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ECONOMY MATTERS Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation & Resettlement Bill, 2013 Volume 01 No. 08 August - September 2013

Economy Matters, August - September 2013

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Economy Matters is bi-monthly newsletter of CII on Economic Affairs. Our major neighboring economies- Sri Lanka, Bangladesh, Pakistan and Nepal - too are facing the heat as both global slowdown and country specific factors have stunted their domestic economic growth. We discuss the major trends in these South Asian economies in the section on Global Trends in this month’s issue of Economy Matters. In the section on Domestic Trends, we discuss the trends emanating out of the recent releases on GDP, IIP, Inflation and Trade during the month of August-September 2013. In Corporate Performance, we examine the financial performance of larger sample of firms in the first quarter of the current year, in order to decipher the evolving trends. The Sectoral spotlight for this issue is on Capital Goods, which is of strategic importance for the Indian economy. Being large and diverse in nature and playing a critical role in production process, the sector has high multiplier effect on the overall growth of the economy. In the Special Article, we discuss various provisions of the Land Acquisition, Rehabilitation & Resettlement Bill 2013, which was recently passed by both the Houses of the Parliament. Industry has concerns on some of the provisions of the Bill.

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Page 1: Economy Matters, August - September 2013

ECONOMY MATTERS

Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation &Resettlement Bill, 2013

Volume 01 No. 08August - September 2013

Page 2: Economy Matters, August - September 2013

Our major neighboring economies- Sri Lanka, Bangladesh, Pakistan and Nepal - too are

facing the heat as both global slowdown and country specific factors have stunted their

domestic economic growth. The Sri Lankan economy bounced back strongly after the end

of the civil war, but has not been immune to the global headwinds. Bangladesh has been

fast emerging as a manufacturing hub in view of its low labour cost. Pakistan, on the other

hand, finds itself embroiled in the worst ever fiscal deterioration due to inefficient

performance of various government sector enterprises and the mounting cost of

maintaining internal security in the country. Nepal is facing the classic macroeconomic

dilemma of low growth and high inflation. Going forward, the growth outlook in these

economies will be contingent upon the pace of recovery of the advanced economies and

their internal domestic resilience.

The domestic scenario looks equally challenging at present, with the first quarter GDP

numbers confirming that we are not out of the woods as yet. With monsoons being normal,

a good agricultural performance coupled with rise in rural wages would help bolster rural

demand. But, that by itself is not adequate, when the other indicators are all southward

bound. There are no visible signs of investment pick up as investor sentiments continue to

be very low. A weak rupee, tight liquidity, high cost of funds, procedural delays, etc are all

coming in the way of an investment revival. A coordinated effort from the Government and

the RBI is required to ensure that this vicious cycle is broken. Hastening disinvestment of

public sector units, ensuring coal supplies to the power sector, promoting competition in

the mining sector and ensuring speedy implementation of Delhi Mumbai Industrial

Corridor (DMIC), all of which require non-legislative action, would be seen as positive

developments.

The Right to Fair Compensation, Resettlement, Rehabilitation and Transparency in Land

Acquisition Bill 2013 will be a milestone since it is the first ever attempt to combine

Resettlement of Project Affected People and their Rehabilitation (R&R) along with land

acquisition. Besides, the new Bill provides a prominent role for Government in land

acquisition process for the Industry, which is a very welcome step. Industry however

continues to have apprehensions on some of the key provisions of the Bill. These pertain to

compensation package and R&R entitlements; Consent Clause; Acquisition of Irrigated

Multi-Crop Land; Retrospective Applicability of the Bill; Return of Un-utilised Land etc.

Besides, the process of land acquisition, as proposed in the new Bill is highly complex and

time taking, stretching up to a minimum of 56 Months. While the objective should be

improving quality of life of affected families post land acquisition, it is imperative to

streamline the land acquisition mechanism in the country in a manner that balances the

interests of affected families with industry affordability.

Chandrajit Banerjee

Director-General, CII

1 AUGUST-SEPTEMBER 2013

FOREWORD

Page 3: Economy Matters, August - September 2013

Our major neighboring economies- Sri Lanka, Bangladesh, Pakistan and Nepal - too are

facing the heat as both global slowdown and country specific factors have stunted their

domestic economic growth. The Sri Lankan economy bounced back strongly after the end

of the civil war, but has not been immune to the global headwinds. Bangladesh has been

fast emerging as a manufacturing hub in view of its low labour cost. Pakistan, on the other

hand, finds itself embroiled in the worst ever fiscal deterioration due to inefficient

performance of various government sector enterprises and the mounting cost of

maintaining internal security in the country. Nepal is facing the classic macroeconomic

dilemma of low growth and high inflation. Going forward, the growth outlook in these

economies will be contingent upon the pace of recovery of the advanced economies and

their internal domestic resilience.

The domestic scenario looks equally challenging at present, with the first quarter GDP

numbers confirming that we are not out of the woods as yet. With monsoons being normal,

a good agricultural performance coupled with rise in rural wages would help bolster rural

demand. But, that by itself is not adequate, when the other indicators are all southward

bound. There are no visible signs of investment pick up as investor sentiments continue to

be very low. A weak rupee, tight liquidity, high cost of funds, procedural delays, etc are all

coming in the way of an investment revival. A coordinated effort from the Government and

the RBI is required to ensure that this vicious cycle is broken. Hastening disinvestment of

public sector units, ensuring coal supplies to the power sector, promoting competition in

the mining sector and ensuring speedy implementation of Delhi Mumbai Industrial

Corridor (DMIC), all of which require non-legislative action, would be seen as positive

developments.

The Right to Fair Compensation, Resettlement, Rehabilitation and Transparency in Land

Acquisition Bill 2013 will be a milestone since it is the first ever attempt to combine

Resettlement of Project Affected People and their Rehabilitation (R&R) along with land

acquisition. Besides, the new Bill provides a prominent role for Government in land

acquisition process for the Industry, which is a very welcome step. Industry however

continues to have apprehensions on some of the key provisions of the Bill. These pertain to

compensation package and R&R entitlements; Consent Clause; Acquisition of Irrigated

Multi-Crop Land; Retrospective Applicability of the Bill; Return of Un-utilised Land etc.

Besides, the process of land acquisition, as proposed in the new Bill is highly complex and

time taking, stretching up to a minimum of 56 Months. While the objective should be

improving quality of life of affected families post land acquisition, it is imperative to

streamline the land acquisition mechanism in the country in a manner that balances the

interests of affected families with industry affordability.

Chandrajit Banerjee

Director-General, CII

1 AUGUST-SEPTEMBER 2013

FOREWORD

Page 4: Economy Matters, August - September 2013

CO

NT

EN

T

Cover Story

The passage of Land Acquisition

Bill by both Houses of Parliament

has brought little cheer to the

industry as there are concerns on

some of its provisions. Cost of land

acquisition is likely to increase by

3-3.5 times, making industrial

projects unviable and raising costs

in the overall economy. We discuss

the key provisions of the new Bill

and how it would bring out about a

change in the existing scenario in

this month’s Special Article.

3 AUGUST-SEPTEMBER 2013

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

GDP Forecasts Scaled Down for 2013-14.......................07

T A X E S

Global Trends

08Deciphering Trends in the Major South Asian Economies

Domestic TrendsGDP, IIP, Inflation & External Sector

15

TaxationDraft Safe Harbour Rules - Do they Bridge or Widen the Taxpayer-Exchequer Divide?22

Sector in FocusCapital Goods

27

Special ArticleRight to Fair Compensation and Transparency in Land Acquisition, Rehabilitation &Resettlement Bill, 2013 34

Corporate PerformanceIndustry Under Pressure as Growth Dips Further24

Economy Monitor ................................................................... 43

Special FeatureGreen Manufacturing: The Next Big Opportunity40

Page 5: Economy Matters, August - September 2013

CO

NT

EN

T

Cover Story

The passage of Land Acquisition

Bill by both Houses of Parliament

has brought little cheer to the

industry as there are concerns on

some of its provisions. Cost of land

acquisition is likely to increase by

3-3.5 times, making industrial

projects unviable and raising costs

in the overall economy. We discuss

the key provisions of the new Bill

and how it would bring out about a

change in the existing scenario in

this month’s Special Article.

