes and procedures by :

* Establishing Environment Comliance Assistance Center in states to facilitate information exchange

* Introducing concept of ‘deemed approvals’

* Introducing e-governance & technology based initiatives to simplify processes

- Set up Task Force on simplification of admin-istrative processes to take India to 50 rank in World Bank Ease of Doing Business, with pri-vate sector participation

- Expedite FIPB approvals

- Introduce self-certification and third party cer-tification by MSMEs

- Adopt flexible exit policy on lines of Chapter 11 bankruptcy procedure of US

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• Labour Reforms

- Set up a task force to simplify and rationalize labour laws

- Move towards a flexible labour policy. Create a ‘social safety net’ to compensate workers ra-tionalized during the production process. The formula for providing a higher severance bene-fit can be arrived at after a tripartite discussion between all stakeholders’

(F). Tax Reforms

Implementing suitable tax reforms is the principal in-strument to correct severe budgetary pressures. It helps to improve the prospects of important sectors of the economy like- boosting domestic demand drivers, infrastructure development etc. In this regard, the fol-lowing measures are recommended:

• Boosting Consumption and Investment Demand. Reviving domestic demand drivers, viz, consump-tion and investment demand is imperative for charting any meaningful recovery in growth. Gross fixed capital formation contracted in the last fiscal on the back of weak industrial demand. In order to boost these two components of demand, following measures are suggested from the tax front:

- Reduce the effective corporate tax rate inclu-sive of surcharge, cess and other levies to 25 per cent

- Bring down MAT rate to 10 per cent

- Increase personal income tax exemption limit from Rs.2 lakhs to Rs.5 lakhs. Alternatively, link basic exemption to cost of living index

- Remove surcharge and education cess for cor-porate assessees and education cess for non-corporate assesses

- Increase exemption limit for wealth tax to Rs.5,00,000

- Strategic investments into the subsidiaries by the holding company and investment as per

bidding/Joint Venture (JV)/regulatory/business requirements should not be considered for computing disallowance under section 14A

- Restore exemption under Section 10(23G) of IT Act to incentivize investment in infrastructure sector.

- Reduce the threshold limit provided in invest-ment allowance

- Allow investment allowance to power and con-struction sector companies

• Infrastructure Development

- Restore deduction under Section 80CCF of the IT Act to boost infrastructure development

- Bonds issued by infrastructure companies should be qualified under section 54EC of the Act

- Exempt MAT for Infrastructure sector under section 115JB. Alternatively, MAT rate applica-ble for infrastructure projects should be sub-stantially reduced to provide incentives result-ing in improvement of returns to the investors

- The MAT credit should be allowed to be carried forward without any time limit

- Unutilized MAT credit be allowed to be carried forward and set off should be allowed accord-ingly against the normal tax payable under the DTC regime

To conclude, the new government would need to im-plement the above stated measures in order to revive growth which has fallen to its multi-year lows in the last two years. Reviving growth is the panacea for solving many problems which the economy is facing currently- unemployment, inflation, poverty etc. We would want the government should focus on the 3 “Cs” – Credibil-ity, Continuity and Clarity. Government policies must have credibility, government decisions must have con-tinuity and the legislation must have clarity. Addition-ally, it’s pivotal that proper implementation time-line is charted by the government in order to avoid falling into the trap of policy inertia.

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Firstly, let’s set the context correctly. The govern-ment has an unenviable task of walking a tightrope

between the diametrically opposite expectations of the farmers for higher prices and the consumers for lower prices. Given that the majority of our farmers are small and resource-poor, and the consumers are largely low or middle-income, the government cannot short-change either constituency for the sake of the other.

In this backdrop, let’s recount the key actions taken by the governments from time to time, and the limitations of such actions, because of which the prices continue to rise.

When the objective is to balance conflicting interests, any government’s first strategy is to subsidise. Subsi-dies on inputs like water, power, credit, and fertiliser to keep the cost of production low; and then subsidies on food itself by buying at high support prices from the farmers and selling at lower prices to the poor consum-ers through the public distribution system. No doubt, subsidies have delivered the expectations to a large ex-tent. But, given the fiscal position of the government, this strategy is neither scalable nor sustainable beyond a point. Once that point is reached, as we have now, the subsidies strategy leaves both the farmers and the consumers dissatisfied despite consuming massive amounts of money. Additionally, the resultant market distortion discourages the private investment in the sector, and the value chains remain under-developed.

Another strategy that’s adopted is to import food prod-

ucts, or ban the exports in times of shortage. Given the fleeting speed at which the international commodity markets move, our responses are often too late. The problem is further compounded by the weak market in-telligence system the governments typically have, and the complex logistics of the global trade. In times of shortages, expectedly, the domestic prices are sky-high while the crops are standing in the fields, raising the price expectations of the farmers; then the import con-signments usually arrive just about the time the farmers are ready to harvest their crops, and the prices start fall-ing like there is no bottom!

Imposing stock limits to prevent hoarding of farm pro-duce is yet another measure that’s commonly used to control prices. This action does soften the prices, but only temporarily. However, because this measure can-not actually increase the availability of food in the sea-son as a whole, the prices do go up eventually. Besides, since the government doesn’t distinguish between hoarders and the genuine Agri Businesses / Food Pro-cessors, such restraints render investments along the supply chain and processing unviable, and the value chain participants remain fragmented.

