CII Economy Matters, September-October 2013

ECONOMY MATTERSVolume 01 No. 9September-October 2013

2

4

6

8

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18

Food Inflation in India

Underlying risks in the global economy have not abated and there is still good reason to be

worried about the future growth prospects of large economies. This was the clear message

from IMF's second bi-annual outlook released in October 2013. Taking cognizance of the

risks, the multilateral agency pared its global growth forecast by 0.3 per cent to 2.9 per cent

for the current year. The slower-than-expected growth this year is mainly attributable to

the sluggish growth in the emerging economies. However, notwithstanding the dim

prospects of emerging economies, they still continue to account for the bulk of global

growth. Growth in the advanced economies has turned around to some extent, but the

durability of the recovery process remains a concern, noted IMF. In this regard, the

resolution of the debt crisis in US, in the nick of time, came as a huge relief.

Coming to the domestic front, the resurgence of current account deficit (CAD) to 4.9 per

cent of GDP during April-June 2013 quarter from 3.6 per cent in the last quarter clearly

indicates that the economy continues to remain vulnerable to the external environment.

However, going forward, the positive turn in exports evidenced during the past two

months along with early signs of revival in the US economy would bring down CAD. A

favourable policy environment such as lowering the cost of credit for exporters and

providing priority sector status for export finance to improve cost competitiveness in

international markets would help to further improve exports. Other indicators of economic

health like industrial production continued to exhibit stress. In order to lift industrial

growth, we urge the government to take immediate action to bring demand back into the

economy. Easing monetary policy alone is not sufficient. This must be supplemented with

government action to revive investment and stimulate demand. There is a crying need to

expedite project clearances, implement the national manufacturing policy, indicate

timelines for implementation of industrial and freight corridors and provide a competitive

market for the coal and mining sectors.

High food inflation has been one of the key drivers of overall WPI inflation since the last

many years. High food inflation, in turn, has been primarily driven by supply-side shocks.

The shocks arose from a shortfall in food-grain and non-food grain commodities

(vegetables, fruits, protein-based foods - pulses, milk, eggs, meat and fish). Sharp increases

in international prices of fuels and commodity too were a trigger. The concerns over food

inflation are driven by the fact that an average household in India still spends almost half of

its expenditure on food, with the poor spending as much as 60 per cent. With the National

Food Security Act on the anvil, it will be ever more important to rein in food inflation. There

are several policy prescriptions suggested in order to contain high food prices like

liberalising agricultural markets, developing advanced supply chains and, developing

integrated agri-intelligence hubs amongst other measures.

Chandrajit Banerjee

Director-General, CII

1

FOREWORD

SEPTEMBER-OCTOBER 2013

Underlying risks in the global economy have not abated and there is still good reason to be

worried about the future growth prospects of large economies. This was the clear message

from IMF's second bi-annual outlook released in October 2013. Taking cognizance of the

risks, the multilateral agency pared its global growth forecast by 0.3 per cent to 2.9 per cent

for the current year. The slower-than-expected growth this year is mainly attributable to

the sluggish growth in the emerging economies. However, notwithstanding the dim

prospects of emerging economies, they still continue to account for the bulk of global

growth. Growth in the advanced economies has turned around to some extent, but the

durability of the recovery process remains a concern, noted IMF. In this regard, the

resolution of the debt crisis in US, in the nick of time, came as a huge relief.

Coming to the domestic front, the resurgence of current account deficit (CAD) to 4.9 per

cent of GDP during April-June 2013 quarter from 3.6 per cent in the last quarter clearly

indicates that the economy continues to remain vulnerable to the external environment.

However, going forward, the positive turn in exports evidenced during the past two

months along with early signs of revival in the US economy would bring down CAD. A

favourable policy environment such as lowering the cost of credit for exporters and

providing priority sector status for export finance to improve cost competitiveness in

international markets would help to further improve exports. Other indicators of economic

health like industrial production continued to exhibit stress. In order to lift industrial

growth, we urge the government to take immediate action to bring demand back into the

economy. Easing monetary policy alone is not sufficient. This must be supplemented with

government action to revive investment and stimulate demand. There is a crying need to

expedite project clearances, implement the national manufacturing policy, indicate

timelines for implementation of industrial and freight corridors and provide a competitive

market for the coal and mining sectors.

High food inflation has been one of the key drivers of overall WPI inflation since the last

many years. High food inflation, in turn, has been primarily driven by supply-side shocks.

The shocks arose from a shortfall in food-grain and non-food grain commodities

(vegetables, fruits, protein-based foods - pulses, milk, eggs, meat and fish). Sharp increases

in international prices of fuels and commodity too were a trigger. The concerns over food

inflation are driven by the fact that an average household in India still spends almost half of

its expenditure on food, with the poor spending as much as 60 per cent. With the National

Food Security Act on the anvil, it will be ever more important to rein in food inflation. There

are several policy prescriptions suggested in order to contain high food prices like

liberalising agricultural markets, developing advanced supply chains and, developing

integrated agri-intelligence hubs amongst other measures.

Chandrajit Banerjee

Director-General, CII

1

FOREWORD


CO

NT

EN

T

Cover Story

High food inflation is the worst

form of hidden tax often inflicted

on poor people. Supply-side

shocks have led to high food

inflation in the last few years. The

shocks arose from a shortfall in

food-grain and non-food grain

commodities (vegetables, fruits,

protein-based foods - pulses, milk,

eggs, meat and fish). We discuss

the various aspects of food

inflation to explore its hows and

whys coupled with recommended

policy prescription to tame it in

this month's Special Article.

3

DISCLAIMER

Copyright © 2013 by Confederation of Indian Industry (CII), All rights reserved.

No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by

any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the

copyright owner. CII has made every effort to ensure the accuracy of information presented in this document. However,

neither CII nor any of its office bearers or analysts or employees can be held responsible for any financial consequences arising

out of the use of information provided herein. However, in case of any discrepancy, error, etc., same may please be brought to

the notice of CII for appropriate corrections.

Published by Confederation of Indian Industry (CII), The Mantosh Sondhi Centre; 23, Institutional Area, Lodi Road, New Delhi-

110003 (INDIA),

Tel: +91-11-24629994-7, Fax: +91-11-24626149; Email: [email protected]; Web: www.cii.in

2ECONOMY MATTERS

The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India,

partnering industry, Government, and civil society, through advisory and consultative processes.

CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in India's

development process. Founded over 118 years ago, India's premier business association has over 7100 members, from the

private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 enterprises from

around 257 national and regional sectoral industry bodies.

CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing

efficiency, competitiveness and business opportunities for industry through a range of specialized services and strategic

global linkages. It also provides a platform for consensus-building and networking on key issues.

Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes.

Partnerships with civil society organizations carry forward corporate initiatives for integrated and inclusive development

across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill

development, empowerment of women, and water, to name a few.

The CII Theme for 2013-14 is Accelerating Economic Growth through Innovation, Transformation, Inclusion and Governance.

Towards this, CII advocacy will accord top priority to stepping up the growth trajectory of the nation, while retaining a strong

focus on accountability, transparency and measurement in the corporate and social eco-system, building a knowledge

economy, and broad-basing development to help deliver the fruits of progress to all.

With 63 offices, including 10 Centres of Excellence, in India, and 7 overseas offices in Australia, China, Egypt, France, Singapore,

UK, and USA, as well as institutional partnerships with 224 counterpart organizations in 90 countries, CII serves as a reference

point for Indian industry and the international business community.

ABOUT CII ResearchThe CII Research team regularly tracks economic, political and business developments within India and abroad to comment on

the emerging economic scenario for the Indian corporate sector. It tracks policy developments, offers comprehensive analysis

of industries and comments on and analyzes the economic climate through its regular publications– Economy Matters,

Business Outlook Survey and, Fortnightly Economic Updates.

We have in-house expertise in providing the most comprehensive, in-depth, unbiased and incisive analysis and forecasts on the

Indian economy and various sectors. CII Research is also well versed and well equipped to offer customized research based

consultancy services on any theme. It has been catering to the needs of various stakeholders including industries, business

houses and government providing meaningful insights about the prevailing trends, outlook on likely future trends, factors

behind these trends, existing government policies and policy recommendations with an objective to help stakeholders in

better understanding of the issues at hand. The objective of CII Research is to assist stakeholders in taking more informed and

strategic decisions with due focus on the attainment of short term as well as long term goals. For more details and to advertise

in our products, write to us at [email protected]

Inside This Issue

Executive Summary .................................................................04

Overview of the World Economic .....................................05

Outlook Projections

Global Trends

06IMF Predicts a Grim Outlook for the Global Economy

Domestic TrendsCurrent Account Deficit, IIP, InflationCII-BOS09

TaxationBase Erosion and Profit Shifting

16

Sector in FocusFood Processing

18

Special ArticleFood Inflation in India

23

Economy Monitor ................................................................... 39

Special FeatureImpact of Government Moves on Fertilizer Industry35


CO

NT

EN

T

Cover Story

High food inflation is the worst

form of hidden tax often inflicted

on poor people. Supply-side

shocks have led to high food

inflation in the last few years. The

shocks arose from a shortfall in

food-grain and non-food grain

commodities (vegetables, fruits,

protein-based foods - pulses, milk,

eggs, meat and fish). We discuss

the various aspects of food

inflation to explore its hows and

whys coupled with recommended

policy prescription to tame it in

this month's Special Article.

3

DISCLAIMER

Copyright © 2013 by Confederation of Indian Industry (CII), All rights reserved.

No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by

any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the

copyright owner. CII has made every effort to ensure the accuracy of information presented in this document. However,

neither CII nor any of its office bearers or analysts or employees can be held responsible for any financial consequences arising

out of the use of information provided herein. However, in case of any discrepancy, error, etc., same may please be brought to

the notice of CII for appropriate corrections.

Published by Confederation of Indian Industry (CII), The Mantosh Sondhi Centre; 23, Institutional Area, Lodi Road, New Delhi-

110003 (INDIA),

Tel: +91-11-24629994-7, Fax: +91-11-24626149; Email: [email protected]; Web: www.cii.in

2ECONOMY MATTERS

The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India,

partnering industry, Government, and civil society, through advisory and consultative processes.

CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in India's

development process. Founded over 118 years ago, India's premier business association has over 7100 members, from the

private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 enterprises from

around 257 national and regional sectoral industry bodies.

CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing

efficiency, competitiveness and business opportunities for industry through a range of specialized services and strategic

global linkages. It also provides a platform for consensus-building and networking on key issues.

Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes.

Partnerships with civil society organizations carry forward corporate initiatives for integrated and inclusive development

across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill

development, empowerment of women, and water, to name a few.

The CII Theme for 2013-14 is Accelerating Economic Growth through Innovation, Transformation, Inclusion and Governance.

Towards this, CII advocacy will accord top priority to stepping up the growth trajectory of the nation, while retaining a strong

focus on accountability, transparency and measurement in the corporate and social eco-system, building a knowledge

economy, and broad-basing development to help deliver the fruits of progress to all.

With 63 offices, including 10 Centres of Excellence, in India, and 7 overseas offices in Australia, China, Egypt, France, Singapore,

UK, and USA, as well as institutional partnerships with 224 counterpart organizations in 90 countries, CII serves as a reference

point for Indian industry and the international business community.

ABOUT CII ResearchThe CII Research team regularly tracks economic, political and business developments within India and abroad to comment on

the emerging economic scenario for the Indian corporate sector. It tracks policy developments, offers comprehensive analysis

of industries and comments on and analyzes the economic climate through its regular publications– Economy Matters,

Business Outlook Survey and, Fortnightly Economic Updates.

We have in-house expertise in providing the most comprehensive, in-depth, unbiased and incisive analysis and forecasts on the

Indian economy and various sectors. CII Research is also well versed and well equipped to offer customized research based

consultancy services on any theme. It has been catering to the needs of various stakeholders including industries, business

houses and government providing meaningful insights about the prevailing trends, outlook on likely future trends, factors

behind these trends, existing government policies and policy recommendations with an objective to help stakeholders in

better understanding of the issues at hand. The objective of CII Research is to assist stakeholders in taking more informed and

strategic decisions with due focus on the attainment of short term as well as long term goals. For more details and to advertise

in our products, write to us at [email protected]

Inside This Issue

Executive Summary .................................................................04

Overview of the World Economic .....................................05

Outlook Projections

Global Trends

06IMF Predicts a Grim Outlook for the Global Economy

Domestic TrendsCurrent Account Deficit, IIP, InflationCII-BOS09

TaxationBase Erosion and Profit Shifting

16

Sector in FocusFood Processing

18

Special ArticleFood Inflation in India

23

Economy Monitor ................................................................... 39

Special FeatureImpact of Government Moves on Fertilizer Industry35


Global Trends

Domestic Trends

Sector in Focus: Food Processing

Highlighting the underlying global risks still prevailing on

the horizon, International Monetary Fund (IMF) in its

second bi-annual outlook released in the first week of

October 2013, pared its global growth forecast by 0.3 per

cent to 2.9 per cent. The slower-than-expected growth in

the current year is mainly attributable to the sluggish

growth in the emerging economies. Growth rates in

emerging markets and developing economies are now

down some 3 percentage points from 2010 levels, with

Brazil, China, and India accounting for about two-thirds of

the decline. The largest economy in the group, China is

expected to now grow by 7.6 per cent in the current year

as compared to 7.8 per cent in the July forecast. This

slowdown will reverberate across developing Asia, where

growth is expected to remain between 6.25 and 6.5 per

cent in 2013-14. In sum, the latest round of forecasts from

IMF clearly indicates that the glimmer of hope seen in its

April review seems to have faded somewhat.

The latest data for the Indian economy released for the

first-quarter of 2013-14 shows that the current account

deficit (CAD) widened to 4.9 per cent of GDP from 3.6 per

cent in the previous quarter. Widening of CAD in the first

quarter was due to a sharp increase in gold imports. On

BoP basis, there was a slight drawdown in foreign

exchange reserves of US$0.3 billion in the first quarter as

against an accretion of US$0.5 billion in same period of

last year. Going forward, however CAD is expected to

exhibit an improvement due to several policy measures

announced in the last few months, like curb on gold

imports coupled with moderating imports due to

slowdown in domestic demand. In other domestic

developments during the month, index of industrial

production (IIP) decelerated to 0.6 per cent in August

2013 as compared to 2.8 per cent in the previous month

and 2.0 per cent in the same period last year. Contraction

in manufacturing output during the month was the key

driver behind the deceleration in overall industrial output.

WPI inflation on the other hand, accelerated to 7-month

of 6.5 per cent in September 2013 as compared to 6.1 per

cent in the previous month mainly because of higher

vegetable prices. Low growth and high inflation has given

rise to a stagflationary type of environment in the

economy currently.

Food processing (FP) is an emerging sector of the Indian

economy. Driven by factors such as growing per capita

income, large availability of raw materials, changing

lifestyles, and conducive government policies, the sector

has shown robust growth performance in the recent

years. The FP sector in India, however, has yet to go a long

way in realizing its full potential, which in turn will also help

in ensuring remunerative prices to farmers and affordable

prices to consumers, thereby resulting in a win-win

situation to both. Given the huge unexploited potential of

agriculture in the country and rapidly growing per capita

income leading to ever expanding demand for agriculture

and processed food products, not only is India capable of

fulfilling its own food demand, it has vast potential to

become top five food exporter over the next two decades.

This in turn, will also make the Indian food business an

exciting investment destination for global players. The

need of the hour is to trigger the process of

transformation in the sector towards realizing its full

potential in meeting the growing demand and thus in the

process creating income, employment and, export

earnings for the country.

India has been facing high and persistent inflation in the

last five years except in the intervening year of 2009-10.

High growth during this period facilitated a steep rise in

incomes, which in turn pushed up the purchasing power of

the population. WPI inflation averaged 7.5 per cent in the

five year period, which is way higher than the RBI's

comfort threshold of 5 per cent. One of the main drivers of

inflation during this period has been the high food prices.

Total food inflation (primary and manufacturing) has

averaged 10.3 per cent during the period under

consideration. To be sure, in the current fiscal, even

though overall WPI inflation has averaged 5.3 per cent in

the first five months (April-August), food inflation has

remained high at 9 per cent. Further, food inflation has

remained above the psychological 10 per cent mark in 26

months out of 60 months in the last five years, while it has

remained above 9 per cent mark for more than two-thirds

of the period. This clearly highlights the fact that food

inflation in the past few years has remained not only high,

but persistent as well. The concerns over food inflation

are driven by the fact that an average household in India

still spends almost half of its expenditure on food, with the

poor spending as much as 60 per cent. Such price spikes

adversely impacts the household budget allocation for

food and non-food items.

Special Article

EXECUTIVE SUMMARY

4ECONOMY MATTERS

GDP FORECAST

Overview of the IMF World Economic Outlook Projections

5

Year over Year (%)

GDP at market prices ProjectionsDifference from July

2013 WEO Update

Source: IMF, WEO Update, October 2013Note: * For India, data and forecasts are on a fiscal year basis. At factor costs, GDP forecasts stand at 4.25 per cent and 5 per cent in FY14 & FY15 respectively

2011 2012 2013 2014 2013 2014

World Ouput 3.9 3.2 2.9 3.6 -0.3 -0.2

Advanced Economies 1.7 1.5 1.2 2.0 0.0 0.0

United States 1.8 2.8 1.6 2.6 -0.1 -0.2

Euro Area 1.5 -0.6 -0.4 1.0 0.1 0.0

- Germany 3.4 0.9 0.5 1.4 0.2 0.1

- France 2.0 0.0 0.2 1.0 0.3 0.1

- Italy 0.4 -2.4 -1.8 0.7 0.0 0.0

- Spain 0.1 -1.6 -1.3 0.2 0.3 0.1

Japan -0.6 2.0 2.0 1.2 -0.1 0.1

United Kingdom 1.1 0.2 1.4 1.9 0.5 0.4

Canada 2.5 1.7 1.6 2.2 -0.1 -0.1

Emerging & Developing Economies 6.2 4.9 4.5 5.1 -0.5 -0.4

Russia 4.3 3.4 1.5 3.0 -1.0 -0.3

China 9.3 7.7 7.6 7.3 -0.2 -0.4

India* 6.3 3.2 3.8 5.1 -1.8 -1.1

ASEAN-5 4.5 6.2 5.0 5.4 -0.6 -0.3

Brazil 2.7 0.9 2.5 2.5 0.0 -0.7

South Africa 3.5 2.5 2.0 2.9 0.0 0.0


Global Trends

Domestic Trends

Sector in Focus: Food Processing

Highlighting the underlying global risks still prevailing on

the horizon, International Monetary Fund (IMF) in its

second bi-annual outlook released in the first week of

October 2013, pared its global growth forecast by 0.3 per

cent to 2.9 per cent. The slower-than-expected growth in

the current year is mainly attributable to the sluggish

growth in the emerging economies. Growth rates in

emerging markets and developing economies are now

down some 3 percentage points from 2010 levels, with

Brazil, China, and India accounting for about two-thirds of

the decline. The largest economy in the group, China is

expected to now grow by 7.6 per cent in the current year

as compared to 7.8 per cent in the July forecast. This

slowdown will reverberate across developing Asia, where

growth is expected to remain between 6.25 and 6.5 per

cent in 2013-14. In sum, the latest round of forecasts from

IMF clearly indicates that the glimmer of hope seen in its

April review seems to have faded somewhat.

The latest data for the Indian economy released for the

first-quarter of 2013-14 shows that the current account

deficit (CAD) widened to 4.9 per cent of GDP from 3.6 per

cent in the previous quarter. Widening of CAD in the first

quarter was due to a sharp increase in gold imports. On

BoP basis, there was a slight drawdown in foreign



last year. Going forward, however CAD is expected to

exhibit an improvement due to several policy measures



slowdown in domestic demand. In other domestic

developments during the month, index of industrial

production (IIP) decelerated to 0.6 per cent in August

2013 as compared to 2.8 per cent in the previous month

and 2.0 per cent in the same period last year. Contraction

in manufacturing output during the month was the key

driver behind the deceleration in overall industrial output.

WPI inflation on the other hand, accelerated to 7-month

of 6.5 per cent in September 2013 as compared to 6.1 per

cent in the previous month mainly because of higher

vegetable prices. Low growth and high inflation has given

rise to a stagflationary type of environment in the

economy currently.

Food processing (FP) is an emerging sector of the Indian

economy. Driven by factors such as growing per capita

income, large availability of raw materials, changing

lifestyles, and conducive government policies, the sector

has shown robust growth performance in the recent

years. The FP sector in India, however, has yet to go a long

way in realizing its full potential, which in turn will also help

in ensuring remunerative prices to farmers and affordable

prices to consumers, thereby resulting in a win-win

situation to both. Given the huge unexploited potential of

agriculture in the country and rapidly growing per capita

income leading to ever expanding demand for agriculture

and processed food products, not only is India capable of

fulfilling its own food demand, it has vast potential to

become top five food exporter over the next two decades.

This in turn, will also make the Indian food business an

exciting investment destination for global players. The

need of the hour is to trigger the process of

transformation in the sector towards realizing its full

potential in meeting the growing demand and thus in the

process creating income, employment and, export

earnings for the country.

India has been facing high and persistent inflation in the

last five years except in the intervening year of 2009-10.

High growth during this period facilitated a steep rise in

incomes, which in turn pushed up the purchasing power of

the population. WPI inflation averaged 7.5 per cent in the

five year period, which is way higher than the RBI's

comfort threshold of 5 per cent. One of the main drivers of

inflation during this period has been the high food prices.

Total food inflation (primary and manufacturing) has

averaged 10.3 per cent during the period under

consideration. To be sure, in the current fiscal, even

though overall WPI inflation has averaged 5.3 per cent in

the first five months (April-August), food inflation has

remained high at 9 per cent. Further, food inflation has

remained above the psychological 10 per cent mark in 26

months out of 60 months in the last five years, while it has

remained above 9 per cent mark for more than two-thirds

of the period. This clearly highlights the fact that food

inflation in the past few years has remained not only high,

but persistent as well. The concerns over food inflation

are driven by the fact that an average household in India

still spends almost half of its expenditure on food, with the

poor spending as much as 60 per cent. Such price spikes

adversely impacts the household budget allocation for

food and non-food items.