3 AUGUST-SEPTEMBER 2013

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

GDP Forecasts Scaled Down for 2013-14.......................07

T A X E S

Global Trends

08Deciphering Trends in the Major South Asian Economies

Domestic TrendsGDP, IIP, Inflation & External Sector

15

TaxationDraft Safe Harbour Rules - Do they Bridge or Widen the Taxpayer-Exchequer Divide?22

Sector in FocusCapital Goods

27

Special ArticleRight to Fair Compensation and Transparency in Land Acquisition, Rehabilitation &Resettlement Bill, 2013 34

Corporate PerformanceIndustry Under Pressure as Growth Dips Further24

Economy Monitor ................................................................... 43

Special FeatureGreen Manufacturing: The Next Big Opportunity40

Page 6: Economy Matters, August - September 2013

Global Trends

Domestic Trends

Corporate Performance

The large South Asian economies (ex-India), viz, Sri Lanka,

Bangladesh, Pakistan and Nepal are facing varied sets of

problems precipitated as a result of the global slowdown

and country specific factors. The Sri Lankan economy has

bounced back strongly after the end of the civil war, but

has not been immune to global headwinds. Bangladesh

has been fast emerging as a manufacturing hub in view of

its low labour cost. Pakistan on the other hand is facing

mounting difficulties in the wake of sharp increase in

fiscal deficit coupled with internal security strife. The

smallest economy of the region, Nepal on the other hand

is facing the classic macroeconomic dilemma of low

growth and high inflation. Going forward, the growth

outlook in these economies will be contingent upon the

pace of recovery of the advanced economies and their

internal domestic resilience.

GDP growth moderated to its more than four-year low of

4.4 per cent in the first quarter GDP growth dropped to a

four-year low of 4.4 per cent of the current fiscal as

compared to 4.8 per cent in the quarter before. This is the

lowest quarterly growth rate since March 2009, when the

global financial crisis was at its peak. The downslide was

driven by a weak industrial performance, which slipped to

a its multi-year low. Inflation on the other hand has

continued to accelerate, rising to 6.1 per cent in August

2013 mainly due to high food prices. On the external front,

improvement in the global scenario has provided a fillip to

exports growth, which accelerated to 13 per cent in

August 2013, while imports contracted due to subdued

demand in the economy and impact of a weak Rupee.

The deepening economic slowdown, rising interest rates,

tight liquidity, declining investments and depreciating

rupee are slowly taking a toll on India Inc's financial

performance with majority of companies witnessing a

decline in net profits for the past few quarters. The

corporate results at the end of first quarter (April-June) of

the current fiscal painted a rather gloomy picture as the

financial performance of Indian companies deteriorated.

While revenues plummeted sharply, corporate sector

continued to pull expenses down against the backdrop of

a clouded economic outlook. However, the reduction in

expenditure costs was not large enough to provide to

cushion the bottom-line of the firms. Consequently, there

was de-growth witnessed in profit-after-tax (PAT) on an

aggregate basis in the first quarter of 2013-14. Margins,

both net and gross saw an deterioration in the quarter too,

reflecting the fall in profitability. Our analysis is based on

the financial performance of balanced panel of 2,701 firms

(extracted on August 29, 2013).

Capital goods sector is of strategic importance for the

Indian economy. Being large and diverse in nature and

playing a critical role in production process, the sector has

high multiplier effect on the overall growth of the

economy. The sector not only determines the pace of

economic expansion but also gets influenced by the same.

However, the negative growth recorded by the capital

goods sector over the last two years is a matter of

concern. Declining production in the sector was reflected

in the imports of capital goods too, which witnessed sharp

increase over the last decade or so, supported by a

relatively low rate of customs duty in the range of 0.0-7.5

per cent. Poor performance of the sector has much to do

with the low cost competitiveness of the sector, which has

magnified in the face of the economic slowdown. While

revival of manufacturing growth is critical for capital

goods sector, healthy growth performance of capital

goods sector too can help the revival process.

The passage of Land Acquisition bill by both Houses of

Parliament has brought little cheer to the industry as there

are concerns on some of the provisions of the Bill. Cost of

land acquisition is likely to increase by 3-3.5 times, making

industrial projects unviable and raising costs in the overall

Indian economy. The Bill would also lead to major delays in

the process of Land Acquisition as taking the consent of 80

per cent of affected families for Private Sector and 70 per

cent of affected families for Public Private Partnership

(PPP) Projects under 'Public Purpose' in the Bill would

make the process of obtaining consent a very long drawn

out process. Further, retrospective applicability of the Bill

would severely affect the on-going industry projects as re-

starting the entire land acquisition process would lead to

avoidable delays and consequent cost over-runs. CII

however does appreciate the holistic nature of the Bill and

role of government in acquiring land. However, at a time

when major projects are stalled and India's global

competitiveness is eroding, a more facilitative land

acquisition process would have helped long-term growth

and restore investor sentiments.

Sector in Focus: Capital Goods

Special Article

EXECUTIVE SUMMARY

4ECONOMY MATTERS

Page 7: Economy Matters, August - September 2013

Global Trends

Domestic Trends

Corporate Performance

The large South Asian economies (ex-India), viz, Sri Lanka,

Bangladesh, Pakistan and Nepal are facing varied sets of

problems precipitated as a result of the global slowdown

and country specific factors. The Sri Lankan economy has

bounced back strongly after the end of the civil war, but

has not been immune to global headwinds. Bangladesh

has been fast emerging as a manufacturing hub in view of

its low labour cost. Pakistan on the other hand is facing

mounting difficulties in the wake of sharp increase in

fiscal deficit coupled with internal security strife. The

smallest economy of the region, Nepal on the other hand

is facing the classic macroeconomic dilemma of low

growth and high inflation. Going forward, the growth

outlook in these economies will be contingent upon the

pace of recovery of the advanced economies and their

internal domestic resilience.

GDP growth moderated to its more than four-year low of

4.4 per cent in the first quarter GDP growth dropped to a

four-year low of 4.4 per cent of the current fiscal as

compared to 4.8 per cent in the quarter before. This is the

lowest quarterly growth rate since March 2009, when the

global financial crisis was at its peak. The downslide was

driven by a weak industrial performance, which slipped to

a its multi-year low. Inflation on the other hand has

continued to accelerate, rising to 6.1 per cent in August

2013 mainly due to high food prices. On the external front,

improvement in the global scenario has provided a fillip to

exports growth, which accelerated to 13 per cent in

August 2013, while imports contracted due to subdued

demand in the economy and impact of a weak Rupee.

The deepening economic slowdown, rising interest rates,

tight liquidity, declining investments and depreciating

rupee are slowly taking a toll on India Inc's financial

performance with majority of companies witnessing a

decline in net profits for the past few quarters. The

corporate results at the end of first quarter (April-June) of

the current fiscal painted a rather gloomy picture as the

financial performance of Indian companies deteriorated.

While revenues plummeted sharply, corporate sector

continued to pull expenses down against the backdrop of

a clouded economic outlook. However, the reduction in

expenditure costs was not large enough to provide to

cushion the bottom-line of the firms. Consequently, there

was de-growth witnessed in profit-after-tax (PAT) on an

aggregate basis in the first quarter of 2013-14. Margins,

both net and gross saw an deterioration in the quarter too,

reflecting the fall in profitability. Our analysis is based on

the financial performance of balanced panel of 2,701 firms

(extracted on August 29, 2013).

Capital goods sector is of strategic importance for the

Indian economy. Being large and diverse in nature and

playing a critical role in production process, the sector has

high multiplier effect on the overall growth of the

economy. The sector not only determines the pace of

economic expansion but also gets influenced by the same.

However, the negative growth recorded by the capital

goods sector over the last two years is a matter of

concern. Declining production in the sector was reflected

in the imports of capital goods too, which witnessed sharp

increase over the last decade or so, supported by a

relatively low rate of customs duty in the range of 0.0-7.5

per cent. Poor performance of the sector has much to do

with the low cost competitiveness of the sector, which has

magnified in the face of the economic slowdown. While

revival of manufacturing growth is critical for capital

goods sector, healthy growth performance of capital

goods sector too can help the revival process.

The passage of Land Acquisition bill by both Houses of

Parliament has brought little cheer to the industry as there

are concerns on some of the provisions of the Bill. Cost of

land acquisition is likely to increase by 3-3.5 times, making

industrial projects unviable and raising costs in the overall

Indian economy. The Bill would also lead to major delays in

the process of Land Acquisition as taking the consent of 80

per cent of affected families for Private Sector and 70 per

cent of affected families for Public Private Partnership

(PPP) Projects under 'Public Purpose' in the Bill would

make the process of obtaining consent a very long drawn

out process. Further, retrospective applicability of the Bill

would severely affect the on-going industry projects as re-

starting the entire land acquisition process would lead to

avoidable delays and consequent cost over-runs. CII

however does appreciate the holistic nature of the Bill and

role of government in acquiring land. However, at a time

when major projects are stalled and India's global

competitiveness is eroding, a more facilitative land

acquisition process would have helped long-term growth

and restore investor sentiments.