One can possibly refine these strategies a bit more, viz. sharper targeting of subsidies, proactive imports through real-time market intelligence etc., and keep the prices under check a few weeks longer. The longer-term food inflation cannot be truly tamed unless the key driv-ers are appreciated and managed.

Why are the Food Prices Rising Unabated despite Sev-eral Measures taken by the Government?

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Q1. What according to you are the key drivers of food inflation?

Ans: While quite a few reasons have been cited for trig-gering food inflation, demand outpacing supply is defi-nitely the key cause, to my mind. Increasing incomes and changing lifestyles & aspirations have spurred the demand for food items, especially high value products such as fruits, vegetables, milk and milk products, eggs, fish, and meat. Per capita consumption of many of these products in India is still significantly below that of comparable countries, suggesting the likelihood of this trend continuing in the years to come. Given this sce-nario, it is crucial that the supply rises substantially to meet the rapidly expanding demand for food.

That brings us to supply side drivers. Though farm yields in India have grown significantly over years, they are still largely dependent on the annual monsoon rains and other vagaries of weather. In certain crops like vegetables that are more vulnerable, adverse weather conditions result in serious damages, leading to ex-orbitant prices for a few months almost every year in some corner of the country. Rising Minimum Support Prices for certain key commodities, especially wheat and rice, have pushed the prices of those crops up. With the introduction of the Mahatma Gandhi National Rural Employment Guarantee Act, agricultural wages have risen as a result of labour shortage, contributing to ris-ing costs of production. Then there are chronic supply chain deficiencies (high transaction costs due to long chains, huge wastages due to broken chains, increas-ing cost of transportation due to rising fuel costs) that don’t let a fair share of the consumer price flow back to the producer. The supply chain deficiencies also pre-vent the demand signals from flowing seamlessly to the farmer. In the absence of such a mechanism, most farm-ers produce crops based on the prices obtained for the previous crop rather than the prices expected for the crops being planted. This results in huge price swings due to supply-demand imbalances around the harvest time.

As a combined effect of all these complex factors, the food prices in India kept moving up since 2007 when supplies fell short of demand globally; all that the vari-ous price control measures achieved was temporary

respite from time to time. In these seven years, prices of cereals rose unabated, at an average of 10 per cent per annum; the vegetables also started at a similar rate of 10 per cent per annum, but accelerated to an average annual rise of 30 per cent in the more recent years.

More broad-based reforms in the agricultural policy framework, together with the creation of certain mar-ket based institutions and instruments only can deal with these complex factors and solve the problem of food inflation in the long run. Otherwise, one would have to fire-fight every few months to deal with the cri-sis.

Q2: What are those reforms, which can really contain food inflation in India?

Ans: There are four areas of intervention that will make a difference:

Reforming the APMC Act along the lines of new Model Act recommended by the central government in 2003 is the first step. The alternative marketing models en-visaged in the Model Act, viz. Direct Marketing, Con-tract Farming, and Private Mandis will provide a healthy competition to the conventional Mandis and offer a choice to the farmer. These models will be customised to different contexts, eliminating the non value adding transaction costs that came into being only because the conventional Mandi was mandated as the only mecha-nism for a farmer to market his produce. APMC reform will also help in changing the purely transaction ori-ented relation between an Agri business / Food Proces-sor and the farmer in a Mandi set up, to a reciprocally dependent partnership. This will motivate Businesses to engage with farmers to raise farm productivity and align crop quality to consumer demand in mutual inter-est. This will also lead to complementary investments in storage and handling infrastructure along the supply chain that reduces wastage.

Secondly, the Forward Contracts Regulation Act (FCRA) must be amended to permit trading in ‘Options’. Farm-ers will then be assured of a minimum price at the time of sowing itself, based on the future projections of de-mand simulated by a market consensus. This will help adjust the production volumes to the future demand conditions, thus minimising the potential shortages as

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well as avoidable wastages, and the consequent price volatility.

Solutions like crop and weather insurance are also es-sential to enhance the risk-taking capability of the farm-er, who can then invest in the required technology and inputs to step up productivity.

Lastly, the protocols for approving new technology must be scientific, made transparent and predictable to attract investments into R&D. We have some distance to cover in discovering seeds that will optimize drought tolerance, disease resistance, yield enhancement, pest resistance, enable nutritional enhancement etc.

Q3: You mentioned Food Processing briefly. Can it play an important role in dealing with food in-flation?

Ans: Anywhere from 5 per cent to 40 per cent of food is wasted along the chain, depending on the inherent per-ishability of the crop and the season. This obviously re-duces the actual availability of food even after the farm-ers have produced. Food Processing offers a solution to reduce this colossal wastage and contain inflation.

India processes just about 2 per cent of its agri-based products compared to other developing countries such as Malaysia and Thailand who process as much as 40 per

cent. A key constraint for the growth of the sector is the high prices of processed food, primarily because of the cascading effect of taxation along the value chain. Con-sequently, consumption of processed food remains low despite rising disposable incomes, adversely impacting the investments in this very important sector.

Full potential of this sector can be exploited if pro-cessed food products are made affordable at lower prices through a zero-tax regime. Such a tax regime must be extended for a minimum period of 5 years to “communicate” stability and attract investment.

Q4: With the prediction of a deficit monsoon this year due to El Nino, do you see food inflation go-ing out of bounds soon?