Special Article

EXECUTIVE SUMMARY

4ECONOMY MATTERS

GDP FORECAST

Overview of the IMF World Economic Outlook Projections

5

Year over Year (%)

GDP at market prices ProjectionsDifference from July

2013 WEO Update

Source: IMF, WEO Update, October 2013Note: * For India, data and forecasts are on a fiscal year basis. At factor costs, GDP forecasts stand at 4.25 per cent and 5 per cent in FY14 & FY15 respectively

2011 2012 2013 2014 2013 2014

World Ouput 3.9 3.2 2.9 3.6 -0.3 -0.2

Advanced Economies 1.7 1.5 1.2 2.0 0.0 0.0

United States 1.8 2.8 1.6 2.6 -0.1 -0.2

Euro Area 1.5 -0.6 -0.4 1.0 0.1 0.0

- Germany 3.4 0.9 0.5 1.4 0.2 0.1

- France 2.0 0.0 0.2 1.0 0.3 0.1

- Italy 0.4 -2.4 -1.8 0.7 0.0 0.0

- Spain 0.1 -1.6 -1.3 0.2 0.3 0.1

Japan -0.6 2.0 2.0 1.2 -0.1 0.1

United Kingdom 1.1 0.2 1.4 1.9 0.5 0.4

Canada 2.5 1.7 1.6 2.2 -0.1 -0.1

Emerging & Developing Economies 6.2 4.9 4.5 5.1 -0.5 -0.4

Russia 4.3 3.4 1.5 3.0 -1.0 -0.3

China 9.3 7.7 7.6 7.3 -0.2 -0.4

India* 6.3 3.2 3.8 5.1 -1.8 -1.1

ASEAN-5 4.5 6.2 5.0 5.4 -0.6 -0.3

Brazil 2.7 0.9 2.5 2.5 0.0 -0.7

South Africa 3.5 2.5 2.0 2.9 0.0 0.0


IMF Predicts a Grim Outlook for the Global Economy

second half of 2012. It should pick up to 3.6 per cent in

2014, but that is still weaker than the IMF's previous

forecast of 3.8 per cent. The slower-than-expected

growth in the current year is mainly attributable to

sluggish growth in emerging economies. The differing

growth dynamics between the major economies are

projected to come with subdued inflation pressure, for

two reasons. First, the pickup in activity in the advanced

economies will not be sufficient to mitigate the large

output gaps. Secondly, the commodity prices have

fallen amid improved supply and lower demand growth

from key emerging market economies, notably China.

ighlighting the underlying global risks still Hprevailing on the horizon, International Monetary

Fund (IMF) in its second bi-annual outlook released in

the first week of October 2013, pared its global growth

forecast by 0.3 per cent to 2.9 per cent. As per the IMF,

global growth averaged just 2.5 per cent during the first-

half of 2013, which is about the same pace as in the

GLOBAL TRENDS

6ECONOMY MATTERS

Emerging market and developing economy growth

rates are now down some 3 percentage points from

2010 levels, with Brazil, China, and India accounting for

about two-thirds of the decline. According to IMF

forecasts, the group is expected to grow by 0.5 per cent

points lower at 4.5 per cent in the current year, while

next year the growth is expected to stand at 5.1 per

cent. The largest economy in the group, China is

expected to now grow by 7.6 per cent in the current

year as compared to 7.8 per cent in the July forecast.

This slowdown will reverberate across developing Asia,

where growth is expected to remain between 6.25 and

6.5 per cent in 2013-14. The forecasts assume that

Chinese authorities do not enact major stimulus and

accept somewhat lower growth, consistent with the

transition to a more balanced and sustainable growth

path. India's economy will grow by 3.8 per cent this

fiscal year (April-March) as per the IMF, lower than the

rate at which Sub-Saharan Africa's economy will expand

(5 per cent). To be sure, the numbers are based on GDP

estimates at market prices which IMF prefers. At factor

cost, the fund expects India's growth to come at 4.25

per cent in the current fiscal and about 5 per cent in the

next fiscal.

In sum, the latest round of forecasts from IMF clearly

indicates that the glimmer of hope they saw in their

April review seems to have somewhat faded as new

challenges have emerged on the horizon. The below-

par performance by the emerging economies led by

China is mainly responsible for this. The Fund in no

uncertain words clearly indicated that global growth is

still weak, its underlying dynamics are changing, and the

risks to the forecast remain to the downside.

IMF's new assessment of medium-term prospects in

large emerging economies - China, India, Brazil and

South-Africa is the most sobering one. Having been

optimistic from 2010 onward that emerging Asia could

grow faster than its pre-2008 trend, IMF is now sceptical

about its growth prospects. Notwithstanding the dim

prospects of the emerging economies, they continue to

account for the bulk of global growth. According to the

Fund, the blame lies not with the policies of the US or

Europe, but delays in structural reforms that differ from

country to country.

Growth in the advanced economies has turned around

to some extent, but as per the IMF, the durability of the

recovery process is a concern. The fund expects that the

impulse to global growth would come mainly from the

US, where activity will move into higher gear as fiscal

consolidation eases and monetary conditions stay

supportive. GDP growth of US at 1.6 per cent in the

current year is expected to be lower by 0.1 per cent than

the July forecast, while next year it is expected to come

at 2.6 per cent. In the Euro Area, business confidence

indicators suggest that activity is close to stabilizing in

the periphery and already recovering in the core

economies. Consequently, IMF raised its forecast for

the 17-country Euro Area to a contraction of 0.4 per cent

this year compared with a 0.6 per cent decline in July

forecast. It now expects an expansion of 1 per cent next

year instead of 0.9 per cent three months ago. While

Italy and Spain are expected to shrink this year, Spain's

forecast contraction of 1.3 per cent is an improvement

from a 1.6 per cent prediction three months ago. As per

the IMF, the region's financial industry still remains

fragile and next year's planned assessment of the

banks' balance sheets by the European Central Bank

"provides a critical opportunity to put the system on a

sounder footing.

passed the measure on a 81-18 vote, and the Republican-

controlled House followed suit 285 to 144, clearing the

way for President Obama to sign it into law. The deal,

however, offers only a temporary fix and does not

resolve the fundamental issues of spending and deficits

that divide Republicans and Democrats. It funds the

government only until January 15th 2014 and raises the

debt ceiling until February 7th 2014.

Technically, the US$16.69 trillion debt ceiling was hit on th19 May, 2013. The US Treasury has been using

extraordinary measures to keep going. If Congress

Last Minute Deal Averts a

Major Default by the US

Capping weeks of political brinkmanship that had

unnerved global markets, the US Senate and House of

Representatives each passed the spending measure

after Republicans dropped efforts to link the debt

legislation to changes in President Barack Obama's thsignature healthcare law, hours before the October 17

deadline. The Democratic-led Senate overwhelmingly

7

July'13 Oct'13 July'13 Oct'13 July'13 Oct'13 July'13 Oct'13 July'13 Oct'13

World US Euro Area China India

3.1 2.9

1.7 1.6

-0.6-0.4

7.8 7.6

5.6

3.8

IMF Scales Down Global Growth Forecasts (Growth, %)

Source: IMF Outlook, October 2013 Note: India's forecasts are for fiscal year and at market prices


IMF Predicts a Grim Outlook for the Global Economy

second half of 2012. It should pick up to 3.6 per cent in

2014, but that is still weaker than the IMF's previous

forecast of 3.8 per cent. The slower-than-expected

growth in the current year is mainly attributable to

sluggish growth in emerging economies. The differing

growth dynamics between the major economies are

projected to come with subdued inflation pressure, for

two reasons. First, the pickup in activity in the advanced

economies will not be sufficient to mitigate the large

output gaps. Secondly, the commodity prices have

fallen amid improved supply and lower demand growth

from key emerging market economies, notably China.

ighlighting the underlying global risks still Hprevailing on the horizon, International Monetary

Fund (IMF) in its second bi-annual outlook released in

the first week of October 2013, pared its global growth

forecast by 0.3 per cent to 2.9 per cent. As per the IMF,

global growth averaged just 2.5 per cent during the first-

half of 2013, which is about the same pace as in the

GLOBAL TRENDS

6ECONOMY MATTERS

Emerging market and developing economy growth

rates are now down some 3 percentage points from

2010 levels, with Brazil, China, and India accounting for

about two-thirds of the decline. According to IMF

forecasts, the group is expected to grow by 0.5 per cent

points lower at 4.5 per cent in the current year, while

next year the growth is expected to stand at 5.1 per

cent. The largest economy in the group, China is

expected to now grow by 7.6 per cent in the current

year as compared to 7.8 per cent in the July forecast.

This slowdown will reverberate across developing Asia,

where growth is expected to remain between 6.25 and

6.5 per cent in 2013-14. The forecasts assume that

Chinese authorities do not enact major stimulus and

accept somewhat lower growth, consistent with the

transition to a more balanced and sustainable growth

path. India's economy will grow by 3.8 per cent this

fiscal year (April-March) as per the IMF, lower than the

rate at which Sub-Saharan Africa's economy will expand

(5 per cent). To be sure, the numbers are based on GDP

estimates at market prices which IMF prefers. At factor

cost, the fund expects India's growth to come at 4.25

per cent in the current fiscal and about 5 per cent in the

next fiscal.

In sum, the latest round of forecasts from IMF clearly

indicates that the glimmer of hope they saw in their

April review seems to have somewhat faded as new

challenges have emerged on the horizon. The below-

par performance by the emerging economies led by

China is mainly responsible for this. The Fund in no

uncertain words clearly indicated that global growth is

still weak, its underlying dynamics are changing, and the

risks to the forecast remain to the downside.

IMF's new assessment of medium-term prospects in

large emerging economies - China, India, Brazil and

South-Africa is the most sobering one. Having been

optimistic from 2010 onward that emerging Asia could

grow faster than its pre-2008 trend, IMF is now sceptical

about its growth prospects. Notwithstanding the dim

prospects of the emerging economies, they continue to

account for the bulk of global growth. According to the

Fund, the blame lies not with the policies of the US or

Europe, but delays in structural reforms that differ from

country to country.

Growth in the advanced economies has turned around

to some extent, but as per the IMF, the durability of the

recovery process is a concern. The fund expects that the

impulse to global growth would come mainly from the

US, where activity will move into higher gear as fiscal

consolidation eases and monetary conditions stay

supportive. GDP growth of US at 1.6 per cent in the

current year is expected to be lower by 0.1 per cent than

the July forecast, while next year it is expected to come

at 2.6 per cent. In the Euro Area, business confidence

indicators suggest that activity is close to stabilizing in

the periphery and already recovering in the core

economies. Consequently, IMF raised its forecast for

the 17-country Euro Area to a contraction of 0.4 per cent

this year compared with a 0.6 per cent decline in July

forecast. It now expects an expansion of 1 per cent next

year instead of 0.9 per cent three months ago. While

Italy and Spain are expected to shrink this year, Spain's

forecast contraction of 1.3 per cent is an improvement

from a 1.6 per cent prediction three months ago. As per

the IMF, the region's financial industry still remains

fragile and next year's planned assessment of the

banks' balance sheets by the European Central Bank

"provides a critical opportunity to put the system on a

sounder footing.

passed the measure on a 81-18 vote, and the Republican-

controlled House followed suit 285 to 144, clearing the

way for President Obama to sign it into law. The deal,

however, offers only a temporary fix and does not

resolve the fundamental issues of spending and deficits

that divide Republicans and Democrats. It funds the

government only until January 15th 2014 and raises the

debt ceiling until February 7th 2014.

Technically, the US$16.69 trillion debt ceiling was hit on th19 May, 2013. The US Treasury has been using

extraordinary measures to keep going. If Congress

Last Minute Deal Averts a

Major Default by the US

Capping weeks of political brinkmanship that had

unnerved global markets, the US Senate and House of

Representatives each passed the spending measure

after Republicans dropped efforts to link the debt

legislation to changes in President Barack Obama's thsignature healthcare law, hours before the October 17

deadline. The Democratic-led Senate overwhelmingly

7

July'13 Oct'13 July'13 Oct'13 July'13 Oct'13 July'13 Oct'13 July'13 Oct'13

World US Euro Area China India

3.1 2.9

1.7 1.6

-0.6-0.4

7.8 7.6

5.6

3.8

IMF Scales Down Global Growth Forecasts (Growth, %)

Source: IMF Outlook, October 2013 Note: India's forecasts are for fiscal year and at market prices


a major feature of 'Obamacare' (officially Patient

Protection and Affordable Care Act).

o Meanwhile, the 'Senate' (Democrat-majority)

opposed all moves of the 'House' to delay

Obamacare by a year.

The US is not new to the government shutdown, though

it is not frequent. The first government shutdown

happened in 1976. Since then, there have been 17

occasions when there was no agreement on the funding

of government spending. The last time was 17 years ago

during the Clinton administration, which also saw the

House and Senate divided over spending priorities. The

current shutdown would have a fairly big impact on the

economy. Economists estimate that a two-week

shutdown could cut US GDP growth by 0.3 percentage

points and one that lasts three-to-four weeks could cut

growth by as much as 1.4 percentage points.

The US Government consequently ordered a shutdown

of its various non-essential services. Consequently,

around 800,000 employees of the Federal Government

(out of total 2.1 million) went on unpaid leave. The

'discretionary' or 'non-essential services' were affected.

However, essential services like, military, federal police,

air traffic control, postal services continued unaffected.

hadn't raise the so-called "debt ceiling", then the

Treasury estimated that it can only stretch out the thmoney until 17 October. At which point, it could run out

of money to pay the interest on US government debt,

and the US would technically be in default if it missed an

interest payment. However, in a last minute deal threached hours before the 17 October 2013 deadline was

expiring, both the houses passed the legislation to avoid

a damaging default on government debt, in order to pull

back the economy from the brink of a historic debt

default that could have threatened financial calamity.

Earlier in the month, the two houses of the US Congress -

the Democrat-led "Senate" and the Republican majority

"House of Representatives" had failed to agree over

extending funding for the government's non-essential

expenditures before the October 1 deadline, resulting in

US government shutdown for more than two weeks.

Before the start of the new Budget year 2013-14, the

Congress was required to pass appropriation bills to

fund the 'discretionary' spending programmes.

However, political disagreement saw failure to pass the

required bills. The two houses of the Congress could not

agree on the following terms of funding extensions:

o The US 'House of Representatives' (Republican-

majority) wanted a one-year delay in the activation of

8ECONOMY MATTERS

DOMESTIC TRENDS

Rise in Gold Imports Widens Current Account Deficit in 1QFY14

US$14.5 billion, which translates into 3.2 per cent of GDP.

On BoP basis, there was a slight drawdown in foreign



last year. Going forward, CAD is expected to exhibit an

improvement due to several policy measures



slowdown in domestic demand. As per the Ministry of

Commerce and Industry, exports in the second quarter

(July-September 2013) grew by 5.1 per cent while

imports fell by 1.8 per cent. This resulted in narrowing of

the trade deficit to US$29.9 billion as compared to

US$50.2 billion in the first quarter.

he latest data released for the first-quarter of 2013-T14 shows that the current account deficit (CAD)

widened to 4.9 per cent of GDP from 3.6 per cent in the

previous quarter. Widening of CAD in the first quarter

was due to a sharp increase in gold imports. As per RBI,

by excluding the increase in gold imports of US$7.3

billion in first quarter of 2013-14 over the corresponding

quarter of the preceding year, CAD would work out to

Current Account Deficit Reaches Alarming Levels

9

17.122.6

32.6

18.121.8

4.0

5.4

6.7

3.6

4.9

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

35

30

25

20

15

10

5

01QFY13 2QFY13 3QFY13 4QFY13 1QFY14

CAD (US$ billion) CAD (as a % of GDP) RHSSource : RBI

Other Global Developments During the Month

- China's economy grew by 7.8 per cent in the third quarter, picking up from 7.5 percent in the second quarter

and compared with 7.7 percent in the first. The latest expansion was the strongest since 7.9 percent in the

fourth quarter of 2012. Growth was fuelled by firmer foreign and domestic demand that lifted factory

production and retail sales.

- Higher food prices pushed up China's consumer inflation to 3.1 per cent in September, up from 2.6 per cent in

August as the government tried to keep to keep an economic recovery on track.

- Headline inflation in UK stood at 2.7 per cent in September 2013, unchanged from August 2013. Core inflation,

however, was higher at 2.2 per cent during the reporting month, as against 2.0 per cent in the previous two

months.

- Business sentiment in Japan rose to its highest level in almost six years in the September quarter, the closely-

watched Bank of Japan's Tankan survey showed. The headline index of sentiment among big manufacturers

rose to plus 12 in the three months to September from plus 4 in the June quarter.

- In a bid to cut Japan's mounting domestic debt, Prime Minister, Shinzo Abe, announced the decision to raise

sales tax by 3 percentage points to 8 per cent from April of next year, the first increase since 1997. To cushion

the blow, he unveiled a package to be compiled in early December, which a Cabinet Office statement showed

will include public works spending and tax breaks encouraging companies to boost capital spending and

wages.


a major feature of 'Obamacare' (officially Patient

Protection and Affordable Care Act).

o Meanwhile, the 'Senate' (Democrat-majority)

opposed all moves of the 'House' to delay

Obamacare by a year.

The US is not new to the government shutdown, though

it is not frequent. The first government shutdown

happened in 1976. Since then, there have been 17

occasions when there was no agreement on the funding

of government spending. The last time was 17 years ago

during the Clinton administration, which also saw the

House and Senate divided over spending priorities. The

current shutdown would have a fairly big impact on the

economy. Economists estimate that a two-week

shutdown could cut US GDP growth by 0.3 percentage

points and one that lasts three-to-four weeks could cut

growth by as much as 1.4 percentage points.

The US Government consequently ordered a shutdown

of its various non-essential services. Consequently,

around 800,000 employees of the Federal Government

(out of total 2.1 million) went on unpaid leave. The

'discretionary' or 'non-essential services' were affected.

However, essential services like, military, federal police,

air traffic control, postal services continued unaffected.

hadn't raise the so-called "debt ceiling", then the

Treasury estimated that it can only stretch out the thmoney until 17 October. At which point, it could run out

of money to pay the interest on US government debt,

and the US would technically be in default if it missed an

interest payment. However, in a last minute deal threached hours before the 17 October 2013 deadline was

expiring, both the houses passed the legislation to avoid

a damaging default on government debt, in order to pull

back the economy from the brink of a historic debt

default that could have threatened financial calamity.

Earlier in the month, the two houses of the US Congress -

the Democrat-led "Senate" and the Republican majority

"House of Representatives" had failed to agree over

extending funding for the government's non-essential

expenditures before the October 1 deadline, resulting in

US government shutdown for more than two weeks.

Before the start of the new Budget year 2013-14, the

Congress was required to pass appropriation bills to

fund the 'discretionary' spending programmes.

However, political disagreement saw failure to pass the

required bills. The two houses of the Congress could not

agree on the following terms of funding extensions:

o The US 'House of Representatives' (Republican-

majority) wanted a one-year delay in the activation of

8ECONOMY MATTERS

DOMESTIC TRENDS

Rise in Gold Imports Widens Current Account Deficit in 1QFY14

US$14.5 billion, which translates into 3.2 per cent of GDP.

On BoP basis, there was a slight drawdown in foreign



last year. Going forward, CAD is expected to exhibit an

improvement due to several policy measures



slowdown in domestic demand. As per the Ministry of

Commerce and Industry, exports in the second quarter

(July-September 2013) grew by 5.1 per cent while

imports fell by 1.8 per cent. This resulted in narrowing of

the trade deficit to US$29.9 billion as compared to

US$50.2 billion in the first quarter.

he latest data released for the first-quarter of 2013-T14 shows that the current account deficit (CAD)

widened to 4.9 per cent of GDP from 3.6 per cent in the

previous quarter. Widening of CAD in the first quarter

was due to a sharp increase in gold imports. As per RBI,

by excluding the increase in gold imports of US$7.3

billion in first quarter of 2013-14 over the corresponding

quarter of the preceding year, CAD would work out to

Current Account Deficit Reaches Alarming Levels

9

17.122.6

32.6

18.121.8

4.0

5.4

6.7

3.6

4.9

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

35

30

25

20

15

10

5


CAD (US$ billion) CAD (as a % of GDP) RHSSource : RBI

Other Global Developments During the Month

- China's economy grew by 7.8 per cent in the third quarter, picking up from 7.5 percent in the second quarter

and compared with 7.7 percent in the first. The latest expansion was the strongest since 7.9 percent in the

fourth quarter of 2012. Growth was fuelled by firmer foreign and domestic demand that lifted factory

production and retail sales.

- Higher food prices pushed up China's consumer inflation to 3.1 per cent in September, up from 2.6 per cent in

August as the government tried to keep to keep an economic recovery on track.

- Headline inflation in UK stood at 2.7 per cent in September 2013, unchanged from August 2013. Core inflation,

however, was higher at 2.2 per cent during the reporting month, as against 2.0 per cent in the previous two

months.

- Business sentiment in Japan rose to its highest level in almost six years in the September quarter, the closely-

watched Bank of Japan's Tankan survey showed. The headline index of sentiment among big manufacturers

rose to plus 12 in the three months to September from plus 4 in the June quarter.

- In a bid to cut Japan's mounting domestic debt, Prime Minister, Shinzo Abe, announced the decision to raise

sales tax by 3 percentage points to 8 per cent from April of next year, the first increase since 1997. To cushion

the blow, he unveiled a package to be compiled in early December, which a Cabinet Office statement showed

will include public works spending and tax breaks encouraging companies to boost capital spending and

wages.


index) had posted a 7-month high growth rate of 3.7 per

cent during the month on the back of good

performance by power, cement, steel and fertiliser

sectors. The sequential momentum declined too as the

seasonally-adjusted month-on-month series slid into

the negative territory in August 2013. On a cumulative

basis, for the first four months of the fiscal, IIP growth

stood at a paltry 0.1 per cent.

Springing a negative surprise, index of industrial

production decelerated to 0.6 per cent in August 2013 as

compared to 2.8 per cent in the previous month and 2.0

per cent in the same period last year. The main driver

behind the subdued growth during the month was the

de-growth witnessed in the manufacturing sector.

However, the moderation of industrial output in August

was surprising as the eight infrastructure industries

(which constitutes close to 38 per cent of the total

overall industrial growth. In this respect it's important

for the RBI to cut interest rates at the earliest and for

government to ensure the fast track implementation of

National Manufacturing Policy amongst implementing

other measures. Meanwhile, regulatory and

environmental issues continued to plague the mining

sector, as it contracted by 0.2 per cent in August 2013.

Electricity sector remained on a strong footing as it

grew by 7.2 per cent during the month as compared with

5.2 per cent in the previous month.

On the sectoral front, manufacturing output declined by

0.1 per cent in August 2013 after registering a relatively

robust growth of 3.2 per cent in the previous month. As

per the industry classification, of the 22 industries, 14

showed positive growth, mainly led by electrical

machinery and wearing apparel, while negative growth

was seen in sectors such as radio, TV & communication

equipment and furniture. Rebound of manufacturing

sector output is very critical for aiding the pickup in

10ECONOMY MATTERS

quarter of 2012-13, primarily led by a steep rise in gold

imports in the first two months of the quarter. Within

the invisible category, while net services exports

improved (i.e. US$16.9 billion in first quarter of 2013-14

as compared to US$15.0 billion in first quarter of 2012-13)

transfers (US$ 16.7 billion) and income (-US$4.8 billion)

were broadly flat as compared to same period last year.

As a result of wider trade deficit and slow recovery in the

transfers and income component of the invisible

segment, CAD widened in the reporting quarter.

Merchandise trade deficit (BoP basis) widened further

to US$50.5 billion in first quarter of 2013-14 from US$43.8

billion a year ago. Component wise, merchandise

exports declined by 1.5 per cent on y-o-y basis to

USD$73.9 billion in the first quarter as compared to

US$75.0 billion in the same period of last fiscal. The

muted exports sector performance primarily reflects

the subdued global growth prospects. In contrast,

merchandise imports recorded an increase of 4.7 per

cent at US$124.4 billion in the reporting quarter as

against a decline of 3.9 per cent at US$118.9 billion in first

11

(US$ billion) Q1FY13 Q4FY13 Q1FY14

Trade Balance -43.8 -45.6 -50.5

- Exports 75.0 84.8 73.9

- Imports 118.9 130.4 124.4

Invisibles 26.8 27.5 28.7

- Services 15.0 17.0 16.9

- Transfers 16.7 15.7 16.7

- Income -4.9 -5.2 -4.8

Current Account Balance -17.1 -18.2 -21.8

Current Account Balance as a % of GDP -4.0 -3.6 -4.9

Source : RBI

Current Account Deficit Widens in 1QFY14

dwindled to net outflow of US$245 million, while net

overseas borrowing by banks increased by 57.5 per cent

to US$4.7 billion in first quarter of 2013-14. Outflow of

portfolio investment occurred essentially from the third

week of May 2013 after the US Fed indicated the

possible tapering of quantitative easing.