Sector in Focus: Capital Goods

Special Article

EXECUTIVE SUMMARY

4ECONOMY MATTERS

Page 8: Economy Matters, August - September 2013

ECONOMY MATTERS

n

n

n

Keeps readers abreast of global & domestic

economic developments

Monthly Journal of top management of 8000

companies

Read by CII Members, Thought Leaders,

Diplomats, Policy Makers, MPs and other

decision makers

The Facts

n

n

n

n

n

n

Domestic Trends

Corporate Performance

Sector in Focus

Special Article

Economy Monitor

Global Trends

The Coverage

CII invites full-page* Advertisements for

this flagship document at an attractive rate

of Rs 50,000 per issue and Rs 5 lakh for 12

issues.

For more details, Please Contact: Confederation of Indian Industry

The Mantosh Sondhi Centre, 23, Institutional Area, Lodi Road, New Delhi- 110003 (INDIA)Tel : +91-011-24629994-7, Fax: +91-011-24626149; Email: [email protected]

Dr. Danish A. Hashim, Director- Economic Research

GDP FORECAST

GDP Forecasts Scaled Down for 2013-14

(y-o-y%) Old Forecasts New Forecasts

BNP Paribas 5.2 3.7

HSBC 5.5 4.0

Goldman Sachs 6.4 4.0

Standard Chartered 5.1 4.1

Nomura 5.0 4.2

JP Morgan 5.5 4.7

Macquarie 6.2 5.3

CRISIL 5.5 4.8

RBI 5.7 5.5

PM Economic Advisory Council 6.4 5.3

CII 6.0-6.4 5.3-5.8

7 AUGUST-SEPTEMBER 2013

Page 9: Economy Matters, August - September 2013

ECONOMY MATTERS

n

n

n

Keeps readers abreast of global & domestic

economic developments

Monthly Journal of top management of 8000

companies

Read by CII Members, Thought Leaders,

Diplomats, Policy Makers, MPs and other

decision makers

The Facts

n

n

n

n

n

n

Domestic Trends

Corporate Performance

Sector in Focus

Special Article

Economy Monitor

Global Trends

The Coverage

CII invites full-page* Advertisements for

this flagship document at an attractive rate

of Rs 50,000 per issue and Rs 5 lakh for 12

issues.

For more details, Please Contact: Confederation of Indian Industry

The Mantosh Sondhi Centre, 23, Institutional Area, Lodi Road, New Delhi- 110003 (INDIA)Tel : +91-011-24629994-7, Fax: +91-011-24626149; Email: [email protected]

Dr. Danish A. Hashim, Director- Economic Research

GDP FORECAST

GDP Forecasts Scaled Down for 2013-14

(y-o-y%) Old Forecasts New Forecasts

BNP Paribas 5.2 3.7

HSBC 5.5 4.0

Goldman Sachs 6.4 4.0

Standard Chartered 5.1 4.1

Nomura 5.0 4.2

JP Morgan 5.5 4.7

Macquarie 6.2 5.3

CRISIL 5.5 4.8

RBI 5.7 5.5

PM Economic Advisory Council 6.4 5.3

CII 6.0-6.4 5.3-5.8

7 AUGUST-SEPTEMBER 2013

Page 10: Economy Matters, August - September 2013

Deciphering Trends in the Major South Asian Economies

below trend performance by the agriculture and

services sectors, which grew at 2 per cent and 4.3 per

cent, respectively. Services sector is the most dominant

sector of the Sri Lankan economy, having a share of

above 50 per cent in the total GDP, followed by industry

at around 30 per cent and agriculture constituting the

remaining. The sharp deceleration witnessed in

agriculture was due to the drop in production of rubber

due to lower global prices and unfavourable rainfall for

tapping activities. Amongst the services sector,

transport & communication and hotels & restaurant

sectors grew by 9.5 per cent and 18.6 per cent

respectively.

Sri Lanka

SGDP Growth

ri Lanka's GDP in the first quarter (January-March)

of the current year grew at 6.0 per cent as

compared to 8.0 per cent in the same quarter of the last

year. The subdued performance was underpinned by a

GLOBAL TRENDS

8ECONOMY MATTERS

(y-o-y%) 1Q: 2011 1Q: 2012 1Q: 2013

Agriculture -4.4 12.0 2.0

Industry 11.1 10.8 10.7

Services 9.5 5.8 4.3

Overall GDP 8.0 8.0 6.0

Source: Department of Census & Statistics, Government of Sri Lanka

Yearly GDP growth rate in Sri Lanka (January-December)

the same period last year. Looking ahead, inflation is

expected to remain in single-digit during the remainder

of 2013, and in mid-single digits in 2014. Considering the

subdued inflationary pressures prevalent in the

economy currently, the Monetary Board in its meeting, thheld on 15 August 2013, was of the view that the current

monetary policy stance is appropriate, and therefore,

decided to maintain the Repurchase rate and the

Reverse Repurchase rate of the Central Bank of Sri

Lanka unchanged at 7.00 per cent and 9.00 per cent,

respectively.

Inflation

The prudent demand management policies along with

favourable supply conditions have resulted in a

continued low inflation environment in Sri Lanka.

Inflation has remained at single digit levels for 4 and half

years with headline inflation (year-on-year), as

measured by the Colombo consumers' price index

(base: 2006/07=100) CCPI for first seven months of 2013

standing at 7.5 per cent as compared to 6.7 per cent in

3.86.3

12

10

8

6

4

2

0

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

CPI Inflation in Sri Lanka (y-o-y %)

Source: Department of Census & Statistics, Government of Sri Lanka

On the exchange rate front, following the general trend

of depreciation against the US dollar of the other major

currencies in the region, the Sri Lankan Rupee too fell to

a near 10-month low in August 2013 due to dollar

demand by importers and capital outflows. The rupee

has fallen around 4 per cent since June 7, 2013 as foreign

investors pulled out of Sri Lankan bonds and other

emerging market assets due to a rise in U.S. treasury

yields.

Trade

In the external sector, merchandise exports in June 2013

showed some turnaround, recording a positive year-on-

year growth after the decline observed in the past 15

months. The cumulative performance in merchandise

trade depicts a salutary 7.1 per cent decline in the trade

deficit for the first six months of 2013. Earnings from

tourism and workers' remittances have continued to

improve, while the financial inflows have been

substantial in the first half of the year.

key factor behind this was slower growth in agriculture,

which according to these provisional numbers has

slowed from 3.1 per cent in 2011-12 to 2.2 per cent in 2012-

13. This was largely due to the base effect of two

consecutive years of record growth, lower output due

to the falling price of paddy/rice and also due to

weather-related disruptions. Yet, the industrial growth,

which is the sector most affected by access to timely

credit, is estimated at 9.0 per cent in 2012-13, higher than

the 8.9 per cent in 2011-12, driven in large part by faster

growth of construction and small scale industries. On

Bangladesh

GDP Growth

In 2012-13 (July-June), Bangladesh economy was faced

with the challenges of rising inflation and balance of

payments pressures stemming largely from a sudden

surge in oil imports. Accordingly, the GDP for the annual

year came in lower at 6.0 per cent as compared to 6.2

per cent in the previous fiscal. Growth was also lower

than the previous five-year average of 6.2 per cent. A

9 AUGUST-SEPTEMBER 2013

Page 11: Economy Matters, August - September 2013

Deciphering Trends in the Major South Asian Economies

below trend performance by the agriculture and

services sectors, which grew at 2 per cent and 4.3 per

cent, respectively. Services sector is the most dominant

sector of the Sri Lankan economy, having a share of

above 50 per cent in the total GDP, followed by industry

at around 30 per cent and agriculture constituting the

remaining. The sharp deceleration witnessed in

agriculture was due to the drop in production of rubber

due to lower global prices and unfavourable rainfall for

tapping activities. Amongst the services sector,

transport & communication and hotels & restaurant

sectors grew by 9.5 per cent and 18.6 per cent

respectively.

Sri Lanka

SGDP Growth

ri Lanka's GDP in the first quarter (January-March)

of the current year grew at 6.0 per cent as

compared to 8.0 per cent in the same quarter of the last

year. The subdued performance was underpinned by a

GLOBAL TRENDS

8ECONOMY MATTERS

(y-o-y%) 1Q: 2011 1Q: 2012 1Q: 2013

Agriculture -4.4 12.0 2.0

Industry 11.1 10.8 10.7

Services 9.5 5.8 4.3

Overall GDP 8.0 8.0 6.0

Source: Department of Census & Statistics, Government of Sri Lanka

Yearly GDP growth rate in Sri Lanka (January-December)

the same period last year. Looking ahead, inflation is

expected to remain in single-digit during the remainder

of 2013, and in mid-single digits in 2014. Considering the

subdued inflationary pressures prevalent in the

economy currently, the Monetary Board in its meeting, thheld on 15 August 2013, was of the view that the current

monetary policy stance is appropriate, and therefore,

decided to maintain the Repurchase rate and the

Reverse Repurchase rate of the Central Bank of Sri

Lanka unchanged at 7.00 per cent and 9.00 per cent,

respectively.