Ans: Just as El Nino was showing signs of weakening, a monsoon blocker developed in Indian Ocean! It is cer-tainly a situation that requires close monitoring. More important than the overall deficit in rainfall, is its spa-cial and temporal distribution. There is insufficient vis-ibility on that count at this time. We therefore need to be prepared with contingent plans for different micro-regions, to be able to rapidly deploy them as the situa-tion evolves. A big comfort, of course, is the large stock of wheat and rice available with the government. So, if at all something goes out of bounds, it would only be a vegetable here or a fruit there.

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It was around the Ninth Plan (1997-2002) that India se-riously woke up to the infrastructure challenge. With

a slew of interventions, the key indicator of infrastruc-ture development, gross capital formation in infrastruc-ture (GCFI) as a percentage of gross domestic product (GDP), started a steady upward climb.

From 2002 onwards, the government aggressively pushed public-private partnerships (PPPs) to generate infrastructure investments. The results exceeded ex-pectations. The share of private capital in infrastructure investments, which stood at 22 per cent during the 10th Plan period (2002-07), moved up to 37 per cent in the 11th Plan period (2007-12). The 12th Plan (2012-17) opti-mistically budgeted for 48 per cent.

But, as is well known, the first two years of the 12th Plan have seen an extremely worrying slowdown.

Going forward, the challenges are manifold. Here are 12 priority suggestions for revitalising the infrastructure agenda.

Reform the Railways

Three reports provide a clear reform agenda: the Rake-sh Mohan Committee (2002), the Kakodkar Commit-tee on Railway Safety (2012), and the Pitroda Expert Group for Modernisation of Indian Railways (2012). The Rakesh Mohan Committee suggested that the Railways must eventually be corporatised into the Indian Rail-

ways Corporation (IRC). The government would need to set up an Indian Rail Regulatory Authority (IRRA) to distance the IRC from the government. The IRC should be governed by a reconstituted Indian Railways Execu-tive Board (IREB). The government of India should be in charge of only setting policy direction, and constituting the IRRA and the IREB.

Denationalise coal mining

India boasts the world’s fifth-largest coal reserves. Yet, we all are aware of the bottlenecks in supply and our dependence on Coal India. Coal mining was nationalised in 1973. It now needs to be denationalised with a sense of urgency.

Resurrect the river-linking plan

Prime Minister Atal Bihari Vajpayee had set up a task force under former Union Power Minister Suresh Prab-hu in 2002 to resurrect the idea in the hope of creat-ing another iconic infrastructure initiative. The reasons were powerful. Increasing disposable incomes would prompt voters to demand better water services and pay for them; similar pressures in agricultural water demand would arise due to diversification of Indian ag-riculture. Rising energy costs would make pump irriga-tion increasingly unattractive. Rapid growth in urban agglomerations would seriously strain their ground-water-dependent supply systems. The phenomenon of simultaneous droughts and floods would be substan-

Rebuilding India, Brick by Brick

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tially addressed, and inland water transport would be fostered.

Stop bidding out projects without sovereign clearances in place

Here are two ways to bite the bullet. First, have the sponsoring government authority set up a 100 per cent government-owned special purpose vehicle (SPV) to implement the project. This SPV should secure all per-missions and clearances. Then the authority should bid out the SPV to the highest bidder. Second, let all infra-structure PPP bids carry a special annexure listing all of the permissions required, thereby delineating the responsibilities of the sovereign sponsoring authority. Get babudom and its political leadership to be publicly and monetarily accountable. Let them not merely bid out projects as bemused observers.

Form an infrastructure ministry

There are 12 ministries at the central level that directly look after infrastructure. The rural development, envi-ronment, industry and commerce, and heavy industries ministries raise the count to 16. Adding the Planning Commission, finance ministry, the Prime Minister’s Of-fice and the Cabinet Secretariat (Cabinet Committee In-frastructural and Project Monitoring Group) raises the number of “involved” institutions at the Centre to 20. And they are all co-ordinating with 29 states. It is about time such “co-ordination” was institutionalised through a ministry for infrastructure.

Reshape IIFCL to catalyse long-term funds

The Interim Report of the High-Level Committee on Fi-nancing Infrastructure (August, 2012), headed by Deep-ak Parekh, argued for a significant restructuring of the role of India Infrastructure Finance Company Ltd (IIFCL) from that of a normal lender to one that provides guar-antees for bonds and extends subordinated debt. This would make IIFCL a catalyst in channelling large long-term inflows for infrastructure projects.

Independent regulatory authorities

The Planning Commission’s draft legislation of 2006 rec-ommends that regulators need to be directly responsi-

ble to the legislature. Selection should not only be fair but also “best in class”. India should consider opting for multi-sectoral regulators for communications, electric-ity, fuels and gas, and transport. This would eliminate proliferation of regulatory commissions, help build capacity, promote consistency of approach and check costs. In the case of states, a single regulatory commis-sion for all infrastructure sectors may be more produc-tive and cost-effective.

Set up land bank corporations

Passage of the Land Acquisition Bill (2012) has given rise to apprehensions on adequate and timely availability of land for development purposes. Energetic and vision-ary state land bank corporations need to be created. They should be empowered under the clause of “public purpose” to acquire large tracts of unused, unusable or waste land. They should be sufficiently capitalised by state governments and have the power to leverage more finance on the strength of their land-bank inven-tories. They could also oversee resettlement and reha-bilitation obligations.