In the capital account, foreign investment improved to

US$3 billion in the first quarter of the current fiscal as

against US$1.9 billion in the same quarter last year. The

improvement was entirely on account of strong FDI

flows. Net foreign direct investment surged sharply by a

huge 71 per cent on an annual basis to US$6.5 billion in

the reporting quarter. Portfolio investments meanwhile


- Direct Investment 3.8 5.7 6.5

- Portfolio Investment -1.9 11.3 -0.2

Loans 6.0 9.2 3.6

Banking Capital 9.4 -3.6 10.3

Other Capital -0.7 -2.1 0.3

Capital Account 16.5 20.5 20.5

Overall BoP 0.5 2.7 -0.3

Source: RBI

Capital Account Remains Unchanged

OutlookThe resurgence of current account deficit to 4.9 per cent of GDP during April-June 2013 quarter from 3.6 per cent in

the last quarter is essentially on account of the burgeoning trade deficit and indicates that the economy continues

to remain vulnerable to external environment. However, going forward, with the positive turn in exports evidenced

during the second quarter along with early signs of revival of the US economy and strengthening of the economies

of both Japan and China, CAD during the current fiscal is expected to come down.

Industrial Growth Decelerates in August 2013

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

IIP Growth Moderates in August 2013

Apr

/12

Jun/

12

Aug

/12

Oct

/12

Dec

/12

Feb

/13

Apr

/13

Jun/

13

Aug

/13

10

5

0

-5

Source : CSO


index) had posted a 7-month high growth rate of 3.7 per

cent during the month on the back of good

performance by power, cement, steel and fertiliser

sectors. The sequential momentum declined too as the

seasonally-adjusted month-on-month series slid into

the negative territory in August 2013. On a cumulative

basis, for the first four months of the fiscal, IIP growth

stood at a paltry 0.1 per cent.

Springing a negative surprise, index of industrial

production decelerated to 0.6 per cent in August 2013 as

compared to 2.8 per cent in the previous month and 2.0

per cent in the same period last year. The main driver

behind the subdued growth during the month was the

de-growth witnessed in the manufacturing sector.

However, the moderation of industrial output in August

was surprising as the eight infrastructure industries

(which constitutes close to 38 per cent of the total

overall industrial growth. In this respect it's important

for the RBI to cut interest rates at the earliest and for

government to ensure the fast track implementation of

National Manufacturing Policy amongst implementing

other measures. Meanwhile, regulatory and

environmental issues continued to plague the mining

sector, as it contracted by 0.2 per cent in August 2013.

Electricity sector remained on a strong footing as it

grew by 7.2 per cent during the month as compared with

5.2 per cent in the previous month.

On the sectoral front, manufacturing output declined by

0.1 per cent in August 2013 after registering a relatively

robust growth of 3.2 per cent in the previous month. As

per the industry classification, of the 22 industries, 14

showed positive growth, mainly led by electrical

machinery and wearing apparel, while negative growth

was seen in sectors such as radio, TV & communication

equipment and furniture. Rebound of manufacturing

sector output is very critical for aiding the pickup in

10ECONOMY MATTERS

quarter of 2012-13, primarily led by a steep rise in gold

imports in the first two months of the quarter. Within

the invisible category, while net services exports

improved (i.e. US$16.9 billion in first quarter of 2013-14

as compared to US$15.0 billion in first quarter of 2012-13)

transfers (US$ 16.7 billion) and income (-US$4.8 billion)

were broadly flat as compared to same period last year.

As a result of wider trade deficit and slow recovery in the

transfers and income component of the invisible

segment, CAD widened in the reporting quarter.

Merchandise trade deficit (BoP basis) widened further

to US$50.5 billion in first quarter of 2013-14 from US$43.8

billion a year ago. Component wise, merchandise

exports declined by 1.5 per cent on y-o-y basis to

USD$73.9 billion in the first quarter as compared to

US$75.0 billion in the same period of last fiscal. The

muted exports sector performance primarily reflects

the subdued global growth prospects. In contrast,

merchandise imports recorded an increase of 4.7 per

cent at US$124.4 billion in the reporting quarter as

against a decline of 3.9 per cent at US$118.9 billion in first

11


Trade Balance -43.8 -45.6 -50.5

- Exports 75.0 84.8 73.9

- Imports 118.9 130.4 124.4

Invisibles 26.8 27.5 28.7

- Services 15.0 17.0 16.9

- Transfers 16.7 15.7 16.7

- Income -4.9 -5.2 -4.8

Current Account Balance -17.1 -18.2 -21.8

Current Account Balance as a % of GDP -4.0 -3.6 -4.9

Source : RBI

Current Account Deficit Widens in 1QFY14

dwindled to net outflow of US$245 million, while net

overseas borrowing by banks increased by 57.5 per cent

to US$4.7 billion in first quarter of 2013-14. Outflow of

portfolio investment occurred essentially from the third

week of May 2013 after the US Fed indicated the

possible tapering of quantitative easing.

In the capital account, foreign investment improved to

US$3 billion in the first quarter of the current fiscal as

against US$1.9 billion in the same quarter last year. The

improvement was entirely on account of strong FDI

flows. Net foreign direct investment surged sharply by a

huge 71 per cent on an annual basis to US$6.5 billion in

the reporting quarter. Portfolio investments meanwhile


- Direct Investment 3.8 5.7 6.5

- Portfolio Investment -1.9 11.3 -0.2

Loans 6.0 9.2 3.6

Banking Capital 9.4 -3.6 10.3

Other Capital -0.7 -2.1 0.3

Capital Account 16.5 20.5 20.5

Overall BoP 0.5 2.7 -0.3

Source: RBI

Capital Account Remains Unchanged

OutlookThe resurgence of current account deficit to 4.9 per cent of GDP during April-June 2013 quarter from 3.6 per cent in

the last quarter is essentially on account of the burgeoning trade deficit and indicates that the economy continues

to remain vulnerable to external environment. However, going forward, with the positive turn in exports evidenced

during the second quarter along with early signs of revival of the US economy and strengthening of the economies

of both Japan and China, CAD during the current fiscal is expected to come down.

Industrial Growth Decelerates in August 2013

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

IIP Growth Moderates in August 2013

Apr

/12

Jun/

12

Aug

/12

Oct

/12

Dec

/12

Feb

/13

Apr

/13

Jun/

13

Aug

/13

10

5

0

-5

Source : CSO


12ECONOMY MATTERS

consumer durables. Overall consumer goods sector

showed de-growth to the tune of 0.8 per cent in August

2013 as compared to -0.5 per cent in the previous month.

The continued poor performance by consumer durables

since last the last three quarters, wherein it remained in

the negative territory, is a matter of concern as it is

widely regarded as a proxy for consumption growth.

Non-durables on the other hand remained in the positive

territory, albeit showing a moderation in output in

August 2013 as compared to the previous month.

On the use based front, after growing in double-digits in

July 2013, capital goods once again slipped into the

negative territory in August 2013. The sector's output

contracted by 2 per cent as compared to 15.6 per cent

growth in the previous month. The sector's poor

performance in the month is worrisome as its output

declined on the back of a low base of last year. Notably,

industrial production output excluding capital goods

sector stood at 1.0 per cent during the month. Consumer

goods continue to remain in negative territory for the

fourth consecutive month, primarily on account of

OutlookThe lower-than-expected industrial growth in the month of August 2013 is worrying as it follows healthy

performance by the core sector output. Contraction in manufacturing output during the month was the key driver

behind the deceleration in overall industrial output. In this regard, CII, while fully appreciating the RBI's compulsions

to keep inflation under check, urges RBI to start reducing the interest rates to revive demand. However, easing

monetary policy alone is not sufficient. It would need to be complemented with policy measures on the part of

government in the form of easing the procedural reforms by ensuring faster clearances of industrial projects. The

Cabinet Committee on Investment (CCI) which was constituted by the government to achieve the latter has not

shown the desired results so far.

Inflation Continues to Remain a Worry

upward revision in primary articles inflation to 9.7 per

cent from 9.0 per cent previously. Manufactured

products inflation, however, has been revised down to

2.6 per cent from 2.8 per cent previously. To be sure,

consumer prices based inflation (CPI) too quickened to

9.84 per cent from 9.52 per cent during the month.

Rising food prices have continued to remain the key

driver behind the jump in both WPI and CPI inflation in

the last few months. We analyse this component in

detail in this month's Special Article.

WPI inflation accelerated to 7-month of 6.5 per cent in

September 2013 as compared to 6.1 per cent in the

previous month mainly because of higher vegetable

prices. This is the fourth straight month that wholesale

inflation has remained above the Reserve Bank of India's

comfort zone of 5 per cent. Indicating the upward

sequential momentum, the seasonally-adjusted month-

on-month series climbed to 1.2 per cent during the

month. The July reading was also revised up to 5.85 per

cent versus prior estimate of 5.79 per cent, mainly on an

13

Source : CSO

Sectoral Growth

General 1000.0 2.0 -1.8 2.8 0.6 0.2 0.1

Manufacturing 755.3 2.4 -1.7 3.2 -0.1 0.0 -0.1

Mining 141.6 -0.3 -4.3 -2.5 -0.2 -1.7 -3.4

Electricity 103.2 1.9 0.0 5.2 7.2 4.8 4.5

Use-Based

Basic 456.8 3.0 -1.5 1.5 1.5 2.8 0.5

Capital 88.3 -4.4 -5.8 15.6 -2.0 -14.4 0.8

Intermediates 156.9 2.7 1.3 3.1 3.6 1.0 2.3

Consumer Goods 298.1 3.6 -1.9 -0.5 -0.8 3.2 -1.6

- Durables 84.6 1.0 -10.4 -8.9 -7.6 5.1 -11.0

- Non durables 213.5 6.0 5.7 7.0 5.0 1.6 6.6

Apr-Aug

Weight Aug-12 Jun-13 July13 Aug-13 FY13 FY14

Source : Office of Economic Advisor & CII calculations

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

7.3

6.5

10.9

9.9

Feb

/13

Mar

/13

Apr

/13

May

/13

Jun/

13

Jul/1

3

Aug

/13

Sep

/13

12

10

8

6

4

%

Both WPI & CPI Inflation Remain High

very favourable base effect. This has been mainly

contributed by an increase in non-administered fuel

component during the month. Inflation in petrol has

tripled to 9.6 per cent as against 3.2 per cent in August-

2013, while inflation in diesel remained high at more than

20 per cent. Going forward, we expect fuel inflation to

moderate due to stabilisation witnessed in global crude

prices and the Rupee.

Manufacturing inflation marginally increased to 2.0 per

cent in August as compared to 1.9 per cent last month.

Non-food manufacturing which is widely regarded as

the proxy for demand-side pressures in the economy

too increased marginally to 2.1 per cent during the

reporting month as compared to 1.9 per cent last month.

In contrast, manufacturing food inflation which consists

of processed food products remained relatively

subdued at 1.6 per cent as compared to 1.7 per cent in the

previous month. Inflation under this head has fallen

sharply in the last few months from 7.3 per cent at the

start of the fiscal to below 2 per cent currently. This is

Primary inflation increased to 13.5 per cent in August

2013 as compared to 11.7 per cent in the previous month.

This was mainly attributable to the spike in food inflation

to 18.4 per cent as against 18.2 per cent in August-2013.

The major increase in the food inflation came on account

of a rise in inflation in vegetables to 89.4 per cent as

compared to previous month's reading of 77.8 per cent.

More specifically, a massive 323 per cent rise in onion

inflation drove bulk of the rise in vegetable inflation

during the month. Meanwhile, the structural inflation in

protein rich-items particularly eggs, meat and fish

slipped to 13.4 per cent as against 18.9 per cent in the

previous month. Non-food inflation increased to 5.2 per

cent as against 1.1 per cent in the previous month. Within

non-food articles, the inflation in fibres jumped to 19.9

per cent as against previous month's reading of 10.5 per

cent while it continued to remain very low in case of

oilseeds.

Fuel inflation moderated to 10.1 per cent in August 2013

as against 11.3 per cent in the previous month amidst a


12ECONOMY MATTERS

consumer durables. Overall consumer goods sector

showed de-growth to the tune of 0.8 per cent in August

2013 as compared to -0.5 per cent in the previous month.

The continued poor performance by consumer durables

since last the last three quarters, wherein it remained in

the negative territory, is a matter of concern as it is

widely regarded as a proxy for consumption growth.

Non-durables on the other hand remained in the positive

territory, albeit showing a moderation in output in

August 2013 as compared to the previous month.

On the use based front, after growing in double-digits in

July 2013, capital goods once again slipped into the

negative territory in August 2013. The sector's output

contracted by 2 per cent as compared to 15.6 per cent

growth in the previous month. The sector's poor

performance in the month is worrisome as its output

declined on the back of a low base of last year. Notably,

industrial production output excluding capital goods

sector stood at 1.0 per cent during the month. Consumer

goods continue to remain in negative territory for the

fourth consecutive month, primarily on account of

OutlookThe lower-than-expected industrial growth in the month of August 2013 is worrying as it follows healthy

performance by the core sector output. Contraction in manufacturing output during the month was the key driver

behind the deceleration in overall industrial output. In this regard, CII, while fully appreciating the RBI's compulsions

to keep inflation under check, urges RBI to start reducing the interest rates to revive demand. However, easing

monetary policy alone is not sufficient. It would need to be complemented with policy measures on the part of

government in the form of easing the procedural reforms by ensuring faster clearances of industrial projects. The

Cabinet Committee on Investment (CCI) which was constituted by the government to achieve the latter has not

shown the desired results so far.

Inflation Continues to Remain a Worry

upward revision in primary articles inflation to 9.7 per

cent from 9.0 per cent previously. Manufactured

products inflation, however, has been revised down to

2.6 per cent from 2.8 per cent previously. To be sure,

consumer prices based inflation (CPI) too quickened to

9.84 per cent from 9.52 per cent during the month.

Rising food prices have continued to remain the key

driver behind the jump in both WPI and CPI inflation in

the last few months. We analyse this component in

detail in this month's Special Article.

WPI inflation accelerated to 7-month of 6.5 per cent in

September 2013 as compared to 6.1 per cent in the

previous month mainly because of higher vegetable

prices. This is the fourth straight month that wholesale

inflation has remained above the Reserve Bank of India's

comfort zone of 5 per cent. Indicating the upward

sequential momentum, the seasonally-adjusted month-

on-month series climbed to 1.2 per cent during the

month. The July reading was also revised up to 5.85 per

cent versus prior estimate of 5.79 per cent, mainly on an

13

Source : CSO

Sectoral Growth

General 1000.0 2.0 -1.8 2.8 0.6 0.2 0.1

Manufacturing 755.3 2.4 -1.7 3.2 -0.1 0.0 -0.1

Mining 141.6 -0.3 -4.3 -2.5 -0.2 -1.7 -3.4

Electricity 103.2 1.9 0.0 5.2 7.2 4.8 4.5

Use-Based

Basic 456.8 3.0 -1.5 1.5 1.5 2.8 0.5

Capital 88.3 -4.4 -5.8 15.6 -2.0 -14.4 0.8

Intermediates 156.9 2.7 1.3 3.1 3.6 1.0 2.3

Consumer Goods 298.1 3.6 -1.9 -0.5 -0.8 3.2 -1.6

- Durables 84.6 1.0 -10.4 -8.9 -7.6 5.1 -11.0

- Non durables 213.5 6.0 5.7 7.0 5.0 1.6 6.6

Apr-Aug

Weight Aug-12 Jun-13 July13 Aug-13 FY13 FY14

Source : Office of Economic Advisor & CII calculations

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

7.3

6.5

10.9

9.9

Feb

/13

Mar

/13

Apr

/13

May

/13

Jun/

13

Jul/1

3

Aug

/13

Sep

/13

12

10

8

6

4

%

Both WPI & CPI Inflation Remain High

very favourable base effect. This has been mainly

contributed by an increase in non-administered fuel

component during the month. Inflation in petrol has

tripled to 9.6 per cent as against 3.2 per cent in August-

2013, while inflation in diesel remained high at more than

20 per cent. Going forward, we expect fuel inflation to

moderate due to stabilisation witnessed in global crude

prices and the Rupee.

Manufacturing inflation marginally increased to 2.0 per

cent in August as compared to 1.9 per cent last month.

Non-food manufacturing which is widely regarded as

the proxy for demand-side pressures in the economy

too increased marginally to 2.1 per cent during the

reporting month as compared to 1.9 per cent last month.

In contrast, manufacturing food inflation which consists

of processed food products remained relatively

subdued at 1.6 per cent as compared to 1.7 per cent in the

previous month. Inflation under this head has fallen

sharply in the last few months from 7.3 per cent at the

start of the fiscal to below 2 per cent currently. This is

Primary inflation increased to 13.5 per cent in August

2013 as compared to 11.7 per cent in the previous month.

This was mainly attributable to the spike in food inflation

to 18.4 per cent as against 18.2 per cent in August-2013.

The major increase in the food inflation came on account

of a rise in inflation in vegetables to 89.4 per cent as

compared to previous month's reading of 77.8 per cent.

More specifically, a massive 323 per cent rise in onion

inflation drove bulk of the rise in vegetable inflation

during the month. Meanwhile, the structural inflation in

protein rich-items particularly eggs, meat and fish

slipped to 13.4 per cent as against 18.9 per cent in the

previous month. Non-food inflation increased to 5.2 per

cent as against 1.1 per cent in the previous month. Within

non-food articles, the inflation in fibres jumped to 19.9

per cent as against previous month's reading of 10.5 per

cent while it continued to remain very low in case of

oilseeds.

Fuel inflation moderated to 10.1 per cent in August 2013

as against 11.3 per cent in the previous month amidst a


14ECONOMY MATTERS

consist of food articles); they are not able to pass the

price rise to the end-consumers.

reflective of the low pricing power of the producers as

despite a steep in raw material prices (which primarily

OutlookThe continued rise in both WPI and CPI inflation has complicated the task of RBI as it meets this month-end to

announce its second quarter monetary policy review. However one needs to remember that the bulk of the rise in

inflation is attributable to jump in primary food inflation which is generally transient in nature and is expected to

cool-off in the next few months, given the positive impact of a good monsoon this year. Under this backdrop, we

would urge RBI to cut rates in the policy review, as the economy is in urgent need of fresh stimulus in the form of

lower lending rates.

thCII's 84 Business Outlook Survey is based on sample

survey of firms covering all industry sectors, including

micro, small, medium and large enterprises from

different regions. The survey also enumerated

responses across industry groups both in public and

private sectors engaged in manufacturing and services

sector.

CII-BCI is calculated as a weighted average of the Current

Situation Index (CSI) and the Expectation Index (EI),

with greater weight given to EI as compared to CSI.

These indices are based on questions pertaining to

performance of the economy and respondent's firm.

Respondents are asked to rate the current and expected

performance on a scale of 0 to 100. A score above 50

indicates positive confidence while a score above 75

would indicate strong positive confidence. On the

contrary, a score of less than 50 indicates a weak

confidence index.

per cent) expected capacity utilization to be below 75

per cent in the second quarter, while 69.1 per cent

expected their company's spending on capacity

expansion to have either declined or remained un-

changed in the comparable period. Majority of the

respondents (53.9 per cent) in the CII survey expected

current account deficit to lie in a range of 4.0-5.0 per cent

of GDP, while 32.6 per cent expected it to exceed 5 per

cent of GDP in the current fiscal. Not surprisingly,

therefore, majority of the respondents (57 per cent)

expected the rupee to lie above 62 per US$ by end-

March 2014.

In the survey, high current account deficit, expectations

of tapering of QE by US Federal Reserve leading to

capital outflows and weak domestic sentiments were

cited as major contributors for the weakening of the

rupee.

15

Source : Office of Economic Advisor

General 100.0 8.1 5.9 6.1 6.5 7.6 5.3

Primary 20.1 9.2 9.7 11.7 13.5 10.3 8.2

- Food 14.3 8.1 12.3 18.2 18.4 10.4 11.0

- Non-Food 4.3 10.4 5.7 1.1 5.2 8.8 5.3

- Minerals 1.5 13.9 0.5 -7.2 0.0 12.3 -3.5

Fuel 14.9 12.0 11.4 11.3 10.1 10.5 9.2

- Petrol 1.1 6.7 1.2 3.2 9.6 10.5 -0.9

- High Speed Diesel 4.7 8.9 26.3 27.6 20.1 5.0 23.8

Manufacturing 65.0 6.5 2.6 1.9 2.0 5.6 2.9

- Food 10.0 10.3 4.3 1.7 1.6 6.9 5.2

- Non-food 55.0 5.7 2.3 1.9 2.1 5.4 2.4

April-Sept

Weight Sept-12 July13 Aug-13 Sept-13 FY13 FY14

Sectoral Components of Inflation

CII Business Confidence Index Falls Sharply in Q2FY14

improvement expected in the growth of agriculture

output in the current year, achieving a GDP growth of

around 5.5 per cent should be possible, if reforms efforts

are sustained by the government and RBI eases the

monetary stance going forward.

Indicating that the economy is moving towards a

situation of stagflation, respondents said that inflation

has emerged as a major area of concern. A majority (47

per cent) of the respondents maintained that WPI

inflation is expected to lie above 7 per cent for the

current fiscal. However, by leveraging on a good

monsoon, there is an ample scope for lowering the

inflationary expectations by easing the distribution

chain of food items.

The survey reveals that majority of respondents (57.3

In an indication of continuing slowdown in the second

quarter of current fiscal, CII Business Confidence Index

(CII-BCI) fell by 5.5 points to its lowest ever value to 45.7

for the July-September 2013 quarter from 51.2 in the

previous quarter. The dip below the psychological 50-

level mark does not augur well for the Indian industry as

it mirrors the underlying weakness in the economy and

has dashed any hopes of growth having bottomed out. thThe 84 Business Outlook Survey is based on the

responses from 190 companies.

Most of the survey respondents (40 per cent) expected

GDP growth to decelerate below 5 per cent in the

current fiscal. However, a large proportion of 38 per

cent of the respondents expect GDP growth to range

between 5.0-5.5 per cent for the year. With a significant

66.2 66.762.5

53.648.6

52.9 55.051.3 49.9 51.3 51.2

45.7

Q3* FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

CII Business Confidence Index

Know Your Facts: Marginal Standing Facility (MSF)Reserve Bank of India reduced the Marginal Standing facility (MSF) rate by 50 bps to 9 per cent on October 7, 2013.

This follows the reduction in MSF by 75 bps earlier in September 2013. Though traditionally the spread between

Repo and MSF was fixed at 100 bps, the same now stands at 150 bps. MSF was brought in under the new operating

procedure of monetary policy supplementing the repo and reverse repo rates. Earlier, RBI tried to keep the main

money market rates under its LAF corridor of Reverse Repo and repo. This now shifted to Reverse Repo and MSF as

corridors with Repo rate in the corridor. Banks are free to borrow any amount under the repo rate as long as they

maintain the Statutory Liquidity Ratio (SLR). But in case any bank needs extra funds, it can get the same under the

MSF, however at a higher rate. As a part of its liquidity tightening measures announced in July 2013, RBI had hiked

the MSF by 200 bps to 10.25 per cent, without touching the key repo rate. Under normal times, banks usually borrow

at the repo rate, but in this period, since RBI capped borrowing under repo at 0.5 per cent of NDTL, banks had no

option but to borrow under the MSF. Hence, the recent decision of the Central Bank to ease the MSF rate is a bid to

smoothen the liquidity requirements for the banks as the Rupee has now appreciated from its all-time lows.