Inflation

The prudent demand management policies along with

favourable supply conditions have resulted in a

continued low inflation environment in Sri Lanka.

Inflation has remained at single digit levels for 4 and half

years with headline inflation (year-on-year), as

measured by the Colombo consumers' price index

(base: 2006/07=100) CCPI for first seven months of 2013

standing at 7.5 per cent as compared to 6.7 per cent in

3.86.3

12

10

8

6

4

2

0

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

CPI Inflation in Sri Lanka (y-o-y %)

Source: Department of Census & Statistics, Government of Sri Lanka

On the exchange rate front, following the general trend

of depreciation against the US dollar of the other major

currencies in the region, the Sri Lankan Rupee too fell to

a near 10-month low in August 2013 due to dollar

demand by importers and capital outflows. The rupee

has fallen around 4 per cent since June 7, 2013 as foreign

investors pulled out of Sri Lankan bonds and other

emerging market assets due to a rise in U.S. treasury

yields.

Trade

In the external sector, merchandise exports in June 2013

showed some turnaround, recording a positive year-on-

year growth after the decline observed in the past 15

months. The cumulative performance in merchandise

trade depicts a salutary 7.1 per cent decline in the trade

deficit for the first six months of 2013. Earnings from

tourism and workers' remittances have continued to

improve, while the financial inflows have been

substantial in the first half of the year.

key factor behind this was slower growth in agriculture,

which according to these provisional numbers has

slowed from 3.1 per cent in 2011-12 to 2.2 per cent in 2012-

13. This was largely due to the base effect of two

consecutive years of record growth, lower output due

to the falling price of paddy/rice and also due to

weather-related disruptions. Yet, the industrial growth,

which is the sector most affected by access to timely

credit, is estimated at 9.0 per cent in 2012-13, higher than

the 8.9 per cent in 2011-12, driven in large part by faster

growth of construction and small scale industries. On

Bangladesh

GDP Growth

In 2012-13 (July-June), Bangladesh economy was faced

with the challenges of rising inflation and balance of

payments pressures stemming largely from a sudden

surge in oil imports. Accordingly, the GDP for the annual

year came in lower at 6.0 per cent as compared to 6.2

per cent in the previous fiscal. Growth was also lower

than the previous five-year average of 6.2 per cent. A

9 AUGUST-SEPTEMBER 2013

Page 12: Economy Matters, August - September 2013

fiscal, Bangladesh Bank (Central Bank of Bangladesh)

forecasts that the output growth is unlikely to deviate

significantly from the last ten year average of 6.2 per

cent.

the other hand, growth of services sector marginally

slowed down to 5.7 per cent in 2012-13 from 5.9 per cent

in 2011-12 as the retail and wholesale trade sectors were

particularly affected. Looking ahead to the current

(y-o-y%) 2010-11 2011-12 2012-13 (P)

Agriculture 5.1 3.1 2.2

Industry 8.2 8.9 9.0

Services 6.2 6.0 5.7

Overall GDP 6.7 6.2 6.0

Source: Bangladesh BankNote: P- Provisional

GDP Growth Rate in Bangladesh in Fiscal Year (July-June)

using the 1995-96 base. The risks to the inflation target

stem partly from likely wage increases, in both the

public and private sectors, which will further add to

existing aggregate demand pressures. Consequently,

the expected monetary stance of the Central Bank of

Bangladesh for the second-half of the current fiscal

(July-December 2013) states maintaining the repo rates

and reserve requirement ratios unchanged following

the 50 bps rate cut in January 2013, in addition to

bringing down average inflation to 7 per cent (using the

1995-96 base).

Inflation

Average inflation, using the 1995-96 base year, has been

declining steadily over the past fifteen months, from a

peak of 10.9 per cent in February 2012 to 7.7 per cent in

June 2013. This decline was driven by a steady fall in

point-to-point food and non-food inflation until October

2012 when food inflation bottomed out at 5.6 per cent.

Since then, food inflation has begun to rise and in June

2013 came in at 8.5 per cent. For the current fiscal, the

inflation target announced in the Budget is 7.0 per cent,

10.6

7.7

11

10

9

8

7

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13

CPI Inflation in Bangladesh (y-o-y%)

Source: Bangladesh Bank

2012-13, partly reflecting the significant fall in food

import demand, lower petroleum imports as well as

slower demand for imports related to manufacturing

output. The capital account shows that foreign direct

investment is projected to have increased from US$1.2

billion in 2011-12 to US$1.3 billion in 2012-13. Remittances

remain an important source of foreign capital for the

Trade

In the external sector, the current account balance

(CAB) continued to be in surplus of US$2004 million in

2012-13, on the back of increasing inflows of remittances,

continued buoyant export expansion, and declining

imports. Import growth continued to remain sluggish in

10ECONOMY MATTERS

appreciated 2.6 per cent between January 1st-June 30th

2013 and real exchange rate data indicates a marginal

impact on export competitiveness. However, Central

Bank's interventions in the foreign exchange market

have limited this loss significantly by slowing the

appreciation of the Taka.

country. Remittances have been buoyed by larger

numbers of Bangladeshi workers moving abroad in 2011-

12 as well as real wage growth in the Middle East

following the 'Arab Spring' events.

The Central Bank has been also working to rein in the

excessive volatility in the exchange rate. The Taka

(US$ million) 2010-11 (Actual) 2011-12 (P) 2012-13 (Estimation)

Current Account Balance -1549 151 2004

Capital Account 642 469 535

Financial Account 514 785 2347

Overall Balance -656 494 4886

Source: Bangladesh BankNote: P- Provisional

Bangladesh's Balance of Payments

growth rate for the past five years has remained as low

as 3 per cent, which is alarming when compared to the

2.1 per cent growth in the population. Performance of all

the three sub-sectors, viz, agriculture, industry and

services remained subdued during the year. For the

current fiscal, government is targeting 4.4 per cent GDP

growth. Though the new government that came in May

2013 is expected to provide some clarity on the political

front, power shortages and security conditions

continue to be strong impediments to growth.

Pakistan

GDP Growth

Embroiled in an acute energy crisis since the last many

years, Pakistan economy continues to face challenges

on all fronts. The data for the GDP in Pakistan, which is

released on an annual basis, shows that for 2012-13 (July-

June), the GDP grew by merely 3.6 per cent as compared

to the annual plan target of 4.3 per cent. The average

2012-13 2011-12

Growth (y-o-y%) Shares (%) Contribution (%) Growth (y-o-y%)

Agriculture 3.3 21.4 0.7 3.5

Industry 3.5 20.9 0.7 2.7

Services 3.7 57.7 2.1 5.3

Overall GDP 3.6 100 3.6 4.4

Source: State Bank of Pakistan

GDP Growth in Pakistan (July-June)

impact of the depreciation of the Pakistani Rupee. In the

latest budget the government has announced an

increase of 1 percentage point in the General Sales Tax

(GST), from 16 per cent to 17 per cent, and changes in the

tax structure for some goods & services. In addition, the

government is considering a phase-wise upward

adjustment in electricity tariff. Therefore, there is a risk

Inflation

Inflation continues to remain high, with July 2013 CPI

inflation reading coming at a 10-month high of 8.3 per

cent as compared to 9.6 per cent in the same month of

last year mainly due to rise in food prices and adverse

11 AUGUST-SEPTEMBER 2013

Page 13: Economy Matters, August - September 2013

fiscal, Bangladesh Bank (Central Bank of Bangladesh)

forecasts that the output growth is unlikely to deviate

significantly from the last ten year average of 6.2 per

cent.

the other hand, growth of services sector marginally

slowed down to 5.7 per cent in 2012-13 from 5.9 per cent

in 2011-12 as the retail and wholesale trade sectors were

particularly affected. Looking ahead to the current

(y-o-y%) 2010-11 2011-12 2012-13 (P)

Agriculture 5.1 3.1 2.2

Industry 8.2 8.9 9.0

Services 6.2 6.0 5.7

Overall GDP 6.7 6.2 6.0

Source: Bangladesh BankNote: P- Provisional

GDP Growth Rate in Bangladesh in Fiscal Year (July-June)

using the 1995-96 base. The risks to the inflation target

stem partly from likely wage increases, in both the

public and private sectors, which will further add to

existing aggregate demand pressures. Consequently,

the expected monetary stance of the Central Bank of

Bangladesh for the second-half of the current fiscal

(July-December 2013) states maintaining the repo rates

and reserve requirement ratios unchanged following

the 50 bps rate cut in January 2013, in addition to

bringing down average inflation to 7 per cent (using the

1995-96 base).