Push hydroelectricity

India has exploited only 24 per cent of its hydro poten-tial at an installed capacity of around 35,000 megawatts against an “identified potential” of 148,701 Mw. A real-istic target would be to try and restore hydropower to at least an overall share of 20 per cent in India’s energy basket by the end of the 14th Plan period. This would re-quire an addition of 62,000 Mw of hydro capacity over the next 14 years.

Implement the 74th Amendment for urban governance

The 74th Amendment to the Constitution in 1992 sought to bring about a major change in the function-ing of urban local governments. Unfortunately, very little additional empowerment of municipal bodies has happened.

Clean up electricity distribution

Distribution reform requires micro-management of mil-lions and millions of end-users with metering, billing,

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collection, theft reduction, mafia control, and local area infrastructure upgradation. This systemic micro over-haul across the length and breadth of the country with attention to detail and a granular set of related activi-ties needs massive orchestration. Large-scale appoint-ment of “distribution franchisees in PPP mode” is the only practical solution.

Create a “National Infrastructure Partner-ship Commission”

There is an all-pervasive belief in the private sector that the manner in which risks are currently shared between

the government and private players in PPP contracts is heavily skewed against the private sector. Where, then, is the so-called “partnership”? Such a partnership should be carefully nurtured. There is the Infrastructure Concessions Regulatory Commission in Nigeria, the PPP Advisory Unit in Ghana, the PPP Centre in the Philip-pines and the PPP Unit in South Africa. In the case of South Africa, for example, one of the key functions of the PPP Unit is “contract renegotiations”.

-Here’s hoping that with a new government, we also get a revitalised infrastructure agenda.

This article appeared in Business Standard dated 13th March 2014. We thank Business Standard for allowing us to reprint the article. The online version can be accessed from the following link: http://www.business-standard.com/article/opinion/vinayak-chatterjee-rebuilding-india-brick-by-brick-114031301214_1.html

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ECONOMY MATTERS 50

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The Bharatiya Janata Party (BJP) coined the phrase ‘Tax Terrorism’ in its election manifesto while de-

scribing the state of affairs of the tax administration in India. The manifesto pledged to provide clarity, stability and certainty in taxation so that investors and individu-als alike are saved from the rude shocks arising from ag-gressive and unexpected tax demands. And now, many hopes are pinned on the new government to live up to its assurances.

Discussed below are some of the key measures which the new Government may consider in its endeavour to achieve the objectives mentioned in the Election mani-festo and revive the investment spirit:

Retrospective taxation of indirect transfers

This single measure introduced in the Budget 2012 pos-sibly caused more damage to investor sentiments than any other factor, especially as it was introduced in the wake of a favourable judgement by the Supreme Court in favour of the taxpayer. The Shome Committee has clearly recommended using retrospective amendments only in the ‘rarest of rare’ cases. In view of the favour-able ruling of the Supreme Court and the previous Gov-ernment’s reluctance to actually implement the retro-spective amendment on the ground, there has been no significant mobilisation of tax on account of this meas-ure. Senior leaders of the BJP have gone on record to state that such retrospective amendments are avoid-able and should not form part of a good tax policy.

The new Government has a golden opportunity, when it presents the current year’s budget in July, to rescind

this obnoxious provision. It will at one stroke assuage in-vestors’ concerns about the stability of the rule of law in India without any significant dent in revenue for the rea-sons mentioned above. In the prospective application of this provision, the Government should incorporate the very valuable suggestions by the Shome Committee in regard to the threshold limit of over 50 percent to de-termine the ‘substantial value’ test in respect of value derived from a business carried out in India.

Definition of royalties and fees for technical services

A similar retrospective amendment introduced in the context of change of definition of royalties and fees for technical services should be made prospective. Po-sitions have been taken in the past based on the pre-vailing judicial precedents and withholding tax paid by Indian companies while making such payments to non-resident companies. The unexpected retrospective amendment has caused enormous hardships to Indian companies as the concerned payments have already been made to non-residents as per the then prevailing law based on judicial precedents.

The Kelkar Committee recommendations

Almost a decade ago, the Vijay Kelkar Committee had made some ground breaking recommendations to sim-plify the Direct Tax law and also introduce the unified Goods and Services Tax (GST). Essentially, the Com-mittee had recommended more moderate tax rates and rationalisation of tax exemptions with a view to expanding the tax base. In line with the Kelkar Com-

Reforming the Tax System: Time to End ‘Tax Terror-ism’ and Revive Investments

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mittee recommendations, the Government should con-sider abolishing the various surcharges which have no-toriously become a permanent feature of the tax rates applicable to individuals as well as corporates. This will ensure a moderate rate of 30 percent tax applicable to corporates, though it will still be higher than the rates in China, Brazil, South Africa, Indonesia and Turkey. The basic tax exemption limit for individuals should also be increased keeping in mind the inflation over the years when the original exemption limit was fixed. This was also the recommendation of the Parliamentary Stand-ing Committee on Finance in its Report on DTC. The Government has already announced its resolve to intro-duce the long pending GST which is very heartening.

Reinstating investment allowance

The manufacturing sector is in a dire state and all meas-ures should be taken to put it on the growth track. There is an urgent need to bring tax investment allow-ance on capital investments made during a period of, say 3 years, to encourage companies to restart the in-vestment cycle. The revenue sacrificed will be more than offset by the increased collection in indirect taxes on the increase in output.