Additionally, with the credit deposit (CD) ratio rising to its all time high of 78.3 on 20th September 2013, there was a

crying need to lower money market rates and ease liquidity, which was precisely what the RBI did.


14ECONOMY MATTERS

consist of food articles); they are not able to pass the

price rise to the end-consumers.

reflective of the low pricing power of the producers as

despite a steep in raw material prices (which primarily

OutlookThe continued rise in both WPI and CPI inflation has complicated the task of RBI as it meets this month-end to

announce its second quarter monetary policy review. However one needs to remember that the bulk of the rise in

inflation is attributable to jump in primary food inflation which is generally transient in nature and is expected to

cool-off in the next few months, given the positive impact of a good monsoon this year. Under this backdrop, we

would urge RBI to cut rates in the policy review, as the economy is in urgent need of fresh stimulus in the form of

lower lending rates.

thCII's 84 Business Outlook Survey is based on sample

survey of firms covering all industry sectors, including

micro, small, medium and large enterprises from

different regions. The survey also enumerated

responses across industry groups both in public and

private sectors engaged in manufacturing and services

sector.

CII-BCI is calculated as a weighted average of the Current

Situation Index (CSI) and the Expectation Index (EI),

with greater weight given to EI as compared to CSI.

These indices are based on questions pertaining to

performance of the economy and respondent's firm.

Respondents are asked to rate the current and expected

performance on a scale of 0 to 100. A score above 50

indicates positive confidence while a score above 75

would indicate strong positive confidence. On the

contrary, a score of less than 50 indicates a weak

confidence index.

per cent) expected capacity utilization to be below 75

per cent in the second quarter, while 69.1 per cent

expected their company's spending on capacity

expansion to have either declined or remained un-

changed in the comparable period. Majority of the

respondents (53.9 per cent) in the CII survey expected

current account deficit to lie in a range of 4.0-5.0 per cent

of GDP, while 32.6 per cent expected it to exceed 5 per

cent of GDP in the current fiscal. Not surprisingly,

therefore, majority of the respondents (57 per cent)

expected the rupee to lie above 62 per US$ by end-

March 2014.

In the survey, high current account deficit, expectations

of tapering of QE by US Federal Reserve leading to

capital outflows and weak domestic sentiments were

cited as major contributors for the weakening of the

rupee.

15

Source : Office of Economic Advisor

General 100.0 8.1 5.9 6.1 6.5 7.6 5.3

Primary 20.1 9.2 9.7 11.7 13.5 10.3 8.2

- Food 14.3 8.1 12.3 18.2 18.4 10.4 11.0

- Non-Food 4.3 10.4 5.7 1.1 5.2 8.8 5.3

- Minerals 1.5 13.9 0.5 -7.2 0.0 12.3 -3.5

Fuel 14.9 12.0 11.4 11.3 10.1 10.5 9.2

- Petrol 1.1 6.7 1.2 3.2 9.6 10.5 -0.9

- High Speed Diesel 4.7 8.9 26.3 27.6 20.1 5.0 23.8

Manufacturing 65.0 6.5 2.6 1.9 2.0 5.6 2.9

- Food 10.0 10.3 4.3 1.7 1.6 6.9 5.2

- Non-food 55.0 5.7 2.3 1.9 2.1 5.4 2.4

April-Sept

Weight Sept-12 July13 Aug-13 Sept-13 FY13 FY14

Sectoral Components of Inflation

CII Business Confidence Index Falls Sharply in Q2FY14

improvement expected in the growth of agriculture

output in the current year, achieving a GDP growth of

around 5.5 per cent should be possible, if reforms efforts

are sustained by the government and RBI eases the

monetary stance going forward.

Indicating that the economy is moving towards a

situation of stagflation, respondents said that inflation

has emerged as a major area of concern. A majority (47

per cent) of the respondents maintained that WPI

inflation is expected to lie above 7 per cent for the

current fiscal. However, by leveraging on a good

monsoon, there is an ample scope for lowering the

inflationary expectations by easing the distribution

chain of food items.

The survey reveals that majority of respondents (57.3

In an indication of continuing slowdown in the second

quarter of current fiscal, CII Business Confidence Index

(CII-BCI) fell by 5.5 points to its lowest ever value to 45.7

for the July-September 2013 quarter from 51.2 in the

previous quarter. The dip below the psychological 50-

level mark does not augur well for the Indian industry as

it mirrors the underlying weakness in the economy and

has dashed any hopes of growth having bottomed out. thThe 84 Business Outlook Survey is based on the

responses from 190 companies.

Most of the survey respondents (40 per cent) expected

GDP growth to decelerate below 5 per cent in the

current fiscal. However, a large proportion of 38 per

cent of the respondents expect GDP growth to range

between 5.0-5.5 per cent for the year. With a significant

66.2 66.762.5

53.648.6

52.9 55.051.3 49.9 51.3 51.2

45.7

Q3* FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

CII Business Confidence Index

Know Your Facts: Marginal Standing Facility (MSF)Reserve Bank of India reduced the Marginal Standing facility (MSF) rate by 50 bps to 9 per cent on October 7, 2013.

This follows the reduction in MSF by 75 bps earlier in September 2013. Though traditionally the spread between

Repo and MSF was fixed at 100 bps, the same now stands at 150 bps. MSF was brought in under the new operating

procedure of monetary policy supplementing the repo and reverse repo rates. Earlier, RBI tried to keep the main

money market rates under its LAF corridor of Reverse Repo and repo. This now shifted to Reverse Repo and MSF as

corridors with Repo rate in the corridor. Banks are free to borrow any amount under the repo rate as long as they

maintain the Statutory Liquidity Ratio (SLR). But in case any bank needs extra funds, it can get the same under the

MSF, however at a higher rate. As a part of its liquidity tightening measures announced in July 2013, RBI had hiked

the MSF by 200 bps to 10.25 per cent, without touching the key repo rate. Under normal times, banks usually borrow

at the repo rate, but in this period, since RBI capped borrowing under repo at 0.5 per cent of NDTL, banks had no

option but to borrow under the MSF. Hence, the recent decision of the Central Bank to ease the MSF rate is a bid to

smoothen the liquidity requirements for the banks as the Rupee has now appreciated from its all-time lows.

Additionally, with the credit deposit (CD) ratio rising to its all time high of 78.3 on 20th September 2013, there was a

crying need to lower money market rates and ease liquidity, which was precisely what the RBI did.


overcome this concern, as BEPS may be technically

legal, it is not intended by domestic policy.

The recent Action Plan Report issued by the OECD sets

out 15 areas for further work, some quite specific viz.:

addressing ecommerce situations and examining

circumstances where significant digital presence

exists in a country without the corresponding

taxable presence;

amending the OECD model convention to eliminate

undue tax advantages arising from hybrid

instruments and entities;

phishing loopholes in CFC rules,

making recommendations to limit base erosion via

interest deductions;

amending transfer pricing guidelines to prevent

profit shifting by relocating intangibles or

contractually transferring risks and capital within the

group etc.

while others more generic, like:

revisiting disclosure requirements by taxpayers - of

their tax planning schemes as well as within the

transfer pricing documentation;

making the dispute resolution mechanism more

effective;

establishing methodologies to collect and analyze

data on BEPS etc.

Though changes may be expected to be brought about

to the OECD Model Tax Convention and new guidelines

are expected to be introduced, the same may not be

directly effective since bilateral tax treaties will need to

be amended. If undertaken on a treaty-by-treaty basis,

the sheer number of treaties in effect may make the

process very lengthy. The OECD therefore suggests

developing a multilateral instrument which can be

signed by various countries and the tax treaties of such

signatory countries would stand amended accordingly.

The OECD has also outlined the deadlines for carrying

out these actions, depending upon the nature thereof

and the likely effort involved. Once the detailed work is

carried out (last deadline set for December 2015), its

effectiveness would really depend upon acceptance,

adoption and implementation by various countries.

n

n

n

n

n

n

n

n

Organization for Economic Co-operation and

Development (OECD). In light thereof, the OECD

released its initial report in February 2013 to present

aspects relating to Base Erosion and Profit Shifting

(BEPS). Another report was released in July 2013 which

presents a more comprehensive 'action plan' to address

the issue of BEPS by identifying the actions needed,

setting deadlines to implement these actions and

identifying the resources needed and the methodology

to implement the actions.

One would often come across terms such as 'tax

havens', 'low-tax jurisdiction', 'double Irish with a Dutch

sandwich strategy' when dealing with BEPS. Simply put,

BEPS refers to shifting of profits by corporates in ways

that erodes the taxable base to locations where they are

subject to a more favorable tax treatment - i.e. moving

revenues to where they are taxed at lower rates and

expenses to where they are relieved at higher rates.

As mentioned above, multinationals are not breaking

the rules. The issue is with the design of the current tax

regulations and the arms' length standards, and not the

conduct of multinational companies. Recent years have

witnessed globalization and liberalization at a pace

unprecedented. Free movement of capital and labor,

shift of manufacturing bases from high-cost to low-cost

locations, removal of trade barriers, technological and

telecom developments, and increasing importance of

risk management and IPR have resulted in a shift from

country-specific operating models to global models.

BEPS strategically takes advantage of the gaps in tax

rules or tax arrangements between different countries

such that it results in:

minimizing tax in a foreign operating or source

country by shifting gross profits via trading

structures or reducing net profit by maximizing

deductions for the payer;

low or no tax withholding at source;

low or no tax for the recipient; and

no tax of the low-taxed profits at the ultimate parent

level.

Therefore, it is difficult for a particular country to

address this issue single-handedly. The OECD Reports

suggest tax reforms in the form of a comprehensive

internationally coordinated solution to successfully

n

n

n

n

16ECONOMY MATTERS

Base Erosion and Profit Shifting

have a responsibility towards their shareholders to

legally reduce the taxes, the same however do not

alleviate government's fear around:

Businesses which operate cross border and are able

to reduce tax expense on account of such planning,

are likely to have competitive advantages over

enterprises that operate mostly at domestic level.

If the perception that

multinationals are dodging taxes continues, it would

encourage the opinion that taxes are only paid by the

naïve and would undermine the practice of voluntary

compliance by other taxpayers.

Tax revenue

is critical to foster long-term development in such

countries.

From the UK's Parliament's Public Accounts Committee

report criticizing the UK tax avoidance practices of giant

global firms to US President Obama stating income-

shifting behavior by multinationals as a serious concern,

the issue is grabbing not only media attention, but has

also reached political levels. G20 leaders and BRIC

countries are expressing concern, and so is the

nDistorted competition and issues with fairness:

nModern tax administration's dependence on

voluntary compliance:

nDetrimental for developing countries:

Gone are the days when taxpayers were worried

about double taxation of cross-border income and

would make representations to authorities to draw a

legislative framework that would prevent such

'injustice'. The tables seem to have turned and the

governments today are vexed about 'double non-

taxation'. Google "UK tax avoidance" and you would

know what we mean.

Multinationals these days are being accused of lowering

their tax bill by shifting their revenues to low tax

jurisdictions like Bermuda, Ireland etc. The structures

that are set up or the schemes that are employed are

perfectly legitimate, therefore the reference to 'tax

avoidance' and not 'tax evasion'. Critics may allege

'immorality'; however there is nothing illegal about tax

avoidance, as it involves working well within the

framework of tax laws. Hence, the problem.

A leading internet company's Chairman defended his

company's tax strategies arguing that the corporates

TAXATION

17

Guest Article

By Rohinton Sidhwa, Partner and Swati Goyal, Manager, Deloitte Haskins & Sells

( Views expressed in the article are those of the authors and not necessarily of CII.)


overcome this concern, as BEPS may be technically

legal, it is not intended by domestic policy.

The recent Action Plan Report issued by the OECD sets

out 15 areas for further work, some quite specific viz.:

addressing ecommerce situations and examining

circumstances where significant digital presence

exists in a country without the corresponding

taxable presence;

amending the OECD model convention to eliminate

undue tax advantages arising from hybrid

instruments and entities;

phishing loopholes in CFC rules,

making recommendations to limit base erosion via

interest deductions;

amending transfer pricing guidelines to prevent

profit shifting by relocating intangibles or

contractually transferring risks and capital within the

group etc.

while others more generic, like:

revisiting disclosure requirements by taxpayers - of

their tax planning schemes as well as within the

transfer pricing documentation;

making the dispute resolution mechanism more

effective;

establishing methodologies to collect and analyze

data on BEPS etc.

Though changes may be expected to be brought about

to the OECD Model Tax Convention and new guidelines

are expected to be introduced, the same may not be

directly effective since bilateral tax treaties will need to

be amended. If undertaken on a treaty-by-treaty basis,

the sheer number of treaties in effect may make the

process very lengthy. The OECD therefore suggests

developing a multilateral instrument which can be

signed by various countries and the tax treaties of such

signatory countries would stand amended accordingly.

The OECD has also outlined the deadlines for carrying

out these actions, depending upon the nature thereof

and the likely effort involved. Once the detailed work is

carried out (last deadline set for December 2015), its

effectiveness would really depend upon acceptance,

adoption and implementation by various countries.

n

n

n

n

n

n

n

n

Organization for Economic Co-operation and

Development (OECD). In light thereof, the OECD

released its initial report in February 2013 to present

aspects relating to Base Erosion and Profit Shifting

(BEPS). Another report was released in July 2013 which

presents a more comprehensive 'action plan' to address

the issue of BEPS by identifying the actions needed,

setting deadlines to implement these actions and

identifying the resources needed and the methodology

to implement the actions.

One would often come across terms such as 'tax

havens', 'low-tax jurisdiction', 'double Irish with a Dutch

sandwich strategy' when dealing with BEPS. Simply put,

BEPS refers to shifting of profits by corporates in ways

that erodes the taxable base to locations where they are

subject to a more favorable tax treatment - i.e. moving

revenues to where they are taxed at lower rates and

expenses to where they are relieved at higher rates.

As mentioned above, multinationals are not breaking

the rules. The issue is with the design of the current tax

regulations and the arms' length standards, and not the

conduct of multinational companies. Recent years have

witnessed globalization and liberalization at a pace

unprecedented. Free movement of capital and labor,

shift of manufacturing bases from high-cost to low-cost

locations, removal of trade barriers, technological and

telecom developments, and increasing importance of

risk management and IPR have resulted in a shift from

country-specific operating models to global models.

BEPS strategically takes advantage of the gaps in tax

rules or tax arrangements between different countries

such that it results in:

minimizing tax in a foreign operating or source

country by shifting gross profits via trading

structures or reducing net profit by maximizing

deductions for the payer;

low or no tax withholding at source;

low or no tax for the recipient; and

no tax of the low-taxed profits at the ultimate parent

level.

Therefore, it is difficult for a particular country to

address this issue single-handedly. The OECD Reports

suggest tax reforms in the form of a comprehensive

internationally coordinated solution to successfully

n

n

n

n

16ECONOMY MATTERS

Base Erosion and Profit Shifting

have a responsibility towards their shareholders to

legally reduce the taxes, the same however do not

alleviate government's fear around:

Businesses which operate cross border and are able

to reduce tax expense on account of such planning,

are likely to have competitive advantages over

enterprises that operate mostly at domestic level.

If the perception that

multinationals are dodging taxes continues, it would

encourage the opinion that taxes are only paid by the

naïve and would undermine the practice of voluntary

compliance by other taxpayers.

Tax revenue

is critical to foster long-term development in such

countries.

From the UK's Parliament's Public Accounts Committee

report criticizing the UK tax avoidance practices of giant

global firms to US President Obama stating income-

shifting behavior by multinationals as a serious concern,

the issue is grabbing not only media attention, but has

also reached political levels. G20 leaders and BRIC

countries are expressing concern, and so is the

nDistorted competition and issues with fairness:

nModern tax administration's dependence on

voluntary compliance:

nDetrimental for developing countries:

Gone are the days when taxpayers were worried

about double taxation of cross-border income and

would make representations to authorities to draw a

legislative framework that would prevent such

'injustice'. The tables seem to have turned and the

governments today are vexed about 'double non-

taxation'. Google "UK tax avoidance" and you would

know what we mean.

Multinationals these days are being accused of lowering

their tax bill by shifting their revenues to low tax

jurisdictions like Bermuda, Ireland etc. The structures

that are set up or the schemes that are employed are

perfectly legitimate, therefore the reference to 'tax

avoidance' and not 'tax evasion'. Critics may allege

'immorality'; however there is nothing illegal about tax

avoidance, as it involves working well within the

framework of tax laws. Hence, the problem.

A leading internet company's Chairman defended his

company's tax strategies arguing that the corporates

TAXATION

17

Guest Article

By Rohinton Sidhwa, Partner and Swati Goyal, Manager, Deloitte Haskins & Sells

( Views expressed in the article are those of the authors and not necessarily of CII.)


Food Processing

Food Processing Sector - Status and

Characteristics

India is at an inflection point of food consumption with

the domestic demand likely to grow at 4 per cent per

annum in the next 15-20 years. This growth could be even

higher across high value food items like animal products,

fruits & vegetables, and processed food. Vast

opportunities, thus, exist for the food processing sector

in India that needs to be tapped with right set of policies

aimed at unlocking the supply potential of the sector.

The growth and contribution of food processing sector

has been encouraging in recent years, thus setting the

tone for an improved performance of the sector going

forward. As compared to the average overall GDP

growth of 8 per cent during 2007-08 to 2011-12, FP sector

has expanded by an average of 8.6 per cent per annum

during the period. Its growth stayed far ahead of

manufacturing and agricultural GDP, indicating the

rising prominence of the sector in overall economy.

Around 65 per cent production of FP sector comes from

the organized segment. Unorganized segment, on the

other hand, contributes significantly in term of themployment generation with 3/4 of the total persons

engaged in the industry (64.6 lakh persons) belonging to

Food processing (FP) is an emerging sector of the

Indian economy. Driven by factors such as growing

per capita income, large availability of raw materials,

changing lifestyles, and conducive government policies,

the sector has shown robust growth performance in the

recent years. Connecting agriculture to manufacturing,

this sector plays a critical role in value addition to the

agriculture produce and creating income, employment

and exports earnings in the process. The sector also

contributes in reducing the waste of agricultural

produce, enhancing the shelf life of agricultural

products, and stimulating the nutritive capacity of food

items. The FP sector in India, however, has yet to go a

long way in realizing its full potential, which in turn will

also help in ensuring remunerative prices to farmers and

affordable prices to consumers, thereby resulting in a

win-win situation to both. Providing food security to

large and growing population and managing food

inflation are other critical components attached with

the healthy performance of the sector.

SECTOR IN FOCUS

vulnerability to economic slowdown and high inflation,

the sector's growth as per the IIP (Index of Industrial

Production) stood at mere 2.6 per cent in the last fiscal.

this segment alone. Organized FP industry in India

registered an average growth of 11 per cent per annum

during 2007-08 to 2011-12, much higher than 4 per cent

registered by unorganized segment. Showing FP's

8.0

3.8

7.78.6

GDP GDP Agri GDP Manuf. GDP-FP

Average GDP Growth (%) during 2007-08 to 2011-12

Source: Ministry of Food Processing Industry

10.4

8.9

3.7

1.4

Agriculture Manufacturing Industry Overall GDP

Average Share of FP(%) in Broad GDP Aggregates during 2007-08 to 2011-12


Un Regd FP35.4%

Regd FP64.6%

Share of Registered and Unregistered FP

FPI (72.8) Manf (755.3) General (1000)

Source: Source: Ministry of Food Processing Industry

IIP growth (y-o-y%)

7.0

15.4

2.6

8.6

3.0

1.3

8.2

2.9

1.1

2010-11 2011-12 2012-13

18ECONOMY MATTERS 19

Note: Numbers in brackets indicate the weights


Food Processing

Food Processing Sector - Status and

Characteristics

India is at an inflection point of food consumption with

the domestic demand likely to grow at 4 per cent per

annum in the next 15-20 years. This growth could be even

higher across high value food items like animal products,

fruits & vegetables, and processed food. Vast

opportunities, thus, exist for the food processing sector

in India that needs to be tapped with right set of policies

aimed at unlocking the supply potential of the sector.

The growth and contribution of food processing sector

has been encouraging in recent years, thus setting the

tone for an improved performance of the sector going

forward. As compared to the average overall GDP

growth of 8 per cent during 2007-08 to 2011-12, FP sector

has expanded by an average of 8.6 per cent per annum

during the period. Its growth stayed far ahead of

manufacturing and agricultural GDP, indicating the

rising prominence of the sector in overall economy.

Around 65 per cent production of FP sector comes from

the organized segment. Unorganized segment, on the

other hand, contributes significantly in term of themployment generation with 3/4 of the total persons

engaged in the industry (64.6 lakh persons) belonging to

Food processing (FP) is an emerging sector of the

Indian economy. Driven by factors such as growing

per capita income, large availability of raw materials,

changing lifestyles, and conducive government policies,

the sector has shown robust growth performance in the

recent years. Connecting agriculture to manufacturing,

this sector plays a critical role in value addition to the

agriculture produce and creating income, employment

and exports earnings in the process. The sector also

contributes in reducing the waste of agricultural

produce, enhancing the shelf life of agricultural

products, and stimulating the nutritive capacity of food

items. The FP sector in India, however, has yet to go a

long way in realizing its full potential, which in turn will

also help in ensuring remunerative prices to farmers and

affordable prices to consumers, thereby resulting in a

win-win situation to both. Providing food security to

large and growing population and managing food

inflation are other critical components attached with

the healthy performance of the sector.

SECTOR IN FOCUS

vulnerability to economic slowdown and high inflation,

the sector's growth as per the IIP (Index of Industrial

Production) stood at mere 2.6 per cent in the last fiscal.

this segment alone. Organized FP industry in India

registered an average growth of 11 per cent per annum

during 2007-08 to 2011-12, much higher than 4 per cent

registered by unorganized segment. Showing FP's

8.0

3.8

7.78.6

GDP GDP Agri GDP Manuf. GDP-FP

Average GDP Growth (%) during 2007-08 to 2011-12


10.4

8.9

3.7

1.4

Agriculture Manufacturing Industry Overall GDP

Average Share of FP(%) in Broad GDP Aggregates during 2007-08 to 2011-12


Un Regd FP35.4%

Regd FP64.6%

Share of Registered and Unregistered FP

FPI (72.8) Manf (755.3) General (1000)

Source: Source: Ministry of Food Processing Industry

IIP growth (y-o-y%)

7.0

15.4

2.6

8.6

3.0

1.3

8.2

2.9

1.1

2010-11 2011-12 2012-13


Note: Numbers in brackets indicate the weights


as an agriculture and high value food powerhouse: A

new vision for 2030", published in April 2013.

1. Accelerate sustainable yield improvement

In order to improve the yield on sustainable basis, two

new initiatives are necessary. First, instituting a

"National Agricultural Technology Mission" and for

thatIndia needs a focused programme to create high

yielding, disease resistant varieties of seeds across

crops, well marketed farmer education and distribution

programmme to encourage them to adopt high quality

seeds; promote relevant mechanism and modern

irrigation practices; catalyze the development of

modern technology; align farming techniques to best

practices and encourage private participation in

ensuring world class farming practices. Second,

instituting a "National Agricultural Sustainability

Mission" - Objective of this mission should be to dissolve

the supply side barriers and provide farmers with

seamless linkages to scientific inputs and best practices

to realize the true potential of agriculture.

on the monsoon season for irrigation. Only 35 to 40 per

cent of cultivated land in India is irrigated and there is

minimal penetration of new water saving technologies

like drip irrigation. Outdated chemicals continue to be

used for fertilizer and pesticides. A paucity of

investment in seed technology affects the supply of

good quality seeds.