Inflation

Average inflation, using the 1995-96 base year, has been

declining steadily over the past fifteen months, from a

peak of 10.9 per cent in February 2012 to 7.7 per cent in

June 2013. This decline was driven by a steady fall in

point-to-point food and non-food inflation until October

2012 when food inflation bottomed out at 5.6 per cent.

Since then, food inflation has begun to rise and in June

2013 came in at 8.5 per cent. For the current fiscal, the

inflation target announced in the Budget is 7.0 per cent,

10.6

7.7

11

10

9

8

7

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13

CPI Inflation in Bangladesh (y-o-y%)

Source: Bangladesh Bank

2012-13, partly reflecting the significant fall in food

import demand, lower petroleum imports as well as

slower demand for imports related to manufacturing

output. The capital account shows that foreign direct

investment is projected to have increased from US$1.2

billion in 2011-12 to US$1.3 billion in 2012-13. Remittances

remain an important source of foreign capital for the

Trade

In the external sector, the current account balance

(CAB) continued to be in surplus of US$2004 million in

2012-13, on the back of increasing inflows of remittances,

continued buoyant export expansion, and declining

imports. Import growth continued to remain sluggish in

10ECONOMY MATTERS

appreciated 2.6 per cent between January 1st-June 30th

2013 and real exchange rate data indicates a marginal

impact on export competitiveness. However, Central

Bank's interventions in the foreign exchange market

have limited this loss significantly by slowing the

appreciation of the Taka.

country. Remittances have been buoyed by larger

numbers of Bangladeshi workers moving abroad in 2011-

12 as well as real wage growth in the Middle East

following the 'Arab Spring' events.

The Central Bank has been also working to rein in the

excessive volatility in the exchange rate. The Taka

(US$ million) 2010-11 (Actual) 2011-12 (P) 2012-13 (Estimation)

Current Account Balance -1549 151 2004

Capital Account 642 469 535

Financial Account 514 785 2347

Overall Balance -656 494 4886

Source: Bangladesh BankNote: P- Provisional

Bangladesh's Balance of Payments

growth rate for the past five years has remained as low

as 3 per cent, which is alarming when compared to the

2.1 per cent growth in the population. Performance of all

the three sub-sectors, viz, agriculture, industry and

services remained subdued during the year. For the

current fiscal, government is targeting 4.4 per cent GDP

growth. Though the new government that came in May

2013 is expected to provide some clarity on the political

front, power shortages and security conditions

continue to be strong impediments to growth.

Pakistan

GDP Growth

Embroiled in an acute energy crisis since the last many

years, Pakistan economy continues to face challenges

on all fronts. The data for the GDP in Pakistan, which is

released on an annual basis, shows that for 2012-13 (July-

June), the GDP grew by merely 3.6 per cent as compared

to the annual plan target of 4.3 per cent. The average

2012-13 2011-12

Growth (y-o-y%) Shares (%) Contribution (%) Growth (y-o-y%)

Agriculture 3.3 21.4 0.7 3.5

Industry 3.5 20.9 0.7 2.7

Services 3.7 57.7 2.1 5.3

Overall GDP 3.6 100 3.6 4.4

Source: State Bank of Pakistan

GDP Growth in Pakistan (July-June)

impact of the depreciation of the Pakistani Rupee. In the

latest budget the government has announced an

increase of 1 percentage point in the General Sales Tax

(GST), from 16 per cent to 17 per cent, and changes in the

tax structure for some goods & services. In addition, the

government is considering a phase-wise upward

adjustment in electricity tariff. Therefore, there is a risk

Inflation

Inflation continues to remain high, with July 2013 CPI

inflation reading coming at a 10-month high of 8.3 per

cent as compared to 9.6 per cent in the same month of

last year mainly due to rise in food prices and adverse

11 AUGUST-SEPTEMBER 2013

Page 14: Economy Matters, August - September 2013

economy, the State Bank of Pakistan (SBP) chose to cut

its policy rate by 50 bps, to 9 per cent in its policy review

held on June 24th, 2013, thus giving more weight to the

declining growth prospects.

that average inflation for the current fiscal could exceed

the announced target of 8 per cent for the year.

Notwithstanding, the rising inflationary pressures in the

Fiscal Deficit

Another significant challenge facing the economy is the

rising fiscal deficit. The centre fiscal deficit for 2012-13 is

estimated to be 8.8 per cent (of GDP), which is nearly

twice the initial target of 4.7 per cent. The source of

deviation is structural and well known - low tax

revenues due to absence of meaningful tax reforms and

continuation of untargeted subsidies without

comprehensively addressing the energy sector

problems. The high inefficiency of the public sector

enterprises (PSEs) is worth highlighting in this context.

For the current year, the federal government has

announced a provisional fiscal deficit estimate of 6.3 per

cent.

12.3

8.3

14

12

10

8

6

4

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

CPI Inflation in Pakistan (y-o-y%)

Source: State Bank of Pakistan

12ECONOMY MATTERS

1980s 1990s 2000s FY11 FY12 FY13 E

7.0 6.8

4.7

6.6

8.5 8.8

Fiscal Deficit (as a % of GDP) in Pakistan

Source: State Bank of PakistanNote: E- Estimated

Trade

On the external front, the exports from Pakistan during

2012-13 stood at US$24.5 billion, marginally higher than

US$23.6 billion recorded in 2011-12. Energy shortages

and slow economic growth in developed world

economies were the major reasons behind the relatively

slow expansion in exports. Almost all the exports

earnings originated from textile manufactures, as the

country's exports are concentrated in a few items like

cotton & cotton manufactures, leather, rice and few

others. Imports in to the country were recorded at

US$44.9 billion during 2012-13. The trade deficit, hence,

during 2012-13 amounted to US$20.4 billion as against

the US$21.3 billion deficit recorded during the same

period of last year.

On the exchange rate front, the Pakistani Rupee

continues to be battered against the US$. The Rupee

dropped to a fresh all-time low of 103.47 per US dollar on

August 21, 2013, a depreciation of over 9 per cent on an

annual basis. The widening current account deficit,

slipped to 1.6 per cent in 2012-13 as compared to 3.0 per

cent in the previous year. The services sector in 2012-13,

however, expanded by 6.0 per cent, much higher than

4.5 per cent last year. Nepal's economy has been

embroiled in a major political crisis, with the elections

now being postponed to November 2013. The country

has been without a parliament for more than a year

now, after major political parties missed yet another

deadline to write a constitution and reach a consensus

on the structure of the government. The political

paralysis has deeply affected the economy. The strong

factor for Nepal's economy has been the remittances

sent by its residents staying outside; which constitutes

roughly 22 per cent of the country's gross domestic

product.

Nepal

GDP Growth

According to the preliminary estimates of the Central

Bureau of Statistics (CBS), the Real GDP is estimated to

have grown by 3.6 per cent in 2012-13 compared, lower

than 4.5 per cent in the previous year. The deceleration

in growth was underpinned by subdued performance by

the agriculture and industrial sector. Agriculture grew by

a tepid 1.3 per cent mainly due to unfavourable

monsoons which led to decrease in the produce of major

crops. Due to various structural bottlenecks, including

energy shortage, industrial labour relation and delay in

adopting a full-fledged budget, industrial growth

(y-o-y%) 2011-12 2012-13 (P)

Agriculture 4.9 1.2

Industry 3.0 1.6

Services 4.5 6.0

Overall GDP 4.5 3.6

Source: Nepal Rastra BankNote: P- Provisional

GDP Growth in Nepal (fiscal year starting mid-July)

In conclusion, from the analysis of the major South Asian

economies, it emerges that they too are facing

headwinds emanating from the tough global

macroeconomic scenario. Out of the four major

economies of South Asia, Pakistan appears to be in the

most precarious state, troubled by deteriorating law

and order, energy deficiencies, high inflation and fiscal

deficit, and dip in the external aid. The currencies of all

the four economies have witnessed sharp depreciation

in the last few months, in line with the evolving global

developments. Going forward, the growth outlook in

these economies will be contingent upon the pace of

recovery of the advanced economies and their internal

domestic resilience.

Inflation

Annual average inflation based on consumer price index

was estimated at 9.9 per cent in 2012-13, compared to 8.3

per cent in the previous year. Additional pressure on

inflation has emerged as a result of a number of factors

such as decline in food production due to unfavorable

weather, weak supply situation, energy crisis,

devaluation of Nepalese currency, increase in the price

of petroleum products and Indian inflation. The

monetary policy formulated by the Central Bank of

Nepal for the current fiscal, adopted an accommodative

policy stance to facilitate higher economic growth of 5.5

per cent during the year by making adequate provisions

of credit along with containing inflation at 8 per cent.

excessive government borrowing from State Bank,

absence of foreign inflows, increasing oil imports, lack of

foreign investment and repayments to the International

Monetary Fund are the prominent reasons behind the

constant depreciation of Pakistani Rupee.