Tax administration

• Dispute resolution - The need for reforming the ground level tax administration and a change in the mind-set of the authorities cannot be overempha-sised.. As on date, there will perhaps be very few large companies, particularly MNCs, who do not face litigation. And many of these disputes are a re-sult of the unique positions adopted by the authori-ties. Over the last decade, the scale and size of tax litigation in India has been unprecedented. The Dis-pute Resolution mechanism which was introduced a few years ago has not helped in reducing the number of disputes being taken to the Tribunal and higher Courts. The Dispute Resolution Panels (DRP) which exclusively consist of Revenue officials, are reluctant to take views favourable to the taxpayer.

For dispute resolution to be really effective the DRP should consist of independent judicial members in addition to Revenue officials and all the members should be full time devoted to the DRP. Further, the DRP should be empowered to enter into nego-

tiated settlements with the taxpayer on the basis that neither the Tax authorities nor the taxpayer will go in for further appeal on matters so settled. This will go a long way in reducing the number of disputes at the Tribunal and Courts.

The Tax Administrative Reforms Commission (TARC) has been actively engaging with the indus-try to understand their concerns and suggest meas-ures to improve various administrative aspects. While TARC’s first report is still awaited, the govern-ment should consider TARC’s recommendations for reforming tax administration.

• Alternative Dispute Mechanism - The Authority for Advance Rulings (AAR) and the Advanced Pricing Authority (APA) are excellent initiatives for obtain-ing tax certainty in respect to proposed transac-tions. Whilst the AAR has been extensively used by non-residents, unfortunately in the last couple of years, not much progress has been made in terms of disposal of cases at the AAR. It’s telling that nearly 500 applications are pending for admission at the AAR, thus negating the very advantage of obtaining certainty in advance of proposed trans-actions. There is an urgent need to strengthen the AAR and incorporate greater accountability on the part of AAR in disposal of cases. The APA has got off to a flying start with nearly 400 applications made in the 2 years of its inception. The APA too needs to be strengthened with greater number of subject matter experts to help in disposal of the requests that are received in such large numbers.

• Risk based assessments - Many tax jurisdictions have started adopting the risk based assessment approach meaning focussing only on higher risk corporates who have taken aggressive tax posi-tions on their tax returns or have demonstrated aggressive tax behaviour in the past. This enables tax administration to increase their chances of rais-ing substantial and sustainable tax revenues rather than spread itself thin by assessment of almost all the taxpayers with diluted results. There is a crying and urgent need in India for the tax administration to adopt this risk based approach in assessment of corporates. This will encourage corporates to re-main in the ‘low risk category’ by adopting reason-

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able tax positions thus reducing the administrative burden on the Tax authorities as well as reducing the number of cases resulting in disputes.

• Enhancement of tax base - There is a crying need to enhance the tax base and improve the tax GDP ratio so as to reduce the burden on honest taxpay-ers. Whilst the Government has decided to set up a Special Investigation Team (SIT) under direction of Supreme Court to unearth black money stashed abroad by Indian residents, the Government should aggressively pursue foreign jurisdictions to enter into automatic exchange of information mecha-nism whereby these jurisdictions will automatically exchange, say once a year, information relating to bank balances, interest and dividend income, pro-ceeds of sale of capital assets, etc of Indian resi-dents.

Simultaneously, the Tax administration should up-grade its technology systems to enable analysis of data so obtained from various jurisdictions. Like other countries have done, India should make an example by initiating stringent punitive action in those cases where Indian residents have avoided Indian taxes by siphoning of money to tax havens abroad to serve as a strong deterrent against such tax avoidance in future. Thus, along with aggres-

sive approach to recover taxes, strong deterrents need to be established to ensure correct reporting of income for taxation in India.

Goods and Services Tax (GST)

Finally, the industry eagerly awaits the implementa-tion of GST, which has the potential to enhance growth by 1.5 – 2 per cent. The FM’s statement that he would meet the State finance ministers to build consensus on the GST is heartening. The government must address the States’ concerns about compensation for any losses and other issues. However, it should not compromise on the GST design by allowing various exclusions. The basic objectives of GST are to have a simple, rational and efficient tax system that would promote investments and economic growth. To be able to achieve these ob-jectives, GST must include in its ambit all industry sec-tors without exclusions, particularly not under the Con-stitution. It is a view supported by the Parliamentary standing Committee on Finance on GST.

The new Government has started well by emphasising the problems at hand in its Election manifesto. Like with its other pledges, it will surely be judged based on the progress achieved in ending the problem of ‘Tax Terrorism’ in India and promoting tax policies that facili-tate investment and growth.

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The outcome of the recent Lok Sabha elections was historic and unprecedented. A single party voted

with an absolute majority of seats means an end to the era of coalition politics, which was often associ-ated with policy gridlock, or stalled economic reforms. The government led by Prime Minister Narendra Modi now faces a twin challenge, of carrying the huge bur-den of expectations, and of overcoming adverse mac-roeconomic conditions. The air is certainly filled with optimism as signified by the stock market, and by the inrush of foreign portfolio capital. The priorities before the the new government are to reduce inflation sharply, increase industrial investment and growth, help large scale job creation, restore fiscal health and ensure that economic development benefits all, especially the poor.