Low farmer-industry interactions

Farmer-industry interactions in India continue to be low

due to restrictive policies and general hesitance of the

companies to engage with the farmers.

In order to transform the food processing sector to

meet its true potential and also achieve the vision of

converting India into a global food and agricultural

powerhouse, we present the summary of 5 points

agenda suggested by CII-McKinsey report titled "India

Strengthening the Food Processing

Sector

government should promote organized agri-input

retail, which can deliver suitable technologies and farm

inputs to the farmers. Third, the government may also

consider enabling other land aggregating measures

such as long term leases for select crops, which will help

in promoting long term investment. Fourth, the

government could encourage corporate farming in

select high value agriculture areas, particularly for

exports.

2. Promote win-win farmer-industry interaction

There are various emerging models of successful

interactions. The first is funding the growth of Farmer

Producer Organisation and Farmer Producer

Companies that allow small farmers to use collective

strength and increase their competiveness by offering

them easier access to credit and technology, reducing

cost of distribution and providing greater marketing

power and negotiations capacity. Second, the

access stems from three reasons - lack of adequate farm

gate infrastructure (such as storage centres and primary

processing centres), fragmented land holdings which

makes it difficult for companies to source enough

produce of consistent quality, and restrictive policies

that limit farm gate access. The lack of adequate

infrastructure for processing, cold storage, etc limit the

benefits of organized play from reaching the

consumers.

Unfulfilled export potential

India has made good progress in exports, going from Rs

90,000 crore in 2006 to Rs 1.35 lakh crore in 2012.

However, import dependency on critical items such as

pulses and edible oils remains high. This is despite the

fact that India is the third largest producer of food after

China and USA and has a sizeable presence in several

crops that are relevant to both the export market and

the industry. It is also close to some of the largest food

importing regions, eg., the Middle East, China, and South

East Asia. Low yield and poor infrastructure limit

competitiveness, particularly from farm gate to markets

and ports. Exports have suffered due to the lack of

active support and sponsorship. Poor infrastructure for

primary processing, packing, grading, and inadequate

cold chain storage have further held back Indian

exports.

Slowing down of yield improvement

While the overall yield in agriculture continues to

improve, there has been no scalable success story of

substantial yield improvement. The few successes have

been small, sporadic, and led by the private sector. In

fact, yield increase has actually slowed down across

crops over the past few decades, which is a cause for

concern since yields for these crops have still not

attained their optimum.

There are several possible reasons for this lackluster

yield performance. First, the quality of research in this

area has been inadequate. Second, insufficient

technology has been used. Third, extension services to

the farmers are not entirely effective. These have

translated into a lack of adoption of best practices

method among the farmers, which in turn has adversely

affected yields. For example, a recent Planning

Commission report estimated that of the one million

extension workers required, India has an extension

workforce of just 1000,00 (10 per cent).

The other main cause is the use of outdated practices

and inputs. A large number of Indian farmers still depend

Exports of FP sector have been growing at an annual

growth of 20.4 per cent for five years ending 2012-13.

With US$36 billion of exports in 2012-13, the sector

contributed 12 per cent to India's total exports.

However, export basket of the sector is concentrated in

just a few products. Guargum constitutes the largest

share (10.9 per cent), followed by rice Basmati (9.9 per

cent), Marine products (9.6 per cent), Meat &

preparations (9.1 per cent), Oil meals (8.1 per cent),

Spices (7.8 per cent), Non-Basmati rice (7.3 per cent),

and Wheat (5.4 per cent).

Showing growing business interest, investment in FP

sector grew by an average rate of 21.7 per cent per

annum between 2006-07 to 2010-11. The sector accounts

for around 5 per cent of the total bank credit

outstanding to all industries. The FDI inflow in the

sector, which is permissible for all the processed food

products up to 100 per cent on automatic route except

for items reserved for Micro and Small Enterprises

(MSEs), has grown nearly 6 times from a figure of US$70

million in 2007-08 to US$401.5 million in 2012-13.

Unrealized potential in food processing

Food processing industry GDP in India accounts for 10

per cent of agricultural GDP. The size of food processing

industry in India in 2010 was just Rs 66,000 crore (at

2004-05 prices), which much below the potential.

Under-performance of the sector can primarily be

attributed to factors like low demand created for

processed food and poor investment in infrastructure.

Low presence in high value categories

The level of participation of private players in the food

and agriculture sector has been low in India. Despite

shifting consumer preferences, the sector is hardly

present in high value categories. Overall industry

participation in the sector remains low, with few large

companies and limited participation from international

players. Very few instances of corporate participation

have shown their ability to create win-win solutions for

all stakeholders by transforming value chains, improving

yield and reducing wastage. These successful pilots have

failed to achieve scale. The lack of scale is primarily due

to structural barriers in farm gate access and the lack of

infrastructure to link the benefits of the value addition

to the consumers. Systematic difficulties in farm gate

Issues Facing the Food Processing

Sector

30

26

39

15

27

911

2

12

24

Wheat Rice Soyabean Potato Maize

1990-99 2000-10

Yield Increases (%) Across Crops have Slowed Down

Source: CII-McKinsey Report (2013)

20ECONOMY MATTERS 21 SEPTEMBER-OCTOBER 2013

as an agriculture and high value food powerhouse: A

new vision for 2030", published in April 2013.

1. Accelerate sustainable yield improvement

In order to improve the yield on sustainable basis, two

new initiatives are necessary. First, instituting a

"National Agricultural Technology Mission" and for

thatIndia needs a focused programme to create high

yielding, disease resistant varieties of seeds across

crops, well marketed farmer education and distribution

programmme to encourage them to adopt high quality

seeds; promote relevant mechanism and modern

irrigation practices; catalyze the development of

modern technology; align farming techniques to best

practices and encourage private participation in

ensuring world class farming practices. Second,

instituting a "National Agricultural Sustainability

Mission" - Objective of this mission should be to dissolve

the supply side barriers and provide farmers with

seamless linkages to scientific inputs and best practices

to realize the true potential of agriculture.

on the monsoon season for irrigation. Only 35 to 40 per

cent of cultivated land in India is irrigated and there is

minimal penetration of new water saving technologies

like drip irrigation. Outdated chemicals continue to be

used for fertilizer and pesticides. A paucity of

investment in seed technology affects the supply of

good quality seeds.

Low farmer-industry interactions

Farmer-industry interactions in India continue to be low

due to restrictive policies and general hesitance of the

companies to engage with the farmers.

In order to transform the food processing sector to

meet its true potential and also achieve the vision of

converting India into a global food and agricultural

powerhouse, we present the summary of 5 points

agenda suggested by CII-McKinsey report titled "India

Strengthening the Food Processing

Sector

government should promote organized agri-input

retail, which can deliver suitable technologies and farm

inputs to the farmers. Third, the government may also

consider enabling other land aggregating measures

such as long term leases for select crops, which will help

in promoting long term investment. Fourth, the

government could encourage corporate farming in

select high value agriculture areas, particularly for

exports.

2. Promote win-win farmer-industry interaction

There are various emerging models of successful

interactions. The first is funding the growth of Farmer

Producer Organisation and Farmer Producer

Companies that allow small farmers to use collective

strength and increase their competiveness by offering

them easier access to credit and technology, reducing

cost of distribution and providing greater marketing

power and negotiations capacity. Second, the

access stems from three reasons - lack of adequate farm

gate infrastructure (such as storage centres and primary

processing centres), fragmented land holdings which

makes it difficult for companies to source enough

produce of consistent quality, and restrictive policies

that limit farm gate access. The lack of adequate

infrastructure for processing, cold storage, etc limit the

benefits of organized play from reaching the

consumers.

Unfulfilled export potential

India has made good progress in exports, going from Rs

90,000 crore in 2006 to Rs 1.35 lakh crore in 2012.

However, import dependency on critical items such as

pulses and edible oils remains high. This is despite the

fact that India is the third largest producer of food after

China and USA and has a sizeable presence in several

crops that are relevant to both the export market and

the industry. It is also close to some of the largest food

importing regions, eg., the Middle East, China, and South

East Asia. Low yield and poor infrastructure limit

competitiveness, particularly from farm gate to markets

and ports. Exports have suffered due to the lack of

active support and sponsorship. Poor infrastructure for

primary processing, packing, grading, and inadequate

cold chain storage have further held back Indian

exports.

Slowing down of yield improvement

While the overall yield in agriculture continues to

improve, there has been no scalable success story of

substantial yield improvement. The few successes have

been small, sporadic, and led by the private sector. In

fact, yield increase has actually slowed down across

crops over the past few decades, which is a cause for

concern since yields for these crops have still not

attained their optimum.

There are several possible reasons for this lackluster

yield performance. First, the quality of research in this

area has been inadequate. Second, insufficient

technology has been used. Third, extension services to

the farmers are not entirely effective. These have

translated into a lack of adoption of best practices

method among the farmers, which in turn has adversely

affected yields. For example, a recent Planning

Commission report estimated that of the one million

extension workers required, India has an extension

workforce of just 1000,00 (10 per cent).

The other main cause is the use of outdated practices

and inputs. A large number of Indian farmers still depend

Exports of FP sector have been growing at an annual

growth of 20.4 per cent for five years ending 2012-13.

With US$36 billion of exports in 2012-13, the sector

contributed 12 per cent to India's total exports.

However, export basket of the sector is concentrated in

just a few products. Guargum constitutes the largest

share (10.9 per cent), followed by rice Basmati (9.9 per

cent), Marine products (9.6 per cent), Meat &

preparations (9.1 per cent), Oil meals (8.1 per cent),

Spices (7.8 per cent), Non-Basmati rice (7.3 per cent),

and Wheat (5.4 per cent).

Showing growing business interest, investment in FP

sector grew by an average rate of 21.7 per cent per

annum between 2006-07 to 2010-11. The sector accounts

for around 5 per cent of the total bank credit

outstanding to all industries. The FDI inflow in the

sector, which is permissible for all the processed food

products up to 100 per cent on automatic route except

for items reserved for Micro and Small Enterprises

(MSEs), has grown nearly 6 times from a figure of US$70

million in 2007-08 to US$401.5 million in 2012-13.

Unrealized potential in food processing

Food processing industry GDP in India accounts for 10

per cent of agricultural GDP. The size of food processing

industry in India in 2010 was just Rs 66,000 crore (at

2004-05 prices), which much below the potential.

Under-performance of the sector can primarily be

attributed to factors like low demand created for

processed food and poor investment in infrastructure.

Low presence in high value categories

The level of participation of private players in the food

and agriculture sector has been low in India. Despite

shifting consumer preferences, the sector is hardly

present in high value categories. Overall industry

participation in the sector remains low, with few large

companies and limited participation from international

players. Very few instances of corporate participation

have shown their ability to create win-win solutions for

all stakeholders by transforming value chains, improving

yield and reducing wastage. These successful pilots have

failed to achieve scale. The lack of scale is primarily due

to structural barriers in farm gate access and the lack of

infrastructure to link the benefits of the value addition

to the consumers. Systematic difficulties in farm gate

Issues Facing the Food Processing

Sector

30

26

39

15

27

911

2

12

24

Wheat Rice Soyabean Potato Maize

1990-99 2000-10

Yield Increases (%) Across Crops have Slowed Down

Source: CII-McKinsey Report (2013)


For promoting farmer industry interactions, there is also

need for instituting a favorable policy regime that

improves agricultural marketing mechanism. An overall

policy regime should enable farmers to decide to whom

and where they can sell their produce.

3. Scale up food processing exports

To promote large scale production of food items,

demand (domestic as well as exports) potential needs to

be harnessed by creating new segments of branded

food. This can be done by promotions, campaigns and

advertisements to illustrate how consumers could

benefit.

To promote exports, the government could launch a

"National Agricultural and Food Export Mission" in

select categories. The Mission, set up by the

government in association with private players, could

enable (a) identifying the right products and markets;

(b) investing in market creation; (c) updating evacuation

and access infrastructure such as cold chains and ports;

(d) adhering to internationally acclaimed benchmarks

for quality standards.

Attracting 'private capital and world class expertise"

would also be critical. Global food majors can be

attracted to India though targeted campaigns, such as

road shows, and by creating a conducive investment

environment.

4. Invest selectively in infrastructure with private

participation

Among other critical measures, there is a need for

creating a "National Farm Gate to Market Infrastructure

Authority" (similar to the National Highway Authority of

India) that will have the authority and be accountable for

the development of the pan India infrastructure. The

new authority will create a national blueprint for viable

agricultural infrastructure that will reduce operating

costs for agricultural and foods products and then either

build it themselves, or oversee the creation of this

infrastructure through the appropriate contracting and

Special Purpose Vehicle (SPV) model.

Additionally, "Mega Demand Servicing and Export

Hubs" could be created that will allow companies to

procure, store, process, and export from a single

location. Such hubs will help put in place the necessary

forward and backward linkages, along with the storage

infrastructure and provide for end-to-end facilities

across the value chain.

5. Nurture the next generation of agri-business

technocrats and entrepreneurs

In this regard, it is necessary to scale up agricultural

extension services through private participation and

new infrastructure creation. Initiatives such as

introducing PPP in extension services, encouraging

private sector to participate in farmer training, and

creating dedicated institutes providing vocational

training in extension services would greatly help.

There is also a need for creating a network of four to five

new world class food and agricultural universities and

research laboratories to stimulate agriculture research,

and they can be branded as the "Indian Institute of

Agriculture and Technology".

Further, setting up agri-business focused angel and

venture capital funds as a PPP initiative between central

and state governments and private capital providers will

go a long way in creating a generation of agri -

entrepreneurs who will lead the next wave of growth.

Conclusion

Given the huge unexploited potential of agriculture in the country and rapidly growing per capita income leading

to ever expanding demand for agriculture and processed food products, not only is India capable of fulfilling its

own food demand, it has vast potential to become top five food exporters over the next two decades. This in turn,

will also make the Indian food business an exciting investment destination for global players. The need of the hour

is to trigger the process of transformation in the sector towards realizing its full potential in meeting the growing

demand and thus in the process creating income, employment and, export earnings for the country.

SPECIAL ARTICLE


India has been facing high and persistent inflation in

the last five years except in the intervening year of

2009-10. High growth during this period facilitated a

steep rise in incomes, which in turn pushed up the

purchasing power of the population. The surge in

demand triggered inflationary pressures, particularly in

sectors where supply lagged behind. WPI inflation

averaged 7.5 per cent in the five year period, which is

way higher than the RBI's comfort threshold of 5 per

cent. One of the main drivers of inflation during this

period has been the high food prices. Total food inflation

(primary and manufacturing, henceforth referred to as

food inflation in the article) has averaged 10.3 per cent

during the period under consideration. To be sure, in the

current fiscal, even though overall WPI inflation has

averaged 5.3 per cent in the first five months (April-

August), food inflation has remained high at 9 per cent.

This persistence in food inflation is a matter of concern

for the policy makers as it affects the common man most

profusely. In this article, we analyse the various aspects

of food inflation- trying to answer the how's and why's

coupled with the required policy prescription to tame

the same.

Food inflation in India started spiralling-up since mid-

2009 onwards, reaching a peak in February 2010. The

spill-over effects were visible in other sectors too and

2010-11 witnessed overall inflation rate crossing the

psychological threshold of 10 per cent for five months in

a row. Further, food inflation has remained above the

psychological 10 per cent mark in 26 months out of 60

months in the last five years, while it has remained above

9 per cent mark for more than two-thirds of the period.

Moreover, food inflation has remained higher than

overall WPI inflation for most periods during the last five

years, except for only two intervening periods from April

08- October 08 and February 11- February 12.This clearly

highlights the fact that food inflation in the past few

years has remained not only high, but persistent as well.

Trends in Food Inflation


For promoting farmer industry interactions, there is also

need for instituting a favorable policy regime that

improves agricultural marketing mechanism. An overall

policy regime should enable farmers to decide to whom

and where they can sell their produce.

3. Scale up food processing exports

To promote large scale production of food items,

demand (domestic as well as exports) potential needs to

be harnessed by creating new segments of branded

food. This can be done by promotions, campaigns and

advertisements to illustrate how consumers could

benefit.

To promote exports, the government could launch a

"National Agricultural and Food Export Mission" in

select categories. The Mission, set up by the

government in association with private players, could

enable (a) identifying the right products and markets;

(b) investing in market creation; (c) updating evacuation

and access infrastructure such as cold chains and ports;

(d) adhering to internationally acclaimed benchmarks

for quality standards.

Attracting 'private capital and world class expertise"

would also be critical. Global food majors can be

attracted to India though targeted campaigns, such as

road shows, and by creating a conducive investment

environment.

4. Invest selectively in infrastructure with private

participation

Among other critical measures, there is a need for

creating a "National Farm Gate to Market Infrastructure

Authority" (similar to the National Highway Authority of

India) that will have the authority and be accountable for

the development of the pan India infrastructure. The

new authority will create a national blueprint for viable

agricultural infrastructure that will reduce operating

costs for agricultural and foods products and then either

build it themselves, or oversee the creation of this

infrastructure through the appropriate contracting and

Special Purpose Vehicle (SPV) model.

Additionally, "Mega Demand Servicing and Export

Hubs" could be created that will allow companies to

procure, store, process, and export from a single

location. Such hubs will help put in place the necessary

forward and backward linkages, along with the storage

infrastructure and provide for end-to-end facilities

across the value chain.

5. Nurture the next generation of agri-business

technocrats and entrepreneurs

In this regard, it is necessary to scale up agricultural

extension services through private participation and

new infrastructure creation. Initiatives such as

introducing PPP in extension services, encouraging

private sector to participate in farmer training, and

creating dedicated institutes providing vocational

training in extension services would greatly help.

There is also a need for creating a network of four to five

new world class food and agricultural universities and

research laboratories to stimulate agriculture research,

and they can be branded as the "Indian Institute of

Agriculture and Technology".

Further, setting up agri-business focused angel and

venture capital funds as a PPP initiative between central

and state governments and private capital providers will

go a long way in creating a generation of agri -

entrepreneurs who will lead the next wave of growth.

Conclusion

Given the huge unexploited potential of agriculture in the country and rapidly growing per capita income leading

to ever expanding demand for agriculture and processed food products, not only is India capable of fulfilling its

own food demand, it has vast potential to become top five food exporters over the next two decades. This in turn,

will also make the Indian food business an exciting investment destination for global players. The need of the hour

is to trigger the process of transformation in the sector towards realizing its full potential in meeting the growing

demand and thus in the process creating income, employment and, export earnings for the country.

SPECIAL ARTICLE


India has been facing high and persistent inflation in

the last five years except in the intervening year of

2009-10. High growth during this period facilitated a

steep rise in incomes, which in turn pushed up the

purchasing power of the population. The surge in

demand triggered inflationary pressures, particularly in

sectors where supply lagged behind. WPI inflation

averaged 7.5 per cent in the five year period, which is

way higher than the RBI's comfort threshold of 5 per

cent. One of the main drivers of inflation during this

period has been the high food prices. Total food inflation

(primary and manufacturing, henceforth referred to as

food inflation in the article) has averaged 10.3 per cent

during the period under consideration. To be sure, in the

current fiscal, even though overall WPI inflation has

averaged 5.3 per cent in the first five months (April-

August), food inflation has remained high at 9 per cent.

This persistence in food inflation is a matter of concern

for the policy makers as it affects the common man most

profusely. In this article, we analyse the various aspects

of food inflation- trying to answer the how's and why's

coupled with the required policy prescription to tame

the same.

Food inflation in India started spiralling-up since mid-

2009 onwards, reaching a peak in February 2010. The

spill-over effects were visible in other sectors too and

2010-11 witnessed overall inflation rate crossing the

psychological threshold of 10 per cent for five months in

a row. Further, food inflation has remained above the

psychological 10 per cent mark in 26 months out of 60

months in the last five years, while it has remained above

9 per cent mark for more than two-thirds of the period.

Moreover, food inflation has remained higher than

overall WPI inflation for most periods during the last five

years, except for only two intervening periods from April

08- October 08 and February 11- February 12.This clearly

highlights the fact that food inflation in the past few

years has remained not only high, but persistent as well.

Trends in Food Inflation


(i). Cereals: Inflation in food grains has remained high in

the last five years and also in the current fiscal. The two

sub-categories of food grains are cereals and pulses.

Inflation in cereals has averaged 9.4 per cent in the last

five years and stood at a high of 16.3 per cent in the first

five months of the current fiscal. One of the main

reasons behind this is the rapid increase in procurement

price for cereals, above the rise in the cost of production.

Over the last five years, the procurement price of cereals

has increased over cost of production by almost 15-60

per cent for a cumulative differential of around 150 per

cent over a five-year period. Amongst the various sub-

categories of cereals, rice and wheat have been the main

drivers of inflation, with inflation in rice averaging a high

of 19.5 per cent and wheat at 12.1 per cent in the current

year so far. High inflation in these two key staples affects

the common man most profusely.

Inflation rate in coarse cereals such as bajra, ragi has

remained high too, but given its relatively low weight in

cereals inflation, its impact on overall inflation has

remained subdued. As per the recently released first

advance estimates for the kharif 2013 season, rice and

coarse cereals output has been pegged higher as

compared to last year's estimates. This is expected to

dampen inflation in these categories going forward.

Wholesale Price Index: Avg Total Food (Prim + Manu)

22

18

14

10

6

2

-2

Apr

-08

Jun-

08

Aug

-08

Oct

-08

Dec

-08

Feb-

09

Apr

-09

Jun-

09

Aug

-09

Oct

-09

Dec

-09

Feb-

10

Apr

-10

Jun-

10

Aug

-10

Oct

-10

Dec

-10

Feb-

11

Apr

-11

Jun-

11

Aug

-11

Oct

-11

Dec

-11

Feb-

12

Apr

-12

Jun-

12

Aug

-12

Oct

-12

Dec

-12

Feb-

13

Apr

-13

Jun-

13

Aug

-13

Source: Office of Economic Advisor and CII calculations

Trends in Overall and Food Inflation (y-o-y%)

Food component is present in both primary articles and

manufactured products. Together, primary food articles

and manufactured food products account for about 24

per cent weight in overall WPI. As we can see from the

below graph, the main drivers of food inflation in the last

five years have been mainly primary food articles. The

inflation rate has been high in manufactured food

products too (see table), but given their relatively low

contribution to overall food inflation, we dwell on only

inflation in primary food articles in our analysis. Amongst

food articles, inflation in food grains (cereals & pulses),

fruits & vegetables, milk and eggs, meat & fish has been

at the forefront.