13 AUGUST-SEPTEMBER 2013

Page 15: Economy Matters, August - September 2013

economy, the State Bank of Pakistan (SBP) chose to cut

its policy rate by 50 bps, to 9 per cent in its policy review

held on June 24th, 2013, thus giving more weight to the

declining growth prospects.

that average inflation for the current fiscal could exceed

the announced target of 8 per cent for the year.

Notwithstanding, the rising inflationary pressures in the

Fiscal Deficit

Another significant challenge facing the economy is the

rising fiscal deficit. The centre fiscal deficit for 2012-13 is

estimated to be 8.8 per cent (of GDP), which is nearly

twice the initial target of 4.7 per cent. The source of

deviation is structural and well known - low tax

revenues due to absence of meaningful tax reforms and

continuation of untargeted subsidies without

comprehensively addressing the energy sector

problems. The high inefficiency of the public sector

enterprises (PSEs) is worth highlighting in this context.

For the current year, the federal government has

announced a provisional fiscal deficit estimate of 6.3 per

cent.

12.3

8.3

14

12

10

8

6

4

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

CPI Inflation in Pakistan (y-o-y%)

Source: State Bank of Pakistan

12ECONOMY MATTERS

1980s 1990s 2000s FY11 FY12 FY13 E

7.0 6.8

4.7

6.6

8.5 8.8

Fiscal Deficit (as a % of GDP) in Pakistan

Source: State Bank of PakistanNote: E- Estimated

Trade

On the external front, the exports from Pakistan during

2012-13 stood at US$24.5 billion, marginally higher than

US$23.6 billion recorded in 2011-12. Energy shortages

and slow economic growth in developed world

economies were the major reasons behind the relatively

slow expansion in exports. Almost all the exports

earnings originated from textile manufactures, as the

country's exports are concentrated in a few items like

cotton & cotton manufactures, leather, rice and few

others. Imports in to the country were recorded at

US$44.9 billion during 2012-13. The trade deficit, hence,

during 2012-13 amounted to US$20.4 billion as against

the US$21.3 billion deficit recorded during the same

period of last year.

On the exchange rate front, the Pakistani Rupee

continues to be battered against the US$. The Rupee

dropped to a fresh all-time low of 103.47 per US dollar on

August 21, 2013, a depreciation of over 9 per cent on an

annual basis. The widening current account deficit,

slipped to 1.6 per cent in 2012-13 as compared to 3.0 per

cent in the previous year. The services sector in 2012-13,

however, expanded by 6.0 per cent, much higher than

4.5 per cent last year. Nepal's economy has been

embroiled in a major political crisis, with the elections

now being postponed to November 2013. The country

has been without a parliament for more than a year

now, after major political parties missed yet another

deadline to write a constitution and reach a consensus

on the structure of the government. The political

paralysis has deeply affected the economy. The strong

factor for Nepal's economy has been the remittances

sent by its residents staying outside; which constitutes

roughly 22 per cent of the country's gross domestic

product.

Nepal

GDP Growth

According to the preliminary estimates of the Central

Bureau of Statistics (CBS), the Real GDP is estimated to

have grown by 3.6 per cent in 2012-13 compared, lower

than 4.5 per cent in the previous year. The deceleration

in growth was underpinned by subdued performance by

the agriculture and industrial sector. Agriculture grew by

a tepid 1.3 per cent mainly due to unfavourable

monsoons which led to decrease in the produce of major

crops. Due to various structural bottlenecks, including

energy shortage, industrial labour relation and delay in

adopting a full-fledged budget, industrial growth

(y-o-y%) 2011-12 2012-13 (P)

Agriculture 4.9 1.2

Industry 3.0 1.6

Services 4.5 6.0

Overall GDP 4.5 3.6

Source: Nepal Rastra BankNote: P- Provisional

GDP Growth in Nepal (fiscal year starting mid-July)

In conclusion, from the analysis of the major South Asian

economies, it emerges that they too are facing

headwinds emanating from the tough global

macroeconomic scenario. Out of the four major

economies of South Asia, Pakistan appears to be in the

most precarious state, troubled by deteriorating law

and order, energy deficiencies, high inflation and fiscal

deficit, and dip in the external aid. The currencies of all

the four economies have witnessed sharp depreciation

in the last few months, in line with the evolving global

developments. Going forward, the growth outlook in

these economies will be contingent upon the pace of

recovery of the advanced economies and their internal

domestic resilience.

Inflation

Annual average inflation based on consumer price index

was estimated at 9.9 per cent in 2012-13, compared to 8.3

per cent in the previous year. Additional pressure on

inflation has emerged as a result of a number of factors

such as decline in food production due to unfavorable

weather, weak supply situation, energy crisis,

devaluation of Nepalese currency, increase in the price

of petroleum products and Indian inflation. The

monetary policy formulated by the Central Bank of

Nepal for the current fiscal, adopted an accommodative

policy stance to facilitate higher economic growth of 5.5

per cent during the year by making adequate provisions

of credit along with containing inflation at 8 per cent.

excessive government borrowing from State Bank,

absence of foreign inflows, increasing oil imports, lack of

foreign investment and repayments to the International

Monetary Fund are the prominent reasons behind the

constant depreciation of Pakistani Rupee.

13 AUGUST-SEPTEMBER 2013

Page 16: Economy Matters, August - September 2013

14ECONOMY MATTERS

Other Major Global Developments during the Month

1. US GDP in the second quarter of 2013 was revised upwards to 2.5 per cent on an annualised basis as compared

to initially estimated 1.7 per cent. Expansion in the second quarter - faster than the annualized growth rate in

the first quarter of 1.1 per cent - was driven by gains in consumer spending, exports, private inventory

investment, non-residential fixed investment and residential fixed investment.

2. In US, non-farm payrolls (NFP) increased by 169K in August 2013, lower than market expectations of an

increase of 180K. Meanwhile, total job addition for July was revised lower from 162K to 104K, while that for

June was revised from 188K to 172K.

3. Real GDP in Euro Area posted a growth of 0.3 per cent on q-o-q basis in the second quarter of 2013, marking its

first expansion since third quarter of 2011. In y-o-y terms though, GDP contracted 0.5 per cent, slower than a

contraction of 1.0 per cent in the previous quarter.

4. Real GDP in UK posted a growth of 0.7 per cent on q-o-q basis - revised up from previously estimated 0.6 per

cent - in second quarter of 2013, as against a growth of 0.3 per cent in the previous quarter. In y-o-y terms also,

GDP increased 1.5 per cent last quarter, marking the highest growth since first quarter of 2011.

5. Headline inflation softened in UK for the second consecutive month to 2.7 per cent in August 2013, as against

2.8 per cent in the previous month. Core inflation, on the other hand, was unchanged at 2.0 per cent last

month.The deceleration in inflation was primarily due to lower contribution by 'transport' and 'clothing &

footwear' sectors, while a rise in 'furniture & household services' partially offset the deceleration.

6. The Bank of England (BoE) kept its policy rate unchanged at 0.5 per cent and the quantum of Asset Purchase thFacility (APF) was also retained at GBP 375 billion in its monetary policy meeting held on 5 September 2013.

7. Government's Purchasing Managers Index (PMI) in China increased to 51.0 in August 2013, up by 0.7

percentage point month-on-month, and positioned above the threshold for 11 consecutive months.

DOMESTIC TRENDS

GDP Slows Down to 4-Year Low

unexpected, as the monthly index of industrial

production (IIP) numbers had pre-empted this

weakness by posting a contraction to the tune of 1.1 per

cent in the first quarter.

The full year growth in the last fiscal was at a decade low

of 5 per cent. At the beginning of this fiscal it seemed as

though the economy had bottomed out and that there

would be some recovery during the course of this year.

However, the first quarter print has effectively dashed

any such hopes and it does not seem as though the

growth cycle has seen the trough yet as the next quarter

is likely to be on a weaker footing too.

GDP growth dropped to a four-year low of 4.4

per cent in the first quarter of the current fiscal as

compared to 4.8 per cent in the quarter before. This is

the lowest quarterly growth rate since March 2009,

when the global financial crisis was at its peak. The

downslide was driven by a weak industrial performance,

which slipped to multi-year lows. This was however not

5.4 5.24.7 4.8

4.4

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

Growth in GDP at Factor cost (y-o-y%)

Source: CSO

15 AUGUST-SEPTEMBER 2013

Page 17: Economy Matters, August - September 2013

14ECONOMY MATTERS

Other Major Global Developments during the Month

1. US GDP in the second quarter of 2013 was revised upwards to 2.5 per cent on an annualised basis as compared

to initially estimated 1.7 per cent. Expansion in the second quarter - faster than the annualized growth rate in

the first quarter of 1.1 per cent - was driven by gains in consumer spending, exports, private inventory

investment, non-residential fixed investment and residential fixed investment.