The revival of economic growth requires a boost to manufacturing, increased spending in infrastructure, unclogging large stalled projects, and catalysing big and small entrepreneurs. Growth needs both domestic and external drivers. In this article, we focus on strategies to revive growth of exports. Even though the world econ-omy is growing moderately, India can harvest global de-mand to at least double its share of world exports. Its share currently stands at a dismal 1.6 per cent of global goods exports, whereas China’s share is 11 per cent. Due to emerging labour shortage in China, the low cost man-ufacturing activity will surely migrate out, giving India a

unique opportunity. In services exports, India’s share is 3.2 per cent, although in the specific category of soft-ware and offshore IT services its share is 22 per cent. In 2010, the Commerce Ministry published a paper outlin-ing a strategy to double India’s exports in three years, and then double India’s share of global exports by 2020. That strategy remains salient and is more relevant in the current context.

India’s merchandise exports have evolved in two dis-tinct ways. In terms of share in overall exports, the share of agri-and allied products, ores and minerals and other commodities has moved in a range-bound fash-ion. However, there has been some perceptible shift from the manufactured goods to the petroleum and crude products segment between FY03 and FY13. It is interesting to note that, together manufactured goods and petroleum and crude products have accounted for 81 per cent of overall exports in FY03 and FY13. Howev-er, the share of manufactured goods has dropped from 76 per cent in FY03 to 61 per cent in FY13, which in turn has been taken over by petroleum and crude products. Share of petroleum and crude products has risen con-siderably, from 5.0 per cent in FY03 to 20.1 per cent in FY13. Thus, the evolution is towards more value-added and more complex, engineering oriented products. But we still have very large underexploited potential in tex-tiles.

Exports as a Growth Driver

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The other distinct trend is that India’s top export des-tinations have moved east. The Middle East and China are the top two trading partners, and exports to East Asia are fast growing. As of FY13, share of Asia, in In-dia’s exports rose to more than half (50 per cent), when compared with that in FY03 (42 per cent). While North America and Europe will remain important markets, the

distinct change in trend highlighted earlier is inescap-able. Along with increased trade integration with Asia, this shift of export direction away from America and Eu-rope may be attributed to the moderation in economic activity in these countries, which has caused import de-mand from these countries (i.e. exports from India and others) to contract.

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2. Emphasis on the Manufacturing Sector

Share of manufacturing exports in total exports has gone down in the past decade (from 80 per cent in 2000 to 61 per cent currently). As a result, India’s share in global manufacturing exports is a miniscule 1.4 per cent, far behind China’s 14.8 per cent. Poor infrastruc-ture, low FDI, Low R&D spending, tax policies and rising input costs are some of the impediments to growth of manufacturing exports.

While in China, Brazil and South Africa, the manufactur-ing sector has grown at higher rates than the GDP, in India, the share of manufacturing in GDP has stagnated at 15 per cent and accounts for a mere 12 per cent of the workforce. Every job created in manufacturing has a multiplier effect, creating three jobs in the services sector. Hence, it is clear that any boost to exports ba-

In this article, we identify four specific factors that are relevant to boosting India’s exports.

1. Translating India’s Demographic Advantage into Productivity

The Japanese workforce has been shrinking since 1995, and the Korean workforce will start to decline beginning 2015. China’s working-age ratio peaked in 2013 and will continue to decline in the next few decades. However, India’s demographic transition is presently well under-way, and the age structure of the population is likely to

sically needs a boost to manufacturing with particular focus on boosting the small and medium enterprises. This also calls for skill upgradation, increased spending on R&D and enhanced infrastructure. The latter means reviving financial health of the power sector, and much improved logistics. India needs to change the mix of road and rail in domestic freight. The National Manufac-turing Policy (NMP) aims to increase the share of manu-facturing in GDP to 25 per cent, and all the ingredients in the NMP are relevant to boosting exports.

3. Improving Trade Facilitation Measures

A powerful way to boost trade is by focusing on trade facilitation by improving both hard infrastructure –ports, railways, roads, airports, and soft infrastructure such as shipping, logistics, telecommunication and busi-ness environment. Trade transaction costs play an im-

evolve favorably over the next two to three decades. The democratic dividend could add 2 percentage points to per capita GDP growth per annum, according to an estimate by the IMF. However, unemployment through skill upgradation is what India will have to manage care-fully in order to take advantage of this demographic dividend. Though India can benefit from rising wages in China, it is important to consider India’s productivity dif-ferential with China, which depends on multiple factors like the extent of automation and skills quality.

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4. Reviewing our Free Trade Agreements

Trade liberalisation has been a key feature of India’s eco-nomic reforms. In recent times, the country has actively pursued free trade agreements (FTAs) with several ma-jor trading partners. Though it is still early to draw defi-nite conclusions about India’s FTAs with ASEAN, Japan and Korea, we can clearly see that the trade deficit with these countries has increased post FTAs. India’s trade

deficit with ASEAN trade increased from US$7.1 billion in FY10 to US$9.9 billion currently. Similarly the trade deficit with Japan also increased from US$3.5 billion in FY11 to US$6.3 billion currently. With Korea the deficit rose from US$5.2 billion to US$ 8.9 billion in the past three years. Since 2006, India’s exports to RTA partners increased by 21 per cent per year, which is roughly the same as with other non-RTA countries. This calls for a comprehensive review of trade agreements, and their benefits in promoting India’s exports.

portant role in decisions to participate in trade. Improv-ing trade facilitation measures now feature prominently in the WTO. A World Bank study by Helble and Wilson estimates that every dollar spent in aid-for-trade by the recipient countries on reforming trade policy and regu-lation (e.g. customs clearance, technical barriers, etc.), the country’s trade increases by US$697 dollars annual-

ly. Any country which wants to be an integral part of the global value chain should try to work on all components of trade facilitation. It is, therefore, imperative for India to improve on these counts in order to boost exports. So far, the best performing component of trade facili-tation for India has been “logistics, quality and compe-tence” and the worst has been the “infrastructure”.