Drivers of Food Inflation


-20%

0%

20%

40%

60%

80%

100%

2008-09 2009-10 2010-11 2011-12 2012-13 Apr-Aug FY14

Others

Salt

Tea & Coffee Processing (TC)

Oil Cakes

Edible Oils

Sugar, Khandsari and Gur

Bakery Products

Grain Mill Products

Canned, Preserved & Processed Food

Dairy Products

Condiments & Spices

Source: Office of Economic Advisor

Break-Up of Food Inflation

Average Average

inflation Inflation

(2008-09 to April-August

Weight 2012-13) FY14

Primary Food Articles 14.33 11.4 11.0

Food Grains 4.09 9.7 12.6

Fruits & Vegetables 3.84 9.8 13.9

Milk 3.24 12.8 4.1

Egg, Meat & Fish 2.41 16.2 12.9

Condiments & Spices 0.57 9.1 13.6

Others 0.18 13.5 -0.2

Manufacturing Food Products 9.97 8.2 5.4

Dairy Products 0.57 8.7 0.4

Canned, Preserved & Processed Food 0.36 6.6 7.6

Grain Mill Products 1.34 4.6 11.7

Bakery Products 0.44 4.3 6.9

Sugar, Khandsari and Gur 2.09 16.7 4.0

Edible Oils 3.04 5.2 -0.7

Oil Cakes 0.49 11.8 13.1

Tea & Coffee Processing (TC) 0.71 8.6 15.1

Salt 0.05 5.8 1.8

Others 0.88 8.9 8.0

Total Food (Primary + Manufacturing) 24.31 10.3 9.0


(i). Cereals: Inflation in food grains has remained high in

the last five years and also in the current fiscal. The two

sub-categories of food grains are cereals and pulses.

Inflation in cereals has averaged 9.4 per cent in the last

five years and stood at a high of 16.3 per cent in the first

five months of the current fiscal. One of the main

reasons behind this is the rapid increase in procurement

price for cereals, above the rise in the cost of production.

Over the last five years, the procurement price of cereals

has increased over cost of production by almost 15-60

per cent for a cumulative differential of around 150 per

cent over a five-year period. Amongst the various sub-

categories of cereals, rice and wheat have been the main

drivers of inflation, with inflation in rice averaging a high

of 19.5 per cent and wheat at 12.1 per cent in the current

year so far. High inflation in these two key staples affects

the common man most profusely.

Inflation rate in coarse cereals such as bajra, ragi has

remained high too, but given its relatively low weight in

cereals inflation, its impact on overall inflation has

remained subdued. As per the recently released first

advance estimates for the kharif 2013 season, rice and

coarse cereals output has been pegged higher as

compared to last year's estimates. This is expected to

dampen inflation in these categories going forward.

Wholesale Price Index: Avg Total Food (Prim + Manu)

22

18

14

10

6

2

-2

Apr

-08

Jun-

08

Aug

-08

Oct

-08

Dec

-08

Feb-

09

Apr

-09

Jun-

09

Aug

-09

Oct

-09

Dec

-09

Feb-

10

Apr

-10

Jun-

10

Aug

-10

Oct

-10

Dec

-10

Feb-

11

Apr

-11

Jun-

11

Aug

-11

Oct

-11

Dec

-11

Feb-

12

Apr

-12

Jun-

12

Aug

-12

Oct

-12

Dec

-12

Feb-

13

Apr

-13

Jun-

13

Aug

-13


Trends in Overall and Food Inflation (y-o-y%)

Food component is present in both primary articles and

manufactured products. Together, primary food articles

and manufactured food products account for about 24

per cent weight in overall WPI. As we can see from the

below graph, the main drivers of food inflation in the last

five years have been mainly primary food articles. The

inflation rate has been high in manufactured food

products too (see table), but given their relatively low

contribution to overall food inflation, we dwell on only

inflation in primary food articles in our analysis. Amongst

food articles, inflation in food grains (cereals & pulses),

fruits & vegetables, milk and eggs, meat & fish has been

at the forefront.

Drivers of Food Inflation


-20%

0%

20%

40%

60%

80%

100%

2008-09 2009-10 2010-11 2011-12 2012-13 Apr-Aug FY14

Others

Salt

Tea & Coffee Processing (TC)

Oil Cakes

Edible Oils

Sugar, Khandsari and Gur

Bakery Products

Grain Mill Products

Canned, Preserved & Processed Food

Dairy Products

Condiments & Spices

Source: Office of Economic Advisor

Break-Up of Food Inflation

Average Average

inflation Inflation



Primary Food Articles 14.33 11.4 11.0

Food Grains 4.09 9.7 12.6

Fruits & Vegetables 3.84 9.8 13.9

Milk 3.24 12.8 4.1

Egg, Meat & Fish 2.41 16.2 12.9

Condiments & Spices 0.57 9.1 13.6

Others 0.18 13.5 -0.2

Manufacturing Food Products 9.97 8.2 5.4

Dairy Products 0.57 8.7 0.4

Canned, Preserved & Processed Food 0.36 6.6 7.6

Grain Mill Products 1.34 4.6 11.7

Bakery Products 0.44 4.3 6.9

Sugar, Khandsari and Gur 2.09 16.7 4.0

Edible Oils 3.04 5.2 -0.7

Oil Cakes 0.49 11.8 13.1

Tea & Coffee Processing (TC) 0.71 8.6 15.1

Salt 0.05 5.8 1.8

Others 0.88 8.9 8.0

Total Food (Primary + Manufacturing) 24.31 10.3 9.0


27

(iii). Vegetables: Notably, in the current fiscal,

vegetables have been the main drivers of food inflation,

averaging a high of 26.9 per cent- which is way higher

than its last five year's average of 9.2 per cent. In the last

four years, onions have been the main contributor to

overall vegetables inflation, while the contribution of

brinjal has increased in the last two years. In the current

year, inflation in onions (145 per cent), ginger (244 per

cent), tapioca (85 per cent), and brinjal (41.7 per cent)

have recorded the maximum jump, coupled with wide

fluctuations and increasing margins between wholesale

and retail prices. It's pertinent to note here that most of

the jumps in vegetable prices in the current fiscal have

come in the last two months (July & August), accounted

by the spurt in stockists demand ahead of the festival

season.

100%

80%

60%

40%

20%

0%

-20%

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

Apr-A

ug F

Y14

Ragi

Barley

Maize

Jowar

Bajra

Wheat

Rice

Drivers of Inflation in Cereals Inflation in Cereals at a Glance (y-o-y%)


-

-

-

Average Average

inflation Inflation



Cereals 3.37 9.4 16.3

- Rice 1.79 9.7 19.5

- Wheat 1.12 7.9 12.1

Bajra 0.10 13.0 20.3

Jowar 0.12 10.4 4.9

Maize 0.22 12.5 13.1

- Barley 0.02 8.9 1.4

- Ragi 0.02 18.4 49.1

Drivers of Inflation in Pulses Inflation in Pulses at a Glance (y-o-y%)


100%

80%

60%

40%

20%

0%

-20%

-40%

-60%

2008-09

2009-10

2010-112011-12

2012-13

Apr-Aug FY14

-Masur

-Moong

-Arhar

-Gram

-Urad

-

-

-

Average Average

inflation Inflation



Pulses 0.72 11.0 -1.4

- Gram 0.33 13.5 -11.9

- Arhar 0.14 11.4 10.1

Moong 0.08 15.0 14.8

Masur 0.06 7.8 14.3

Urad 0.10 9.0 2.6

(iv). Fruits: Inflation in fruits in the last five years has

averaged 10.7 per cent, while in the first five months of

the current fiscal, it has remained subdued at 1.0 per

cent. Amongst fruits, the main drivers of inflation have

been mainly banana and cashewnut. With rising

affluence, people tend to consume more of nutritious

food articles such as fruits. In the current year, inflation

in bananas has increased sharply followed by coconut

and guava.

Drivers of Inflation in Vegetables Inflation in Vegetables at a Glance (y-o-y%)

Source: Office of Economic Advisor and CII calculations Note: Tomato, Green Peas & Cauliflower have been excluded as data was not available for all periods

-40%

-20%

0%

20%

40%

60%

80%

100%

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

Apr

-Aug

FY

14

Cabbage

Okra

Brinjal

Ginger

Tapioca

(ii). Pulses: Inflation in pulses in the current year has

remained in the negative territory, while the average

inflation in last five years stood at 11.0 per cent. Amongst

cereals, gram has been the main contributor in the last

three years, while arhar was the key contributor in 2008-

09 and 2009-10. Given its higher weight in overall pulses,

deflation in gram in the current year has pushed overall

pulses inflation also in the negative territory, even as

inflation in its other categories has remained high. In

pulses, the average production touched a low in 1990s

and has improved recently in 2000s. Even in 2000s, the

annual growth in pulses is highly volatile and does not

show consistent growth. According to the first advance

estimates, pulse production is estimated at 6.01 million

tonnes in the current kharif season, representing an

increase of 1.6 per cent over the last year.Drivers of Inflation in Fruits Inflation in Fruits at a Glance (y-o-y%)

Source: Office of Economic Advisor and CII calculations Note: Mango, Apples, Litchi & Grapes have been excluded as data was not available for all periods

-40%

-20%

0%

20%

40%

60%

80%

100%

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

Ap

r-A

ug

FY1

4

Sapota

Lemon

Guava

Pineapple

Pineapple

Papaya

Coconut

Cashewnuts

Ornages

Average Average

inflation Inflation



Fruits 2.11 10.7 1.0

- Banana 0.34 11.9 13.5

- Oranges 0.13 15.7 -10.3

- Cashewnuts 0.16 12.8 5.1

- Coconut 0.24 7.5 18.9

- Papaya 0.09 6.6 18.3

- Pineapple 0.05 15.1 8.8

- Guava 0.04 0.8 33.7

- Lemon 0.07 3.0 -21.0

- Sapota 0.04 14.0 -2.2

26ECONOMY MATTERS

-

Average Average

inflation Inflation



Vegetables 1.74 9.2 26.9

Potatoes 0.20 16.9 -6.6

- Sweet Potatoes 0.02 6.7 1.2

- Onions 0.18 8.0 145.0

- Tapioca 0.07 17.6 84.9

- Ginger 0.05 12.0 243.7

- Brinjal 0.30 7.6 41.7

- Okra 0.13 14.2 -17.6

- Cabbage 0.19 13.2 -8.6


27

(iii). Vegetables: Notably, in the current fiscal,

vegetables have been the main drivers of food inflation,

averaging a high of 26.9 per cent- which is way higher

than its last five year's average of 9.2 per cent. In the last

four years, onions have been the main contributor to

overall vegetables inflation, while the contribution of

brinjal has increased in the last two years. In the current

year, inflation in onions (145 per cent), ginger (244 per

cent), tapioca (85 per cent), and brinjal (41.7 per cent)

have recorded the maximum jump, coupled with wide

fluctuations and increasing margins between wholesale

and retail prices. It's pertinent to note here that most of

the jumps in vegetable prices in the current fiscal have

come in the last two months (July & August), accounted

by the spurt in stockists demand ahead of the festival

season.

100%

80%

60%

40%

20%

0%

-20%

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

Apr-A

ug F

Y14

Ragi

Barley

Maize

Jowar

Bajra

Wheat

Rice

Drivers of Inflation in Cereals Inflation in Cereals at a Glance (y-o-y%)


-

-

-

Average Average

inflation Inflation



Cereals 3.37 9.4 16.3

- Rice 1.79 9.7 19.5

- Wheat 1.12 7.9 12.1

Bajra 0.10 13.0 20.3

Jowar 0.12 10.4 4.9

Maize 0.22 12.5 13.1

- Barley 0.02 8.9 1.4

- Ragi 0.02 18.4 49.1

Drivers of Inflation in Pulses Inflation in Pulses at a Glance (y-o-y%)


100%

80%

60%

40%

20%

0%

-20%

-40%

-60%

2008-09

2009-10

2010-112011-12

2012-13

Apr-Aug FY14

-Masur

-Moong

-Arhar

-Gram

-Urad

-

-

-

Average Average

inflation Inflation



Pulses 0.72 11.0 -1.4

- Gram 0.33 13.5 -11.9

- Arhar 0.14 11.4 10.1

Moong 0.08 15.0 14.8

Masur 0.06 7.8 14.3

Urad 0.10 9.0 2.6

(iv). Fruits: Inflation in fruits in the last five years has

averaged 10.7 per cent, while in the first five months of

the current fiscal, it has remained subdued at 1.0 per

cent. Amongst fruits, the main drivers of inflation have

been mainly banana and cashewnut. With rising

affluence, people tend to consume more of nutritious

food articles such as fruits. In the current year, inflation

in bananas has increased sharply followed by coconut

and guava.

Drivers of Inflation in Vegetables Inflation in Vegetables at a Glance (y-o-y%)

Source: Office of Economic Advisor and CII calculations Note: Tomato, Green Peas & Cauliflower have been excluded as data was not available for all periods

-40%

-20%

0%

20%

40%

60%

80%

100%

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

Apr

-Aug

FY

14

Cabbage

Okra

Brinjal

Ginger

Tapioca

(ii). Pulses: Inflation in pulses in the current year has

remained in the negative territory, while the average

inflation in last five years stood at 11.0 per cent. Amongst

cereals, gram has been the main contributor in the last

three years, while arhar was the key contributor in 2008-

09 and 2009-10. Given its higher weight in overall pulses,

deflation in gram in the current year has pushed overall

pulses inflation also in the negative territory, even as

inflation in its other categories has remained high. In

pulses, the average production touched a low in 1990s

and has improved recently in 2000s. Even in 2000s, the

annual growth in pulses is highly volatile and does not

show consistent growth. According to the first advance

estimates, pulse production is estimated at 6.01 million

tonnes in the current kharif season, representing an

increase of 1.6 per cent over the last year.Drivers of Inflation in Fruits Inflation in Fruits at a Glance (y-o-y%)

Source: Office of Economic Advisor and CII calculations Note: Mango, Apples, Litchi & Grapes have been excluded as data was not available for all periods

-40%

-20%

0%

20%

40%

60%

80%

100%

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

Ap

r-A

ug

FY1

4

Sapota

Lemon

Guava

Pineapple

Pineapple

Papaya

Coconut

Cashewnuts

Ornages

Average Average

inflation Inflation



Fruits 2.11 10.7 1.0

- Banana 0.34 11.9 13.5

- Oranges 0.13 15.7 -10.3

- Cashewnuts 0.16 12.8 5.1

- Coconut 0.24 7.5 18.9

- Papaya 0.09 6.6 18.3

- Pineapple 0.05 15.1 8.8

- Guava 0.04 0.8 33.7

- Lemon 0.07 3.0 -21.0

- Sapota 0.04 14.0 -2.2

26ECONOMY MATTERS

-

Average Average

inflation Inflation



Vegetables 1.74 9.2 26.9

Potatoes 0.20 16.9 -6.6

- Sweet Potatoes 0.02 6.7 1.2

- Onions 0.18 8.0 145.0

- Tapioca 0.07 17.6 84.9

- Ginger 0.05 12.0 243.7

- Brinjal 0.30 7.6 41.7

- Okra 0.13 14.2 -17.6

- Cabbage 0.19 13.2 -8.6


fact that an average household in India still spends

almost half of its expenditure on food, with the

poor spending as much as 60 per cent. Such price

spikes adversely impacts the household budget

allocation for food and non-food items. The

challenge gets compounded with India being

home to a large number of poor people, who

cannot hedge against food inflation. India's food

security is threatened by frequent fluctuations in

prices. With the National Food Security Act on the

anvil, it will be ever more important to rein in food

inflation.

Ans: While several reasons have been cited for

triggering food inflation, demand outpacing

supply is definitely a key cause. In the case of

certain crops, particularly vegetables, adverse

weather conditions resulting in crop damage, and

supply chain issues (broken chains, increasing cost

of transportation) have contributed to rising

prices. It has also been observed that rising

Minimum Support Prices for certain key crops have

fuelled price inflation. With the introduction of the

Mahatma Gandhi National Rural Employment

Guarantee Act, agricultural wages have risen as a

result of labour shortage, contributing to rising

costs of production. These are largely supply side

issues.

On the demand side, enhanced levels of income

and changing lifestyles and aspirations continue to

spur the demand for food items, especially high

value commodities such as fruits, vegetables, milk

Q2. What according to you are the key drivers of the

current food inflation situation?

Q1. What are the emerging trends in the current food

inflation scenario and why do you think it is a

cause of concern for India?

Ans: The Indian economy has been witnessing rising

food inflation since mid-2009 with some signs of

relief during mid-2011 to early 2012. While India was

successful in containing domestic price spikes

when global prices were reining high in 2007 -

2008, the situation worsened since mid-2009.

Inflation in food articles averaged 10 per cent

during 2008-09 to December 2012.

A closer look at inflationary trends reveals that

food inflation in mid-2009 was primarily driven by

cereals (particularly wheat), pulses, and high value

manufactured products. However, current food

inflation is largely driven by vegetables (77.8 per

cent increase in wholesale price index in August

2013 over August 2012) fruits, rice, egg, meat and

fish. Wholesale price indices of all these

commodities except fruits increased manifold

since August 2011. In the vegetable category,

spiraling prices of onion (at 244.6 per cent dearer)

has been a major cause of concern not only for

consumers but also for the government. Prices of

other key vegetables like tomatoes, ginger and

eggplant have also skyrocketed in the recent past

coupled with wide fluctuations and increasing

margins between wholesale and retail prices.

These are commodities, which form an integral

part of the common man's diet and demand for the

same is rising.

The concerns over food inflation are driven by the

Mr S. Sivakumar Chairman, CII National Council on Agriculture

Chief Executive - ABD, ITC Limited

CII View PointThe Building Blocks Towards Food Price Stability

(v). Milk, Eggs, Meat & Fish (MEM&F): This coterie has

shown high inflation in the last five years and in the

current year too, inflation has averaged 12.9 per cent. In

the last five years, inland and marine fish have

contributed the most to the overall MEM&F inflation.

Incomes have risen in India thanks to its high growth

phase since 2003. The higher incomes in turn have led

people to demand and consume more nutritious protein

based food items like milk, eggs and meat products. As

supplies of these items have not risen in line with

demand, the end result has been persistent inflation in

these food items.

-20%

0%

20%

40%

60%

80%

100%

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

Apr

-Aug

FY

14

Pork

Poultry Chicken

Beef & Buffalo Meat

Mutton

Marine Fish

Drivers of Inflation in EM&F Inflation in MEM&F at a Glance (y-o-y%)


Average Average

inflation Inflation



Egg, Meat and Fish (EM) 2.41 16.2 12.9

- Egg 0.19 10.4 5.7

- Inland Fish 0.57 25.6 23.5

- Marine Fish 0.72 17.7 7.1

- Mutton 0.35 12.2 11.7

- Beef & Buffalo Meat 0.12 11.6 -0.1

- Poultry Chicken 0.41 8.6 15.8

- Pork 0.06 9.4 4.6

Milk 3.24 12.8 4.1

Both demand and supply-side factors are responsible for

driving up the food inflation. Supply of the primary food

articles have remained more-or-less stagnant due to

declining productivity and yield levels. In order to ease

the supply constraints, it is important to increase

investments and productivity across the entire

agriculture sector. This would entail improving

agriculture productivity and yields through adoption of

modern farm technology along with reducing the

dependence on rainfall.

Next, we present view points of sector experts on the

reasons behind the recent spurt in food inflation

coupled with policy prescriptions to bring down the

same. In the first piece, Mr S. Sivakumar, Chairman, CII

National Council on Agriculture and Chief Executive -

ABD, ITC Ltd presents his views followed by Dr. Ashok

Gulati & Ms. Shweta Saini and Dr. C.S.C. Sekhar.


fact that an average household in India still spends

almost half of its expenditure on food, with the

poor spending as much as 60 per cent. Such price

spikes adversely impacts the household budget

allocation for food and non-food items. The

challenge gets compounded with India being

home to a large number of poor people, who

cannot hedge against food inflation. India's food

security is threatened by frequent fluctuations in

prices. With the National Food Security Act on the

anvil, it will be ever more important to rein in food

inflation.

Ans: While several reasons have been cited for

triggering food inflation, demand outpacing

supply is definitely a key cause. In the case of

certain crops, particularly vegetables, adverse

weather conditions resulting in crop damage, and

supply chain issues (broken chains, increasing cost

of transportation) have contributed to rising

prices. It has also been observed that rising

Minimum Support Prices for certain key crops have

fuelled price inflation. With the introduction of the

Mahatma Gandhi National Rural Employment

Guarantee Act, agricultural wages have risen as a

result of labour shortage, contributing to rising

costs of production. These are largely supply side

issues.

On the demand side, enhanced levels of income

and changing lifestyles and aspirations continue to

spur the demand for food items, especially high

value commodities such as fruits, vegetables, milk

Q2. What according to you are the key drivers of the

current food inflation situation?

Q1. What are the emerging trends in the current food

inflation scenario and why do you think it is a

cause of concern for India?

Ans: The Indian economy has been witnessing rising

food inflation since mid-2009 with some signs of

relief during mid-2011 to early 2012. While India was

successful in containing domestic price spikes

when global prices were reining high in 2007 -

2008, the situation worsened since mid-2009.

Inflation in food articles averaged 10 per cent

during 2008-09 to December 2012.

A closer look at inflationary trends reveals that

food inflation in mid-2009 was primarily driven by

cereals (particularly wheat), pulses, and high value

manufactured products. However, current food

inflation is largely driven by vegetables (77.8 per

cent increase in wholesale price index in August

2013 over August 2012) fruits, rice, egg, meat and

fish. Wholesale price indices of all these

commodities except fruits increased manifold

since August 2011. In the vegetable category,

spiraling prices of onion (at 244.6 per cent dearer)

has been a major cause of concern not only for

consumers but also for the government. Prices of

other key vegetables like tomatoes, ginger and

eggplant have also skyrocketed in the recent past

coupled with wide fluctuations and increasing

margins between wholesale and retail prices.

These are commodities, which form an integral

part of the common man's diet and demand for the

same is rising.

The concerns over food inflation are driven by the

Mr S. Sivakumar Chairman, CII National Council on Agriculture

Chief Executive - ABD, ITC Limited

CII View PointThe Building Blocks Towards Food Price Stability

(v). Milk, Eggs, Meat & Fish (MEM&F): This coterie has

shown high inflation in the last five years and in the

current year too, inflation has averaged 12.9 per cent. In

the last five years, inland and marine fish have

contributed the most to the overall MEM&F inflation.

Incomes have risen in India thanks to its high growth

phase since 2003. The higher incomes in turn have led

people to demand and consume more nutritious protein

based food items like milk, eggs and meat products. As

supplies of these items have not risen in line with

demand, the end result has been persistent inflation in

these food items.

-20%

0%

20%

40%

60%

80%

100%

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

Apr

-Aug

FY

14

Pork

Poultry Chicken

Beef & Buffalo Meat

Mutton

Marine Fish

Drivers of Inflation in EM&F Inflation in MEM&F at a Glance (y-o-y%)


Average Average

inflation Inflation



Egg, Meat and Fish (EM) 2.41 16.2 12.9

- Egg 0.19 10.4 5.7

- Inland Fish 0.57 25.6 23.5

- Marine Fish 0.72 17.7 7.1

- Mutton 0.35 12.2 11.7

- Beef & Buffalo Meat 0.12 11.6 -0.1

- Poultry Chicken 0.41 8.6 15.8

- Pork 0.06 9.4 4.6

Milk 3.24 12.8 4.1

Both demand and supply-side factors are responsible for

driving up the food inflation. Supply of the primary food

articles have remained more-or-less stagnant due to

declining productivity and yield levels. In order to ease

the supply constraints, it is important to increase

investments and productivity across the entire

agriculture sector. This would entail improving

agriculture productivity and yields through adoption of

modern farm technology along with reducing the

dependence on rainfall.

Next, we present view points of sector experts on the

reasons behind the recent spurt in food inflation

coupled with policy prescriptions to bring down the

same. In the first piece, Mr S. Sivakumar, Chairman, CII

National Council on Agriculture and Chief Executive -

ABD, ITC Ltd presents his views followed by Dr. Ashok

Gulati & Ms. Shweta Saini and Dr. C.S.C. Sekhar.


transformation in India and although the results

are a mixed bag, there is scope for further

progress. Developing efficient supply chains that

ensure smooth availability of quality produce is

critical for strengthening retail operations.