2. In US, non-farm payrolls (NFP) increased by 169K in August 2013, lower than market expectations of an

increase of 180K. Meanwhile, total job addition for July was revised lower from 162K to 104K, while that for

June was revised from 188K to 172K.

3. Real GDP in Euro Area posted a growth of 0.3 per cent on q-o-q basis in the second quarter of 2013, marking its

first expansion since third quarter of 2011. In y-o-y terms though, GDP contracted 0.5 per cent, slower than a

contraction of 1.0 per cent in the previous quarter.

4. Real GDP in UK posted a growth of 0.7 per cent on q-o-q basis - revised up from previously estimated 0.6 per

cent - in second quarter of 2013, as against a growth of 0.3 per cent in the previous quarter. In y-o-y terms also,

GDP increased 1.5 per cent last quarter, marking the highest growth since first quarter of 2011.

5. Headline inflation softened in UK for the second consecutive month to 2.7 per cent in August 2013, as against

2.8 per cent in the previous month. Core inflation, on the other hand, was unchanged at 2.0 per cent last

month.The deceleration in inflation was primarily due to lower contribution by 'transport' and 'clothing &

footwear' sectors, while a rise in 'furniture & household services' partially offset the deceleration.

6. The Bank of England (BoE) kept its policy rate unchanged at 0.5 per cent and the quantum of Asset Purchase thFacility (APF) was also retained at GBP 375 billion in its monetary policy meeting held on 5 September 2013.

7. Government's Purchasing Managers Index (PMI) in China increased to 51.0 in August 2013, up by 0.7

percentage point month-on-month, and positioned above the threshold for 11 consecutive months.

DOMESTIC TRENDS

GDP Slows Down to 4-Year Low

unexpected, as the monthly index of industrial

production (IIP) numbers had pre-empted this

weakness by posting a contraction to the tune of 1.1 per

cent in the first quarter.

The full year growth in the last fiscal was at a decade low

of 5 per cent. At the beginning of this fiscal it seemed as

though the economy had bottomed out and that there

would be some recovery during the course of this year.

However, the first quarter print has effectively dashed

any such hopes and it does not seem as though the

growth cycle has seen the trough yet as the next quarter

is likely to be on a weaker footing too.

GDP growth dropped to a four-year low of 4.4

per cent in the first quarter of the current fiscal as

compared to 4.8 per cent in the quarter before. This is

the lowest quarterly growth rate since March 2009,

when the global financial crisis was at its peak. The

downslide was driven by a weak industrial performance,

which slipped to multi-year lows. This was however not

5.4 5.24.7 4.8

4.4

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

Growth in GDP at Factor cost (y-o-y%)

Source: CSO

15 AUGUST-SEPTEMBER 2013

Page 18: Economy Matters, August - September 2013

providing the biggest boost to expenditure GDP was

government spending, which came in at 10.5 per cent.

But as mentioned earlier, this trend might not be

sustained in the future. Exports and imports were fairly

muted and clocked -1.2 per cent and 0.7 per cent

respectively. It seems as though the government's

export promotion measures will take some more time

to pan out.

From the demand-side, the situation remains weak and

GDP notched 2.4 per cent in the April-June 2013 quarter

as compared to 3.0 per cent in the previous quarter. The

primary source of concern was the sharp slowdown in

consumption growth, which came in at a dismal 1.6 per

cent, which is the lowest print on record for this GDP

series. In corroboration of the fact that the investment

cycle in the economy is faltering, gross fixed capital

formation contracted by 1.2 per cent. The component

16ECONOMY MATTERS

lows in March 2009. This is particularly worrying as it is a

proxy of consumption expenditure and contributes

more than 25 per cent to overall GDP. In contrast,

community, social & personal spending which is

regarded as a proxy for government spending grew at

its highest pace since the September 2009 quarter.

However, it might be difficult to sustain this high

government spending as slowing growth is having an

adverse impact on tax revenues and the depreciating

rupee is raising the subsidy burden of the government.

In the first quarter alone, the actual fiscal deficit was

almost half of the budgeted deficit for the entire fiscal

year. For the remaining quarters, it looks increasingly

likely that the government will have to cut back

expenditure sharply from budgeted levels to maintain

its fiscal deficit target (4.8 per cent of GDP).

The area under cotton, another important kharif crop,

has surged by 7.3 per cent to 108.5 lakh heactares (lh),

and this bodes well for the textile industry. In 2012-13,

domestic cotton output had declined four per cent to 34

million bales owing to a drought in the main cotton

producing states of Gujarat and Maharashtra. This had

also impacted cotton exports last year. Further, the

coverage of coarse cereals went up by 20.1 per cent to

163.1 lh. This has positive implications for the domestic

poultry industry.

Kharif crop output touched an all-time high of 131.3

million tonnes in 2011-12. But kharif production had

fallen in 2012-13 because of the drought in Karnataka,

Maharashtra, Gujarat and Rajasthan. Timely sowing this

year will ensure crops get adequate time to mature. The

higher kharif output this year is expected to cool food

inflation as well.

From the supply-side, agriculture growth came in at a

one-year high of 2.7 per cent in the first-quarter of the

current fiscal as compared to 1.4 per cent in the previous

quarter. The performance of the sector is expected to

improve further in the coming quarters aided by a good

monsoon this fiscal and expectation of record-high food

grain production this year. In fact agriculture sector's

performance is expected to be key contributor to overall

growth this year. In contrast, industrial sector growth

slumped to a low of 0.2 per cent, the lowest point

second only to contraction in March 2009. Amongst its

sub-sectors, manufacturing sector contracted by 1.2 per

cent, while mining & quarrying continued to remain in

the red territory in the reporting quarter.

Any meaningful revival cannot afford to by-pass the

crucial manufacturing sector, given its importance in

employment creation; hence bold steps by the

policymakers to revive the sector's fortunes are the

need of the hour. Growth in the labour intensive sector

of construction was a mere 2.8 per cent in the June

quarter. Second quarter is usually a seasonally weak

quarter for construction and the trend is likely to

continue. The sector is possibly reflecting the sharp cut

in government's plan expenditure towards the end of

last year and the near halting of private investment

projects.

Services sector grew at the same clip as last fiscal, at 6.6

per cent and has been almost flat for 3 consecutive

quarters now. However, the dynamics within the

services component has changed significantly for the

worse. The trade, hotels, transport and communication

sector came in at a low of 3.9 per cent next only to its

(y-o-y%) 2QFY13 Q3FY13 Q4FY13 Q1FY14

GDP at factor cost 4.4

Agriculture 2.7

Industry 0.2

Services 6.6

-2.8

-1.2

2.8

3.7

3.9

8.9

9.4

5.2 4.7 4.8

1.7 1.8 1.4

1.3 2.5 2.7

7.6 6.7 6.6

Mining & quarrying 1.7 -0.7 -3.1

Manufacturing 0.1 2.5 2.6

Construction 3.1 2.9 4.4

Electricity, gas & water supply 3.2 4.5 2.8

Trade, hotels, transport & communication 6.8 6.4 6.2

Financing, insurance, real estate & business services 8.3 7.8 9.1

Community, social & personal services 8.4 5.6 4.0

Source: CSO

GDP Break-Up from Supply-Side

Source: CSO

GDP Break-Up from Demand-Side

OutlookCII is disappointed with the dismal performance of the first quarter GDP data which showed further deceleration in

the economic growth. In particular, the near stagnation in the manufacturing sector is worrying at a time when

policy makers are keen to raise the share of this sector in the economy. In view of the downside risks to growth, we

have now revised our GDP growth forecast downward to a range of 5.3-5.8 per cent for the current fiscal. In order to

lift the economy out of the current quagmire, that all policy levers should be used to drive a revival in the economy.

Project clearances should be hastened, implementation of the manufacturing policy should begin by identifying

specific zones where industry can invest and interest rates should be reduced.

improvement in IIP growth was not entirely unexpected

as core sector (which constitutes close to 38 per cent of

the total index) had grown at 3.1 per cent during the

month. The positive sequential momentum was evident

from the 3.8 per cent growth in the seasonally-adjusted

month-on-month (SA m-o-m) series in July 2013.

However, on a cumulative basis, for the first four

months of the fiscal, IIP contracted by 0.2 per cent.