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Of course, this does not mean opting out of trade agree-ments, nor does it mean reducing our engagement with blocs like ASEAN or EU. But it does imply that going for-ward; the negotiations should incorporate features that will help exports, in light of the review of performance of past FTA’s.

In addition to the four factors identified, several other reforms will affect the success of export promotion. The big one is the rollout of natiowide Goods and Ser-vices Tax (GST), which will add 10 to 15 per cent to ex-ports. This is basically due to cost reduction and efficien-cy gains. Ultimately, the success of exports is crucially dependent on the strengthening of India’s domestic manufacturing sector, which, in turn, is the culmination

of action-plan outlined in the National Manufacturing Policy.

To conclude, net exports (i.e. exports minus imports) have added roughly 5 to 7 per cent to China’s GDP every year. By comparison India’s net exports are negative, since we have always had a current account deficit. This has largely been due to India’s external energy depend-ence, but it is also because of its underexploited export potential. In the coming years, this negative needs to change to a positive balance. Policymakers have a key role in ensuring this. One of the immediate needs is the implementation of the NMP, which would give a boost to manufacturing output.

(Research inputs for this article were provided by Prachi Priya. Views are personal)

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The role played by manufacturing in economic pro-gress of any country is of paramount importance.

Since the global economic crisis, governments have started targeting specific policies and sectors for pro-motion of manufacturing as an engine for growth and employment creation. A vigorous debate has emerged among economists regarding the ‘new industrial poli-cies’ and their efficacy.

Amid this environment, massive underlying trends are fast transforming global manufacturing. Geographical locations are shifting due to rising wages and costs in China and emergence of new investment destinations. Technology is changing products and shifting the way processes are managed. The rise of niche consumers is enabled through new advances such as 3-D printing and nanotechnology. E-commerce is revamping logistics and supply chains to the ultimate consumer. The im-perative of sustainable development adds yet another dimension to manufacturing change.

Within this, the Indian manufacturing sector must be-come more nimble and competitive just to maintain its standing in the world. But if it is to emerge as a leader and also as a strong growth driver and generator of em-ployment, much more needs to be done than just revive manufacturing, a sector that has seen an unprecedent-ed near-stagnation in the last three years.

Presently manufacturing contributes 15 per cent to the overall GDP, 12 per cent to employment and 61 per cent to exports. The National Manufacturing Policy envisag-es increasing contribution of manufacturing to econom-ic GDP by 25 per cent and creating 100 million additional jobs by 2022; however, under current circumstances, this target seems difficult to achieve.

There are various issues both macro and micro in na-ture which have led to the deterioration in manufac-turing. Complex business regulatory environment, high and cascading tax structures, rising factor costs of land-labour-power-raw material, delays in providing clearances to manufacturing projects, declining manu-facturing investments, falling competitiveness, delay

in announcements of key polices, etc. are some of the key challenges impacting manufacturing growth. Addi-tionally, global recession, rupee depreciation, rising im-ports, high oil prices, etc. have further burdened manu-facturing growth.

The key areas of intervention would be enhancing manufacturing competitiveness, fixing the essential building blocks and factor cost related to land, labour, power, capital, and raw material; ensuring speedy and accountable implementation of all manufacturing poli-cies; and creating demand and developing scale for lo-cal industry.

Short-term Interventions

To begin with, the creation of demand would need at-tention to revive the sector urgently. Many projects are currently non operational due to pending clearances in land, mining leases, environment & forest, etc. Expedit-ing the process of approvals and clearances for these projects to unlock invested funds, creating state level Project Monitoring Groups (PMG), and expanding the scope of the Cabinet Committee on Investment by bringing down the threshold level of projects that could be considered by PMG from Rs 1000 crore to Rs 500 crore would help add to demand.

Continued excise rebate and extension to other sec-tors could also create new demand. Reducing interest rates is critical as this will immediately catalyse demand for consumer durables and boost production. Interest rates subventions can be offered for low-cost housing projects which would re-energise demand for related goods in steel, cement, etc.

Big projects such as Delhi-Mumbai Industrial Corridor (DMIC), Dedicated Freight Corridor (DFC), National In-vestment and Manufacturing Zones (NIMZs), etc. will be essential to the overall manufacturing endeavor. These projects should be continuously monitored for clearances and approvals so that they are implemented as quickly as possible. Bids should be offered after ob-taining sovereign clearances. FDI should be especially

Manufacturing Agenda for the New Government

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invited to these large projects through intensive mar-keting and roadshows.

Many PSEs enjoy surplus funds that can be deployed to add capacity and expansion plans are in place. In synch with the procurement policy, PSEs can work with ven-dors and suppliers to boost their competitiveness while ensuring timely payments to them to keep the business cycle running smoothly.