Efficient agri-businesses will merit investments in

supply chains right from the farming stage to

procurement, storage and marketing and in effect

streamline the otherwise long supply chains in

India crowded by undesirable intermediation. It is

indeed ironical that despite high food prices,

farmers have not benefitted as huge margins

between the farm-gate and retail prices have been

lost in intermediation. Entry of big businesses

(domestic or multinational) will ensure scalability

and the right margins for the farmer, which creates

a win-win situation. It would be important to

enable a balanced and pragmatic policy

framework that attracts private sector

investments in agri-value chains in India. The issue

of post-harvest losses that account for 30-50 per

cent of the produce, particularly of perishable

products can be addressed to a large extent

through advanced and competitive value chains.

Going

forward, it will be critical to develop agri

intelligence hubs that capture and disseminate

price signals in advance, and critical market

information to enable the government take

appropriate measures (in terms of opening up

imports or controlling exports) to avoid price

spikes. Information about weather conditions can

also help farmers plan crop management so that

losses can be avoided. These hubs can provide on-

farm extension services and market linkages to

farmers to help them improve farm productivity

and earn higher returns. The private sector has

been involved in a big way in providing some of

these cr it ical services, through unique

interventions like the ITC e-Choupal, Choupal

Sagar, Tata Kisan Kendras and others. There is an

opportunity to integrate these services and create

an integrated hub for delivery of agri-extension

services.

Q4. Do you see the Food Processing sector playing an

important role in containing price spikes?

Develop Integrated Agri-Intelligence Hubs:

and milk products, egg, fish, meat, both fresh and

processed. Per capita consumption of many of

these commodities is way below that of other

countries and hence given a low base, the scope

for expanding per capita consumption is quite

large. This is likely to create substantial demand

pressures. Given this scenario, it will become

crucial to ensure that supply meets rising demand

for food.

Ans: Several recommendations have been put forth

towards addressing the challenge of food price

inflation. Efforts to liberalise agricultural markets

and trade have yielded positive results in certain

cases. However implementation of relevant policy

as well as institutional reforms would go a long

way in stemming rising food inflation. The need of

the hour is to address the structural factors that

impact food inflation and ease bottlenecks in

supply chains. I would summarize the key

measures as the building blocks towards food

price stability which are as follows:

The merits and

demerits of liberalising agricultural markets with

respect to amending the APMC Act and allowing

farmers the freedom to sell outside the market

yards has been a subject of discussion in various

fora. Implementation of the model APMC Act

which allows farmers the freedom to market their

produce and the scope to establish direct linkages

with private buyers will undoubtedly enhance

farmer incomes and also ensure availability of food

at affordable prices. The ease of doing business

will incentivise private players to invest in

backward linkages with farmers, which are critical

for development of on-farm activities and services.

States will also have to play a progressive role in

ensuring that the amended Act is implemented in

the true spirit and the bottlenecks with regard to

private sector participation are streamlined. Taxes

and fees need to be calibrated to the kind of

services that are being provided to the buyer and

seller and not levied on an ad-hoc basis.

The format of

a g r i c u l t u r e r e t a i l i n g h a s u n d e r g o n e a

Q3. What are the key measures important to contain

food inflation in India?

Liberalise Agricultural Markets:

Develop Advanced Supply Chains:

Ans: Incentives to scale up food processing will be an

effective means of curbing food inflation by

helping overcome seasonality issues, post-harvest

losses and boosting value addition in primary

produce. Despite India being a leading producer of

several high value agricultural commodities,

processing levels are quite low compared to other

countries and this provides an opportunity to scale

up processing to meet the growing demand for

high value commodities. This will require

investment in the right pre and post-harvest

technology that ensures food safety and quality.

Rationalizing taxes and custom duties levied on

the food processing sector will go a long way in

attracting large scale private investments in

technology, value chains and capacity building of

farmers and people involved in food processing

activities. Food processing can help generate

higher incomes for farmers through value addition

opportunities going beyond the market for fresh.

Q5. Lastly, what is your opinion about public private

partnerships in the context of food inflation?

Ans: While the government will continue to play a

pivotal role through enabling policies and

institutions towards achieving higher and

sustainable agricultural growth, the private sector

can make a meaningful contribution through the

delivery of best practices. Agriculture which has so

far largely been subsidy driven, needs to be more

investment led (both public and private),

particularly in areas like agri R&D, technology,

infrastructure and markets. These investments will

generate larger benefits in terms of ensuring

enhanced availability and moving towards food

price stability. Public private partnership will

continue to be important and in the current

context of food inflation, it will be ever more

important to strengthen the existing partnerships

and venture further.


transformation in India and although the results

are a mixed bag, there is scope for further

progress. Developing efficient supply chains that

ensure smooth availability of quality produce is

critical for strengthening retail operations.

Efficient agri-businesses will merit investments in

supply chains right from the farming stage to

procurement, storage and marketing and in effect

streamline the otherwise long supply chains in

India crowded by undesirable intermediation. It is

indeed ironical that despite high food prices,

farmers have not benefitted as huge margins

between the farm-gate and retail prices have been

lost in intermediation. Entry of big businesses

(domestic or multinational) will ensure scalability

and the right margins for the farmer, which creates

a win-win situation. It would be important to

enable a balanced and pragmatic policy

framework that attracts private sector

investments in agri-value chains in India. The issue

of post-harvest losses that account for 30-50 per

cent of the produce, particularly of perishable

products can be addressed to a large extent

through advanced and competitive value chains.

Going

forward, it will be critical to develop agri

intelligence hubs that capture and disseminate

price signals in advance, and critical market

information to enable the government take

appropriate measures (in terms of opening up

imports or controlling exports) to avoid price

spikes. Information about weather conditions can

also help farmers plan crop management so that

losses can be avoided. These hubs can provide on-

farm extension services and market linkages to

farmers to help them improve farm productivity

and earn higher returns. The private sector has

been involved in a big way in providing some of

these cr it ical services, through unique

interventions like the ITC e-Choupal, Choupal

Sagar, Tata Kisan Kendras and others. There is an

opportunity to integrate these services and create

an integrated hub for delivery of agri-extension

services.

Q4. Do you see the Food Processing sector playing an

important role in containing price spikes?

Develop Integrated Agri-Intelligence Hubs:

and milk products, egg, fish, meat, both fresh and

processed. Per capita consumption of many of

these commodities is way below that of other

countries and hence given a low base, the scope

for expanding per capita consumption is quite

large. This is likely to create substantial demand

pressures. Given this scenario, it will become

crucial to ensure that supply meets rising demand

for food.

Ans: Several recommendations have been put forth

towards addressing the challenge of food price

inflation. Efforts to liberalise agricultural markets

and trade have yielded positive results in certain

cases. However implementation of relevant policy

as well as institutional reforms would go a long

way in stemming rising food inflation. The need of

the hour is to address the structural factors that

impact food inflation and ease bottlenecks in

supply chains. I would summarize the key

measures as the building blocks towards food

price stability which are as follows:

The merits and

demerits of liberalising agricultural markets with

respect to amending the APMC Act and allowing

farmers the freedom to sell outside the market

yards has been a subject of discussion in various

fora. Implementation of the model APMC Act

which allows farmers the freedom to market their

produce and the scope to establish direct linkages

with private buyers will undoubtedly enhance

farmer incomes and also ensure availability of food

at affordable prices. The ease of doing business

will incentivise private players to invest in

backward linkages with farmers, which are critical

for development of on-farm activities and services.

States will also have to play a progressive role in

ensuring that the amended Act is implemented in

the true spirit and the bottlenecks with regard to

private sector participation are streamlined. Taxes

and fees need to be calibrated to the kind of

services that are being provided to the buyer and

seller and not levied on an ad-hoc basis.

The format of

a g r i c u l t u r e r e t a i l i n g h a s u n d e r g o n e a

Q3. What are the key measures important to contain

food inflation in India?

Liberalise Agricultural Markets:

Develop Advanced Supply Chains:

Ans: Incentives to scale up food processing will be an

effective means of curbing food inflation by

helping overcome seasonality issues, post-harvest

losses and boosting value addition in primary

produce. Despite India being a leading producer of

several high value agricultural commodities,

processing levels are quite low compared to other

countries and this provides an opportunity to scale

up processing to meet the growing demand for

high value commodities. This will require

investment in the right pre and post-harvest

technology that ensures food safety and quality.

Rationalizing taxes and custom duties levied on

the food processing sector will go a long way in

attracting large scale private investments in

technology, value chains and capacity building of

farmers and people involved in food processing

activities. Food processing can help generate

higher incomes for farmers through value addition

opportunities going beyond the market for fresh.

Q5. Lastly, what is your opinion about public private

partnerships in the context of food inflation?

Ans: While the government will continue to play a

pivotal role through enabling policies and

institutions towards achieving higher and

sustainable agricultural growth, the private sector

can make a meaningful contribution through the

delivery of best practices. Agriculture which has so

far largely been subsidy driven, needs to be more

investment led (both public and private),

particularly in areas like agri R&D, technology,

infrastructure and markets. These investments will

generate larger benefits in terms of ensuring

enhanced availability and moving towards food

price stability. Public private partnership will

continue to be important and in the current

context of food inflation, it will be ever more

important to strengthen the existing partnerships

and venture further.


cent (Centre and states combined fiscal deficit is above 8

percent). Obviously, the damage that has been done on

the fiscal front over the last five years cannot be

corrected in a single year, and certainly not in an election

year. It will take at least 3-4 years before it can be

brought down to acceptable levels. Till then we may

have to live with higher rates of food inflation.

Nevertheless, certain structural reforms can help bring

down the food prices. Massive overhaul of APMC Act,

open policy to welcome organized retail in food,

incentivizing them to invest at the back end to build

efficient food value chains, higher priority to food

processing, liquidating the massive hoarding of grains

by the government, rationalizing and drastically pruning

the fuel, fertilizer and food subsidies, moving towards

cash transfers in case of food and fertilizer subsides, are

some of the policy measures that can bring down food

inflation. Will the policy makers have the courage to do

this in an election year? Only time will tell.

become a grave threat to growth itself.

Similarly the Global fiscal stimulus (by US of about

USD$600 billion, by China of about US$586 billion and by

EU of 200 billion Euros) had created huge liquidity raising

all commodity prices globally. The high global prices of

food also then percolated to the Indian economy

through imports and exports.

Interestingly, one more reason in the Indian context has

been the cost push factor coming from rising farm

wages, which have been rising at 18 percent per annum

since 2008-09. This rising cost feeds into high

procurement prices, which then fan out in the entire

economy.

So, what's the way out now? First and foremost, fiscal

deficit by the Centre needs to be brought down to 3 per

cent of GDP from its current levels of more than 5 per

Policy Solutions

( Views are personal)


Dr. Ashok Gulati

Taming Food Inflation

Ms. Shweta Saini

food products) in August 2013 over August 2012 suggest

a rate of 12 per cent, with food articles price index going

up by 18 percent and food products by only 1.7 per cent.

Within food articles, cereals are up by 14 per cent, led by

rice at 20 per cent, fruits and vegetables up by 42 per

cent, vegetables alone by 78 per cent led by onions at

244 per cent, and eggs, meat and fish by 19 per cent.

This trend and spread of food inflation, sudden

acceleration from 2008-09, and higher in vitamins and

protein products, raises a fundamental question of

diagnostics. What led to this situation that we are in

now? Is it the supply shocks? Not at all. The production of

almost all food items has been growing much faster than

population growth. But the fact that their prices have

risen much faster only reflects that their demand is

pacing faster than supplies. And the demand has been

accelerating partly from higher GDP growth during

2008-09 to 2012-13, but primarily from loose fiscal policy.

India's fiscal deficit suddenly more than doubled in a

single year in 2008-09 over 2007-08, and since then has

remained at unacceptably high levels. It is worth

recalling that this was result of an orchestrated global

fiscal stimulus that was given by G8 plus 5 countries in

the aftermath of global financial crisis in 2008. It suited

the ruling government as it came just before the last

elections. Remember loan waiver of about Rs 72,000

crores, massive expansion of MNREGA, massive fuel,

fertilizer and food subsidies, and so on, on top of the

generous Sixth Pay Commission.Unfortunately, there is

no free lunch in the economy. It has come back to haunt

the policy makers, wherein now high food inflation has

Diagnostics

High food inflation is the worst form of hidden tax often

inflicted on poor people. The reason: an average

household in India still spends almost half of its

expenditure on food, and poor spend about 60 percent

on food. No wonder, runaway food prices bite them

badly adversely impacting their nutrition and hunger

levels.

Food inflation comprises of two components: food

articles and food products. Food articles (such as

cereals, pulses, fruits and vegetables, milk, eggs, meat

and fish, etc) largely contain fresh and unprocessed (or

rudimentary first stage processed) food items, having a

weight of 14.33 per cent in the WPI of all commodities.

Food products are basically processed food items

ranging from milled grain products (atta, maida, suji,

etc), sugar, khadsari, gur, edible oils, milk products, etc.

They have a weight of 9.97 per cent in overall WPI of all

commodities. Together, food articles and food

products, therefore account for about 24 per cent

weight in overall WPI.

Temporally, since 2000-01, food inflation has been under

reasonable control from 2000-01 to 2007-08 with an

average rate of 3.7 per cent, with a peak in 2006-07 at 7.9

per cent and trough in 2000-01 at 0.4 per cent. It is

commendable to see when the world food prices

erupted in 2007-08, Indian food inflation was still 5.6 per

cent. But things changed drastically thereafter. The

average food inflation during 2008-09 to 2012-13 is 10.2

per cent, which is continuing unabated in 2013-14 too.

The latest numbers on food inflation (food articles plus

Composition, Trends and Spread

Chairman

Commission for Agricultural Costs and Prices

Consultant

ICRIER


cent (Centre and states combined fiscal deficit is above 8

percent). Obviously, the damage that has been done on

the fiscal front over the last five years cannot be

corrected in a single year, and certainly not in an election

year. It will take at least 3-4 years before it can be

brought down to acceptable levels. Till then we may

have to live with higher rates of food inflation.

Nevertheless, certain structural reforms can help bring

down the food prices. Massive overhaul of APMC Act,

open policy to welcome organized retail in food,

incentivizing them to invest at the back end to build

efficient food value chains, higher priority to food

processing, liquidating the massive hoarding of grains

by the government, rationalizing and drastically pruning

the fuel, fertilizer and food subsidies, moving towards

cash transfers in case of food and fertilizer subsides, are

some of the policy measures that can bring down food

inflation. Will the policy makers have the courage to do

this in an election year? Only time will tell.

become a grave threat to growth itself.

Similarly the Global fiscal stimulus (by US of about

USD$600 billion, by China of about US$586 billion and by

EU of 200 billion Euros) had created huge liquidity raising

all commodity prices globally. The high global prices of

food also then percolated to the Indian economy

through imports and exports.

Interestingly, one more reason in the Indian context has

been the cost push factor coming from rising farm

wages, which have been rising at 18 percent per annum

since 2008-09. This rising cost feeds into high

procurement prices, which then fan out in the entire

economy.

So, what's the way out now? First and foremost, fiscal

deficit by the Centre needs to be brought down to 3 per

cent of GDP from its current levels of more than 5 per

Policy Solutions

( Views are personal)


Dr. Ashok Gulati

Taming Food Inflation

Ms. Shweta Saini

food products) in August 2013 over August 2012 suggest

a rate of 12 per cent, with food articles price index going

up by 18 percent and food products by only 1.7 per cent.

Within food articles, cereals are up by 14 per cent, led by

rice at 20 per cent, fruits and vegetables up by 42 per

cent, vegetables alone by 78 per cent led by onions at

244 per cent, and eggs, meat and fish by 19 per cent.

This trend and spread of food inflation, sudden

acceleration from 2008-09, and higher in vitamins and

protein products, raises a fundamental question of

diagnostics. What led to this situation that we are in

now? Is it the supply shocks? Not at all. The production of

almost all food items has been growing much faster than

population growth. But the fact that their prices have

risen much faster only reflects that their demand is

pacing faster than supplies. And the demand has been

accelerating partly from higher GDP growth during

2008-09 to 2012-13, but primarily from loose fiscal policy.

India's fiscal deficit suddenly more than doubled in a

single year in 2008-09 over 2007-08, and since then has

remained at unacceptably high levels. It is worth

recalling that this was result of an orchestrated global

fiscal stimulus that was given by G8 plus 5 countries in

the aftermath of global financial crisis in 2008. It suited

the ruling government as it came just before the last

elections. Remember loan waiver of about Rs 72,000

crores, massive expansion of MNREGA, massive fuel,

fertilizer and food subsidies, and so on, on top of the

generous Sixth Pay Commission.Unfortunately, there is

no free lunch in the economy. It has come back to haunt

the policy makers, wherein now high food inflation has

Diagnostics

High food inflation is the worst form of hidden tax often

inflicted on poor people. The reason: an average

household in India still spends almost half of its

expenditure on food, and poor spend about 60 percent

on food. No wonder, runaway food prices bite them

badly adversely impacting their nutrition and hunger

levels.

Food inflation comprises of two components: food

articles and food products. Food articles (such as

cereals, pulses, fruits and vegetables, milk, eggs, meat

and fish, etc) largely contain fresh and unprocessed (or

rudimentary first stage processed) food items, having a

weight of 14.33 per cent in the WPI of all commodities.

Food products are basically processed food items

ranging from milled grain products (atta, maida, suji,

etc), sugar, khadsari, gur, edible oils, milk products, etc.

They have a weight of 9.97 per cent in overall WPI of all

commodities. Together, food articles and food

products, therefore account for about 24 per cent

weight in overall WPI.

Temporally, since 2000-01, food inflation has been under

reasonable control from 2000-01 to 2007-08 with an

average rate of 3.7 per cent, with a peak in 2006-07 at 7.9

per cent and trough in 2000-01 at 0.4 per cent. It is

commendable to see when the world food prices

erupted in 2007-08, Indian food inflation was still 5.6 per

cent. But things changed drastically thereafter. The

average food inflation during 2008-09 to 2012-13 is 10.2

per cent, which is continuing unabated in 2013-14 too.

The latest numbers on food inflation (food articles plus

Composition, Trends and Spread

Chairman

Commission for Agricultural Costs and Prices

Consultant

ICRIER


SPECIAL FEATURE

Impact of Government Moves on Fertilizer Industry

Fertilizer industry is one of the most tightly

controlled and monitored by Government agencies

through different policies directives, rules and

regulations. Even after 20 years from the start of

liberalisation process initiated by Government of India, it

has not yet made much impact on the fertilizer industry.

Administration

Department of Fertilizers under Ministry of Fertilizers &

Chemicals is the administrative ministry for fertilizer

subsidy related policies and also looks after distribution

and control. Fertilizer Control Order, 1985 defines rules

and regulations regarding quality, size, and composition

etc. of different grades of fertilizers sold in India.

Essential Commodities Act empowers the Government

to regulate distribution of fertilizers. Currently 50 per

cent of urea production and 20 per cent of P&K

production/import is under ECA i.e. Government can

instruct producer/importer to supply product to place

specified by Department of Fertilizers. At state level,

normally Agriculture Production Commissioner used to

be the nodal officer to coordinate and oversee fertilizer

related issues.

Subsidy Related Policies

With the intention to make available fertilizers at

affordable rates every nook and corner of country,

different policies have been notified to enable

manufacturer/importer to sell fertilizers at much lower

rate than their cost of production/import. The difference

between cost of production/import and market price is

borne by Government of India in the form of subsidy.

Currently the following policies are allowing companies

to claim subsidy on fertilizes

a) Nutrient Based Subsidy (NBS) Policy for P&K

Fertilizers - From 1st April, 2010, Government of India

introduced Nutrient Based Subsidy Policy for P&K

fertilizers. This policy allowed free MRP and uniform

subsidy rate for one nutrient in all the products

Mr. P.K. Ghose1(Executive Director, and CFO, Tata Chemicals)

1 Views expressed in the article are those of the author and necessarily of CII.

High MSPs Driving Inflation in Cereals

Dr. C.S.C SekharAssociate Professor

Institute of Economic Growth, Delhi

increases have been 15 per cent, 6 per cent and 5 per

cent respectively. These increases have led to large

procurement in food grains, resulting in more than 30

per cent of the production being procured in the last few

years. Correspondingly, the market availability of

cereals declined, leading to sharp rise in prices. It is the

reduced supply in the market place and not any shortfall

in production that has resulted in the price rise. There

has been a bumper production of cereals in the last

seven years, except 2009, which was a drought year. The

international prices (of cereals) have also been declining

in real terms in general since 2009 and more so for more

than a year now as per the FAO statistics. Therefore, the

domestic policies, and not the production shortfalls nor

external factors, appear to have played the major role in

price rise of cereals.

The role of domestic policy also becomes clear when we

look at the pulses sector. The focus on increasing pulses

production in the country through various policy

initiatives such as National Food Security Mission

(NFSM) since 2008, combined with a liberal and stable

import policy, appears to have stabilized the pulse

prices. As regards vegetables & fruits, and meat, eggs &

fish, which are perishable in nature, it is the

infrastructure bottlenecks that play a major role. The

role of transportation facilities, uninterrupted power

supply and cold storage facilities become critical for

these perishable commodities.

Therefore, it is important to make judicious use of price

and procurement policies so as not to throttle the

markets. Also, it is imperative to develop critical

infrastructure such as rural markets, roads, cold

storages and power.

Persistent food inflation has been a worry for Indian

policymakers in the recent times. As per the CSO

estimates, the food and beverages inflation rate based

on CPI, stood at 11 per cent in August 2013. The

corresponding figures for cereals and vegetables are 14

per cent and 26 per cent respectively. This short note

attempts to identify the composition and possible

underlying factors of this inflation.

The pattern of inflation in India seems to vary quite a bit

over time. Few years ago, pulses, milk & milk products,

sugar and fruits & vegetables were mainly responsible

for food inflation. It was argued that rising incomes were

mainly responsible for this kind of inflationary pressure

as all these commodities, except pulses, have higher

income elasticities than staple foods. However, this

seems to have changed in the recent times. The pattern

over the last two years suggests that cereals, particularly

rice and wheat, appear to contribute more to the current

inflationary pressures, alongwith eggs, meat & fish and

vegetables. There is a steady improvement in the price

situation of milk/milk products, pulses and sugar/sugar

products.

The situation as regards the two staple cereals -rice and

wheat -is alarming. The average rate of inflation in 2013

(January-August) based on WPI is 17 per cent for cereals

(wheat and rice) -19 per cent for rice and 16 per cent for

wheat. The grain mill products consisting of atta, maida

and sooji is also showing substantial increase. Domestic

policies appear to play a major role in this price rise.

The minimum support price (MSP) for rice has been

increased by 8 per cent, 15 per cent and 5 per cent in the

last three years. In case of wheat the corresponding

(Views are personal)


SPECIAL FEATURE

Impact of Government Moves on Fertilizer Industry

Fertilizer industry is one of the most tightly

controlled and monitored by Government agencies

through different policies directives, rules and

regulations. Even after 20 years from the start of

liberalisation process initiated by Government of India, it

has not yet made much impact on the fertilizer industry.

Administration

Department of Fertilizers under Ministry of Fertilizers &

Chemicals is the administrative ministry for fertilizer

subsidy related policies and also looks after distribution

and control. Fertilizer Control Order, 1985 defines rules

and regulations regarding quality, size, and composition

etc. of different grades of fertilizers sold in India.

Essential Commodities Act empowers the Government

to regulate distribution of fertilizers. Currently 50 per

cent of urea production and 20 per cent of P&K

production/import is under ECA i.e. Government can

instruct producer/importer to supply product to place

specified by Department of Fertilizers. At state level,

normally Agriculture Production Commissioner used to

be the nodal officer to coordinate and oversee fertilizer

related issues.

Subsidy Related Policies

With the intention to make available fertilizers at

affordable rates every nook and corner of country,

different policies have been notified to enable

manufacturer/importer to sell fertilizers at much lower

rate than their cost of production/import. The difference

between cost of production/import and market price is

borne by Government of India in the form of subsidy.

Currently the following policies are allowing companies

to claim subsidy on fertilizes

a) Nutrient Based Subsidy (NBS) Policy for P&K

Fertilizers - From 1st April, 2010, Government of India

introduced Nutrient Based Subsidy Policy for P&K

fertilizers. This policy allowed free MRP and uniform

subsidy rate for one nutrient in all the products

Mr. P.K. Ghose1(Executive Director, and CFO, Tata Chemicals)

1 Views expressed in the article are those of the author and necessarily of CII.

High MSPs Driving Inflation in Cereals

Dr. C.S.C SekharAssociate Professor

Institute of Economic Growth, Delhi

increases have been 15 per cent, 6 per cent and 5 per

cent respectively. These increases have led to large

procurement in food grains, resulting in more than 30

per cent of the production being procured in the last few

years. Correspondingly, the market availability of

cereals declined, leading to sharp rise in prices. It is the

reduced supply in the market place and not any shortfall

in production that has resulted in the price rise. There

has been a bumper production of cereals in the last

seven years, except 2009, which was a drought year. The

international prices (of cereals) have also been declining

in real terms in general since 2009 and more so for more

than a year now as per the FAO statistics. Therefore, the

domestic policies, and not the production shortfalls nor

external factors, appear to have played the major role in

price rise of cereals.

The role of domestic policy also becomes clear when we

look at the pulses sector. The focus on increasing pulses

production in the country through various policy

initiatives such as National Food Security Mission

(NFSM) since 2008, combined with a liberal and stable

import policy, appears to have stabilized the pulse

prices. As regards vegetables & fruits, and meat, eggs &

fish, which are perishable in nature, it is the

infrastructure bottlenecks that play a major role. The

role of transportation facilities, uninterrupted power

supply and cold storage facilities become critical for

these perishable commodities.

Therefore, it is important to make judicious use of price

and procurement policies so as not to throttle the

markets. Also, it is imperative to develop critical

infrastructure such as rural markets, roads, cold

storages and power.

Persistent food inflation has been a worry for Indian

policymakers in the recent times. As per the CSO

estimates, the food and beverages inflation rate based

on CPI, stood at 11 per cent in August 2013. The

corresponding figures for cereals and vegetables are 14

per cent and 26 per cent respectively. This short note

attempts to identify the composition and possible

underlying factors of this inflation.

The pattern of inflation in India seems to vary quite a bit

over time. Few years ago, pulses, milk & milk products,

sugar and fruits & vegetables were mainly responsible

for food inflation. It was argued that rising incomes were

mainly responsible for this kind of inflationary pressure

as all these commodities, except pulses, have higher

income elasticities than staple foods. However, this

seems to have changed in the recent times. The pattern

over the last two years suggests that cereals, particularly

rice and wheat, appear to contribute more to the current

inflationary pressures, alongwith eggs, meat & fish and

vegetables. There is a steady improvement in the price

situation of milk/milk products, pulses and sugar/sugar

products.

The situation as regards the two staple cereals -rice and

wheat -is alarming. The average rate of inflation in 2013

(January-August) based on WPI is 17 per cent for cereals

(wheat and rice) -19 per cent for rice and 16 per cent for

wheat. The grain mill products consisting of atta, maida

and sooji is also showing substantial increase. Domestic

policies appear to play a major role in this price rise.

The minimum support price (MSP) for rice has been

increased by 8 per cent, 15 per cent and 5 per cent in the

last three years. In case of wheat the corresponding

(Views are personal)


SPECIAL FEATURE

However, now government is trying to control MRP

again even though MRP is being termed as "Free" which

is totally against the spirit of NBS policy.

No Retrospective Changes - Companies are required to

maintain their accounts as per laid down standards and

norms in time bound manner and any change by

government with retrospective effect will make

accounts unreliable. Investors will find it difficult to

make decisions which in turn will affect the market

valuations.

Time bound notifications - All notification should be

issued in time bound manner. Ministry's RFD (Result

Frame Document) must specify date wise schedule for

issue of notifications. This will reduce lot of speculation.

Interest on delayed payment - Government charges

interest and penal interest on delay in deposit of any

recovery from companies. So, number of days required

to pay any subsidy bill should be fixed and government

should pay interest at stipulated bench mark rate for

delay in interest payment. This will offset the cost of

company who receives the delayed payment.

Limited intervention and pre-testing - the movement

controls have to be restricted to the limits laid down

under the ECA with some broad directives for the rest.

Procedural changes need to be tested and trials done on

a smaller lot before implementing.

The topics to be deliberated at the Summit would broadly include:

International & Domestic Tax Developments –Lessons and

Learning for India

Key Current and Emerging Transfer Pricing Audit Issues in India

Alternate Dispute Resolution – Challenges & Way Forward

BEPS – Emerging Trends in Developed and Emerging Markets

Indirect Tax Issues including CENVAT, Service Tax and State VAT

v

v

v

v

v

Ms. Jessy RajjiConfederation of Indian Industry; 23 Institutional Area; Lodhi Road

New Delhi 110 003.

Tel : 91-11-24690715 /24629994 – 7; Fax : 91-11-24615693

Email : [email protected]

CII is organizing a day

long Global Taxation th

Summit 2013 on 20

November, 2013 at

Hotel Taj Palace, New

Delhi.

Mr. Sumit Bose, Secretary - Revenue, Ministry of Finance, has kindly

agreed to be the Chief Guest at the Summit. The Summit would also

have the benefit of the views of senior government officers, tax experts

from India and abroad and industry.

You are invited to participate in the Summit. For registration and

Summit 2013Gl bal Tax

Unresolved Issues - Government is taking time to

announce any decision and list of pending issues keep on

piling. Further, many issues like mopping up of subsidy

on opening stocks, freight notifications etc. are pending

and government is yet to take final decision. So,

profitability of companies dealing in P&K fertilizers is

always at the mercy of government decisions and on a

retrospective basis.

Delay in Policy Decision - NBS circular is supposed to be

issued around January/February to enable companies to

do planning of raw material/f inished goods

procurement. However, during last two years, this

circular is issued in the month of May. Similarly, new

policy for existing urea plants is due from April 2010 and

Government is not able to evolve final model.

Insufficient Budget Allocation - Industry is facing cash

flow problem due to unpaid subsidy bills. As per one

estimate, unpaid subsidy bills as on 1st April 2012 was

around Rs. 20,000 crore and same has reached to Rs.

32,000 crore as on 1st April 2013. It is due to insufficient

budget allocation by Government. Industry is funding

cash requirement from loans and paying interest for the

same. But Government is not paying any interest on

delayed payment. This is resulting into poor liquidity for

the companies. Subsidy payment is always a major

problem in third and fourth quarter every year.

Government is not making sufficient budgetary

provision to solve the problem of carry over amount.

Delay in payment of bills is adding avoidable cost and

directly impacting the profitability. The cost of delayed

subsidy is working out to about Rs 600 crore for the

Indian Fertiliser sector as a whole and an additional

working capital of about Rs 17000 crore at its peak to

about Rs 12000 crore at the end of March 2013.

Procedural barriers - Many a times, industry is not able to

submit the bills due to delay in updation of software in

FMS (portal of DOF). For example, some billing related

changes were introduced from November,12 but FMS

was updated in March,13 resulting into accumulation of

unbilled amount. Similarly, many policy related changes

are notified but changes in FMS take lot of time.

Similarly, issue of escalation notification of urea takes

around 6-8 months after close of the year resulting into

delayed billing as well as payment.

What Needs to be Done

Spirit of Policy should be maintained - Mid way tinkering

with the spirit of policy is creating lot of uncertainty

among the industry players. For example, NBS was

started with the clear intent of free MRP as well as to

allow industry to recover full cost of operation.

whether imported or indigenously produced. Policy

allowed lump sum subsidy rate to encourage use of

Zinc and Boron. This policy encouraged more

customization of product basket and introduction of

new products considering special needs of an area

or crop. Subsidy rates are announced at the

beginning of year and companies are allowed to

change MRP in case of any change in cost of

production/import due to any reason.

b) New Pricing Scheme Stage III for Urea - This policy

was introduced from 1st October 2006 and was

applicable till 31st March 2010. However, now it has

been extended till announcement of new policy

which is under discussion.

c) Uniform Freight Policy - This policy allows freight

payment on urea and was introduced from 1st April

2008. Initially it covered all products but later on

P&K products were excluded after introduction of

NBS Policy.

Interference by Government -

At the time of introduction of NBS for P&K fertilizers,

MRP was freed and manufacturers/importers were

allowed to change MRP on reasonable basis to cover

increase in their cost. The basic essence of NBS was to

allow fertilizer industry to function in market driven

environment and reduce subsidy burden on

Government. Government role was presumed to be

limited to announcing subsidy rate as well as take care of

proper distribution.

In reality, the Government continued to control the

companies through several restrictions in movements

well beyond the quantity covered under the ECA.

Several flip-flops in the policy regarding movements

have resulted in some companies gaining at the cost of

others. From April,13 onwards benchmark MRP has been

notified for each product and now Government intends

to track every increase in cost as well as MRP.

Government has introduced formats to collect certified

cost data from companies before release of subsidy.

Thus the Government is involving itself in micro

management, even for the so called decontrolled

fertilisers. This makes it difficult for companies to take

long term decisions of raw material tie ups, joint

ventures etc.

NBS was positioned as a path breaking step towards

liberalisation of fertilizer industry. Now it has gone to the

other extreme and CAG has been asked to do scrutiny of

private sector enterprises which is unheard of.

Problems Faced by the Industry


SPECIAL FEATURE

However, now government is trying to control MRP

again even though MRP is being termed as "Free" which

is totally against the spirit of NBS policy.

No Retrospective Changes - Companies are required to

maintain their accounts as per laid down standards and

norms in time bound manner and any change by

government with retrospective effect will make

accounts unreliable. Investors will find it difficult to

make decisions which in turn will affect the market

valuations.

Time bound notifications - All notification should be

issued in time bound manner. Ministry's RFD (Result

Frame Document) must specify date wise schedule for

issue of notifications. This will reduce lot of speculation.

Interest on delayed payment - Government charges

interest and penal interest on delay in deposit of any

recovery from companies. So, number of days required

to pay any subsidy bill should be fixed and government

should pay interest at stipulated bench mark rate for

delay in interest payment. This will offset the cost of

company who receives the delayed payment.

Limited intervention and pre-testing - the movement

controls have to be restricted to the limits laid down

under the ECA with some broad directives for the rest.

Procedural changes need to be tested and trials done on

a smaller lot before implementing.

The topics to be deliberated at the Summit would broadly include:

International & Domestic Tax Developments –Lessons and

Learning for India

Key Current and Emerging Transfer Pricing Audit Issues in India

Alternate Dispute Resolution – Challenges & Way Forward

BEPS – Emerging Trends in Developed and Emerging Markets

Indirect Tax Issues including CENVAT, Service Tax and State VAT

v

v

v

v

v

Ms. Jessy RajjiConfederation of Indian Industry; 23 Institutional Area; Lodhi Road

New Delhi 110 003.

Tel : 91-11-24690715 /24629994 – 7; Fax : 91-11-24615693

Email : [email protected]

CII is organizing a day

long Global Taxation th

Summit 2013 on 20

November, 2013 at

Hotel Taj Palace, New

Delhi.

Mr. Sumit Bose, Secretary - Revenue, Ministry of Finance, has kindly

agreed to be the Chief Guest at the Summit. The Summit would also

have the benefit of the views of senior government officers, tax experts

from India and abroad and industry.

You are invited to participate in the Summit. For registration and

Summit 2013Gl bal Tax

Unresolved Issues - Government is taking time to

announce any decision and list of pending issues keep on

piling. Further, many issues like mopping up of subsidy

on opening stocks, freight notifications etc. are pending

and government is yet to take final decision. So,

profitability of companies dealing in P&K fertilizers is

always at the mercy of government decisions and on a

retrospective basis.

Delay in Policy Decision - NBS circular is supposed to be

issued around January/February to enable companies to

do planning of raw material/f inished goods

procurement. However, during last two years, this

circular is issued in the month of May. Similarly, new

policy for existing urea plants is due from April 2010 and

Government is not able to evolve final model.

Insufficient Budget Allocation - Industry is facing cash

flow problem due to unpaid subsidy bills. As per one

estimate, unpaid subsidy bills as on 1st April 2012 was

around Rs. 20,000 crore and same has reached to Rs.

32,000 crore as on 1st April 2013. It is due to insufficient

budget allocation by Government. Industry is funding

cash requirement from loans and paying interest for the

same. But Government is not paying any interest on

delayed payment. This is resulting into poor liquidity for

the companies. Subsidy payment is always a major

problem in third and fourth quarter every year.

Government is not making sufficient budgetary

provision to solve the problem of carry over amount.

Delay in payment of bills is adding avoidable cost and

directly impacting the profitability. The cost of delayed

subsidy is working out to about Rs 600 crore for the

Indian Fertiliser sector as a whole and an additional

working capital of about Rs 17000 crore at its peak to

about Rs 12000 crore at the end of March 2013.

Procedural barriers - Many a times, industry is not able to

submit the bills due to delay in updation of software in

FMS (portal of DOF). For example, some billing related

changes were introduced from November,12 but FMS

was updated in March,13 resulting into accumulation of

unbilled amount. Similarly, many policy related changes

are notified but changes in FMS take lot of time.

Similarly, issue of escalation notification of urea takes

around 6-8 months after close of the year resulting into

delayed billing as well as payment.

What Needs to be Done

Spirit of Policy should be maintained - Mid way tinkering

with the spirit of policy is creating lot of uncertainty

among the industry players. For example, NBS was

started with the clear intent of free MRP as well as to

allow industry to recover full cost of operation.

whether imported or indigenously produced. Policy

allowed lump sum subsidy rate to encourage use of

Zinc and Boron. This policy encouraged more

customization of product basket and introduction of

new products considering special needs of an area

or crop. Subsidy rates are announced at the

beginning of year and companies are allowed to

change MRP in case of any change in cost of

production/import due to any reason.

b) New Pricing Scheme Stage III for Urea - This policy

was introduced from 1st October 2006 and was

applicable till 31st March 2010. However, now it has

been extended till announcement of new policy

which is under discussion.

c) Uniform Freight Policy - This policy allows freight

payment on urea and was introduced from 1st April

2008. Initially it covered all products but later on

P&K products were excluded after introduction of

NBS Policy.

Interference by Government -

At the time of introduction of NBS for P&K fertilizers,

MRP was freed and manufacturers/importers were

allowed to change MRP on reasonable basis to cover

increase in their cost. The basic essence of NBS was to

allow fertilizer industry to function in market driven

environment and reduce subsidy burden on

Government. Government role was presumed to be

limited to announcing subsidy rate as well as take care of

proper distribution.

In reality, the Government continued to control the

companies through several restrictions in movements

well beyond the quantity covered under the ECA.

Several flip-flops in the policy regarding movements

have resulted in some companies gaining at the cost of

others. From April,13 onwards benchmark MRP has been

notified for each product and now Government intends

to track every increase in cost as well as MRP.

Government has introduced formats to collect certified

cost data from companies before release of subsidy.

Thus the Government is involving itself in micro

management, even for the so called decontrolled

fertilisers. This makes it difficult for companies to take

long term decisions of raw material tie ups, joint

ventures etc.

NBS was positioned as a path breaking step towards

liberalisation of fertilizer industry. Now it has gone to the

other extreme and CAG has been asked to do scrutiny of

private sector enterprises which is unheard of.

Problems Faced by the Industry


ECONOMY MONITOR

GDP GROWTH (y-o-y%)

WPI INFLATION (y-o-y%)

INDEX OF INDUSTRIAL PRODUCTION (IIP) (y-o-y%)

US GDP Growth Japan GDP Growth

IndustryOverall GDP

Overall

Euro Area GDP Growth China GDP Growth

Agriculture Services

Primary Fuel Manufacturing

General Manufacturing Electricity Mining

2Q12 3Q12 4Q12 1Q13 2Q13

7.47.9 7.7 7.5 7.8

2.8 3.1

2.01.3 1.6

-0.5-0.7

-1.0 -1.0

-0.5

2Q12 3Q12 4Q12 1Q13 2Q13

3.8

0.3 0.4 0.31.2

2Q12 3Q12 4Q12 1Q13 2Q13

5.4 5.24.7 4.8 4.4


2.9

1.7 1.81.4

2.7


1.8

1.3

2.52.7

0.2


7.7 7.6

6.76.6 6.6


3Q12 4Q12 1Q13 2Q13 3Q13

4.6 5.2 5.9 6.1 6.5

May-13 Jun-13 Jul-13 Aug-13 Sep-13

5.7

8.89.7

11.7

13.5


7.3 7.5

11.4 11.310.1


3.3 2.9 2.61.9 2.0


1.5

-2.5-1.8

2.8

0.6

Apr-13 May-13 Jun-13 Jul-13 Aug-13

1.8

-3.2

-1.7

3.2

-0.1


4.2

6.2

0.0

5.2

7.2


-3.4

-5.9

-4.3

-2.5

-0.2


GLOBAL GDP (y-o-y%)

ECONOMY MATTERS

n

n

n

Keeps readers abreast of global & domestic

economic developments

Monthly Journal of top management of 8000

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Read by CII Members, Thought Leaders,

Diplomats, Policy Makers, MPs and other

decision makers

The Facts

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Domestic Trends

Corporate Performance

Sector in Focus

Special Article

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Dr. Danish A. Hashim, Director- Economic Research

39 SEPTEMBER-OCTOBER 2013

ECONOMY MONITOR

GDP GROWTH (y-o-y%)

WPI INFLATION (y-o-y%)

INDEX OF INDUSTRIAL PRODUCTION (IIP) (y-o-y%)

US GDP Growth Japan GDP Growth

IndustryOverall GDP

Overall

Euro Area GDP Growth China GDP Growth

Agriculture Services

Primary Fuel Manufacturing

General Manufacturing Electricity Mining

2Q12 3Q12 4Q12 1Q13 2Q13

7.47.9 7.7 7.5 7.8

2.8 3.1

2.01.3 1.6

-0.5-0.7

-1.0 -1.0

-0.5

2Q12 3Q12 4Q12 1Q13 2Q13

3.8

0.3 0.4 0.31.2

2Q12 3Q12 4Q12 1Q13 2Q13

5.4 5.24.7 4.8 4.4


2.9

1.7 1.81.4

2.7


1.8

1.3

2.52.7

0.2


7.7 7.6

6.76.6 6.6


3Q12 4Q12 1Q13 2Q13 3Q13

4.6 5.2 5.9 6.1 6.5


5.7

8.89.7

11.7

13.5


7.3 7.5

11.4 11.310.1


3.3 2.9 2.61.9 2.0


1.5

-2.5-1.8

2.8

0.6


1.8

-3.2

-1.7

3.2

-0.1


4.2

6.2

0.0

5.2

7.2


-3.4

-5.9

-4.3

-2.5

-0.2


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Dr. Danish A. Hashim, Director- Economic Research

39 SEPTEMBER-OCTOBER 2013

Exports (%) Imports (%) Trade Deficit (US$ Bn) Current Account Deficit (US$ Bn) Avg Exchange Rate (Rs/US$)

Source: RBI, CSO, SEBI, Office of Economic Advisor, Bureau of Economic Analysis, Euro Stat, Bank of Japan, National Bureau of Statistics

MONETARY VARIABLES (%)

CAPITAL FLOWS (US$ billion)

OTHER IMPORTANT INDICATORS (y-o-y%)

Non-Food Credit Growth (y-o-y%) M3Growth (y-o-y%) Repo Rate (%) Cash Reserve Ratio (%)

Net FII Flows (US$ billion) Net FDI Flows (US$ billion) Forex Reserves (US$ billion) ECB flows (US$ billion)

Core Sector Growth (y-o-y%) Cement Production Growth (y-o-y%) Steel Production Growth (y-o-y%)Commercial Vehicles

Production Growth (y-o-y%)

7.25 7.25 7.25 7.25 7.504.00 4.00 4.00 4.00 4.00

-3.3-5.3

11.6 13.011.2

7.0

0.1

-6.2

-0.7

-18.1


20.1

12.2 12.310.9

6.8


17.1

21.1

31.8

18.221.8


55.0

58.459.8

63.263.8


15.3 13.7 15.1 16.4 15.1


13.6 12.8 12.5 12.2 12.5

May-13 Jun-13 Jul-13 Aug-13 Sep-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13

5.2

1.2

-7.5

-3.0 -2.5


2.82.0 2.1 1.7 1.6


287.9

284.6

277.2 275.5 276.3


0.5 1.0

2.8

4.2

0.9


2.3 2.3

0.1

3.13.7


5.2

2.4 2.3

0.8

5.5


1.9

4.03.4

7.0

4.3


2.5

-15.4-17.9 -19.6

-28.6


EXTERNAL ACCOUNT

40ECONOMY MATTERS

Exports (%) Imports (%) Trade Deficit (US$ Bn) Current Account Deficit (US$ Bn) Avg Exchange Rate (Rs/US$)

Source: RBI, CSO, SEBI, Office of Economic Advisor, Bureau of Economic Analysis, Euro Stat, Bank of Japan, National Bureau of Statistics

MONETARY VARIABLES (%)

CAPITAL FLOWS (US$ billion)

OTHER IMPORTANT INDICATORS (y-o-y%)

Non-Food Credit Growth (y-o-y%) M3Growth (y-o-y%) Repo Rate (%) Cash Reserve Ratio (%)

Net FII Flows (US$ billion) Net FDI Flows (US$ billion) Forex Reserves (US$ billion) ECB flows (US$ billion)

Core Sector Growth (y-o-y%) Cement Production Growth (y-o-y%) Steel Production Growth (y-o-y%)Commercial Vehicles

Production Growth (y-o-y%)

7.25 7.25 7.25 7.25 7.504.00 4.00 4.00 4.00 4.00

-3.3-5.3

11.6 13.011.2

7.0

0.1

-6.2

-0.7

-18.1


20.1

12.2 12.310.9

6.8


17.1

21.1

31.8

18.221.8


55.0

58.459.8

63.263.8


15.3 13.7 15.1 16.4 15.1


13.6 12.8 12.5 12.2 12.5

May-13 Jun-13 Jul-13 Aug-13 Sep-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13

5.2

1.2

-7.5

-3.0 -2.5


2.82.0 2.1 1.7 1.6


287.9

284.6

277.2 275.5 276.3


0.5 1.0

2.8

4.2

0.9


2.3 2.3

0.1

3.13.7


5.2

2.4 2.3

0.8

5.5


1.9

4.03.4

7.0

4.3


2.5

-15.4-17.9 -19.6

-28.6


EXTERNAL ACCOUNT

40ECONOMY MATTERS