Quick implementation of sectoral policies such as Na-tional Chemicals Policy, Mining and Minerals Develop-ment and Regulation Act (MMDR), National Steel Pol-icy and others would provide a fillip to manufacturing growth. Policies should also be instituted for identified sectors such as defence production, aircraft compo-nent manufacturing, ship-building, textiles, ICTE hard-ware etc that have large employment benefits.

Forums for enabling a strong industry-government coordination can resolve and arrive at a consensus on compelling issues such as policy interventions, taxation structures, raw material linkages, infrastructure and lo-gistic requirements, etc. Such a forum should meet on a regular basis to identify issues and monitor progress on resolving them.

Strong coordination is required on export promotion. Industrial parks, related infrastructure and port con-nectivity along with an efficient system of export pro-cesses, taxation, etc is required to slot India into global supply chains. Competitiveness at the firm level must be strengthened while information arising from trade agreements and new infrastructure connectivities should be available to manufacturers.

An export development fund to support MSMEs which are key exporters may be considered. Transaction costs as identified by industry have to be alleviated and a study on impact of FTAs - which are doing well and which are the areas of opportunity - needs to be under-taken. Trade facilitation covers a wide range of areas from infrastructure and connectivity to customs and mutual recognition of standards. Air transport agree-ments, shipping lines, port evacuation, rapid clearances and procedures, etc would be part of this endeavor.

Focusing on sectors of national strategic importance and labour intensive sectors such as defense, auto, chemicals, electronics, textiles, capital goods, steel, etc. could help boost manufacturing in these areas.

Medium-term Interventions

An innovative way to encourage employment-oriented manufacturing would be to incentivize a set of enter-prises employing higher than a minimum threshold of workers. Means such as employment-linked tax struc-ture, easier labour regulations, higher social security, deductions for skill development and worker housing, etc could be deployed for mass manufacturing enter-prises.

The question of complex labour regulations needs to be addressed through a Commission on Employment headed by an eminent leader acceptable to different stakeholders to recommend a holistic strategy to gen-erate employment. The Commission would also address labour reforms to ensure beneficial outcomes for job creation in organized sector and closely monitor trends in job creation. The labor laws in the country are archaic and have not kept pace with globalization, competitive-ness and market dynamics. There is need to rationalise and combine the existing 44 Central Acts and State level labour laws into several major buckets covering Indus-trial Relations, Wages, Social Security and Welfare. A separate set of labour laws for MSMEs and the services sector may be considered.

Fuel availability and cost is a key component of manu-facturing success. A number of actions are required to overcome the power hurdle, such as fuel shortages, tar-iff structures, distribution reforms etc.

The Goods and Services Tax is one of the foremost pri-orities for the manufacturing sector as it would make India a single market and reduce transaction costs in movement of goods. It should be simple, universal, and stable with a strong IT platform. Apart from GST, cus-toms duties also need to be tweaked to check inverted duty structures that promote imports at the cost of do-mestic manufacturing.

Complicated business regulations and administrative processes too deter manufacturing. The Government must set up a Task Force to implement a strategy to take India from 134 to 50 in next 5 years in World Bank’s Ease of Doing Business ranking. Self-regulation, e-govern-ance and facilitative procedures and inspection formats with special attention to small enterprises is needed.

To encourage manufacturing investments, corporate taxes should be aligned with practices in other emerg-

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ing manufacturing nations. India has one of the highest corporate tax rates among developing economies. Indi-rect taxes are complex and layered, adding up to high total rates. Other issues such as anomalies and inverted duty structures need to be weeded out.

Land acquisition and land cost have emerged as a road-block to manufacturing. Land acquisition for public purpose should not take more than 2 years and current Rehabilitation and Resettlement norms under new Act need to be conducted concurrently for fast land use transition. On the whole, the Act must be made industry friendly by reducing time and cost involved in acquiring land.

Sustainable and Green Manufacturing can be a huge new area of opportunity for Indian enterprises, given the global stress on combating climate change. One way to encourage green manufacturing would be to incentivize capital investment and revenue expenditure in environmental care, based on industry-wise norms.

Skill Development has become one of the major chal-lenges in the industry today. It is recommended to create 2000 more Industrial Training Institutes in next three years, and making strong efforts to achieve the target of skilling 500 million persons by 2022. Providing entrepreneurship training, finance access, and hand-holding can go a long way towards converging entre-

preneurship and employment.

The MSME sector requires a special focus in the task of reviving manufacturing. A comprehensive policy ar-chitecture related to labour laws, credit flow and infra-structure as well as technology and competitiveness is needed. The implementation of Public Procurement Policy by various State Governments would go a long way to supporting MSME and the issue of Delayed Pay-ments must be addressed. The recommendations of the Inter Ministerial Committee report on “Boosting Ex-ports from MSME Sector” should be speedily instituted.

R&D and technology adaptation will need innovative ideas on promoting Indian multinationals and encour-aging testing, design and academic linkages. A report should be brought out on how to inculcate R&D and technology adaptation for the next level of manufactur-ing such as 3D printing.

Conclusion

Given that manufacturing is the only source of regular jobs for less-skilled workers, India should be careful to leverage its human resources in a strategic manner. Re-viving the manufacturing sector is therefore a top pri-ority for rejuvenating growth and generating employ-ment.

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