In an encouraging sign, index of industrial production

grew by 2.6 per cent in July 2013 after remaining in

negative territory for two consecutive months. The

turnaround was mainly driven by a positive trend in the

manufacturing growth rate. The print for June has also

been revised upward to -1.8 per cent from -2.2 per cent

earlier. However, it should be noted that the

Industrial Growth Picks Up in July 2013

Jul-12

Sep-1

2

Nov-

12

Jan-1

3

Mar-

13

May-

13

Jul-13

-0.1 2.6

10

5

0

-5

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

IIP Growth Rebounds in July 2013

Source: CSO

(y-o-y%) 2QFY13 Q3FY13 Q4FY13 Q1FY14

GDP at market prices 2.4

1.6

10.5

-1.2

-1.2

0.7

2.5 4.1 3.0

Private Consumption 3.5 4.2 3.8

Govt. Consumption 6.9 2.2 0.6

Fixed Investment 1.1 4.5 3.4

Exports 5.0 -3.5 -0.6

Imports 9.5 4.2 3.3

17 AUGUST-SEPTEMBER 2013

Page 19: Economy Matters, August - September 2013

providing the biggest boost to expenditure GDP was

government spending, which came in at 10.5 per cent.

But as mentioned earlier, this trend might not be

sustained in the future. Exports and imports were fairly

muted and clocked -1.2 per cent and 0.7 per cent

respectively. It seems as though the government's

export promotion measures will take some more time

to pan out.

From the demand-side, the situation remains weak and

GDP notched 2.4 per cent in the April-June 2013 quarter

as compared to 3.0 per cent in the previous quarter. The

primary source of concern was the sharp slowdown in

consumption growth, which came in at a dismal 1.6 per

cent, which is the lowest print on record for this GDP

series. In corroboration of the fact that the investment

cycle in the economy is faltering, gross fixed capital

formation contracted by 1.2 per cent. The component

16ECONOMY MATTERS

lows in March 2009. This is particularly worrying as it is a

proxy of consumption expenditure and contributes

more than 25 per cent to overall GDP. In contrast,

community, social & personal spending which is

regarded as a proxy for government spending grew at

its highest pace since the September 2009 quarter.

However, it might be difficult to sustain this high

government spending as slowing growth is having an

adverse impact on tax revenues and the depreciating

rupee is raising the subsidy burden of the government.

In the first quarter alone, the actual fiscal deficit was

almost half of the budgeted deficit for the entire fiscal

year. For the remaining quarters, it looks increasingly

likely that the government will have to cut back

expenditure sharply from budgeted levels to maintain

its fiscal deficit target (4.8 per cent of GDP).

The area under cotton, another important kharif crop,

has surged by 7.3 per cent to 108.5 lakh heactares (lh),

and this bodes well for the textile industry. In 2012-13,

domestic cotton output had declined four per cent to 34

million bales owing to a drought in the main cotton

producing states of Gujarat and Maharashtra. This had

also impacted cotton exports last year. Further, the

coverage of coarse cereals went up by 20.1 per cent to

163.1 lh. This has positive implications for the domestic

poultry industry.

Kharif crop output touched an all-time high of 131.3

million tonnes in 2011-12. But kharif production had

fallen in 2012-13 because of the drought in Karnataka,

Maharashtra, Gujarat and Rajasthan. Timely sowing this

year will ensure crops get adequate time to mature. The

higher kharif output this year is expected to cool food

inflation as well.

From the supply-side, agriculture growth came in at a

one-year high of 2.7 per cent in the first-quarter of the

current fiscal as compared to 1.4 per cent in the previous

quarter. The performance of the sector is expected to

improve further in the coming quarters aided by a good

monsoon this fiscal and expectation of record-high food

grain production this year. In fact agriculture sector's

performance is expected to be key contributor to overall

growth this year. In contrast, industrial sector growth

slumped to a low of 0.2 per cent, the lowest point

second only to contraction in March 2009. Amongst its

sub-sectors, manufacturing sector contracted by 1.2 per

cent, while mining & quarrying continued to remain in

the red territory in the reporting quarter.

Any meaningful revival cannot afford to by-pass the

crucial manufacturing sector, given its importance in

employment creation; hence bold steps by the

policymakers to revive the sector's fortunes are the

need of the hour. Growth in the labour intensive sector

of construction was a mere 2.8 per cent in the June

quarter. Second quarter is usually a seasonally weak

quarter for construction and the trend is likely to

continue. The sector is possibly reflecting the sharp cut

in government's plan expenditure towards the end of

last year and the near halting of private investment

projects.

Services sector grew at the same clip as last fiscal, at 6.6

per cent and has been almost flat for 3 consecutive

quarters now. However, the dynamics within the

services component has changed significantly for the

worse. The trade, hotels, transport and communication

sector came in at a low of 3.9 per cent next only to its

(y-o-y%) 2QFY13 Q3FY13 Q4FY13 Q1FY14

GDP at factor cost 4.4

Agriculture 2.7

Industry 0.2

Services 6.6

-2.8

-1.2

2.8

3.7

3.9

8.9

9.4

5.2 4.7 4.8

1.7 1.8 1.4

1.3 2.5 2.7

7.6 6.7 6.6

Mining & quarrying 1.7 -0.7 -3.1

Manufacturing 0.1 2.5 2.6

Construction 3.1 2.9 4.4

Electricity, gas & water supply 3.2 4.5 2.8

Trade, hotels, transport & communication 6.8 6.4 6.2

Financing, insurance, real estate & business services 8.3 7.8 9.1

Community, social & personal services 8.4 5.6 4.0

Source: CSO

GDP Break-Up from Supply-Side

Source: CSO

GDP Break-Up from Demand-Side

OutlookCII is disappointed with the dismal performance of the first quarter GDP data which showed further deceleration in

the economic growth. In particular, the near stagnation in the manufacturing sector is worrying at a time when

policy makers are keen to raise the share of this sector in the economy. In view of the downside risks to growth, we

have now revised our GDP growth forecast downward to a range of 5.3-5.8 per cent for the current fiscal. In order to

lift the economy out of the current quagmire, that all policy levers should be used to drive a revival in the economy.

Project clearances should be hastened, implementation of the manufacturing policy should begin by identifying

specific zones where industry can invest and interest rates should be reduced.

improvement in IIP growth was not entirely unexpected

as core sector (which constitutes close to 38 per cent of

the total index) had grown at 3.1 per cent during the

month. The positive sequential momentum was evident

from the 3.8 per cent growth in the seasonally-adjusted

month-on-month (SA m-o-m) series in July 2013.

However, on a cumulative basis, for the first four

months of the fiscal, IIP contracted by 0.2 per cent.

In an encouraging sign, index of industrial production

grew by 2.6 per cent in July 2013 after remaining in

negative territory for two consecutive months. The

turnaround was mainly driven by a positive trend in the

manufacturing growth rate. The print for June has also

been revised upward to -1.8 per cent from -2.2 per cent

earlier. However, it should be noted that the

Industrial Growth Picks Up in July 2013

Jul-12

Sep-1

2

Nov-

12

Jan-1

3

Mar-

13

May-

13

Jul-13

-0.1 2.6

10

5

0

-5

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

IIP Growth Rebounds in July 2013

Source: CSO

(y-o-y%) 2QFY13 Q3FY13 Q4FY13 Q1FY14

GDP at market prices 2.4

1.6

10.5

-1.2

-1.2

0.7

2.5 4.1 3.0

Private Consumption 3.5 4.2 3.8

Govt. Consumption 6.9 2.2 0.6

Fixed Investment 1.1 4.5 3.4

Exports 5.0 -3.5 -0.6

Imports 9.5 4.2 3.3

17 AUGUST-SEPTEMBER 2013

Page 20: Economy Matters, August - September 2013

18ECONOMY MATTERS

the previous month. The sector recorded positive

growth after remaining in the negative territory for

three consecutive months. Consumer goods continue to

remain in negative territory for the third consecutive

month, primarily on account of consumer durables.

Overall consumer goods sector showed de-growth to

the tune of 0.9 per cent in July 2013 as compared to -1.9

per cent in the previous month. The continued poor

performance by consumer durables in the last eight

months, 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

continued to show a robust performance, growing by

6.8 per cent in July 2013 as compared to 5.7 per cent in

the previous month.

On the sectoral front, manufacturing grew at a relatively

robust 3 per cent, as compared to two previous

consecutive months of negative growth. As per the

industry classification, of the 22 industries, 11 showed

positive growth, mainly led by electrical machinery,

wearing apparel, luggage & footwear and tanning of

leather products. In contrast, regulatory and

environmental issues continued to plague the mining

sector, as it contracted by 2.3 per cent in July 2013.

Electricity sector, meanwhile, showed a strong rebound

of 5.2 per cent after the surprise stagnant growth last

month.

On the use based front, the most significant surprise was

on the capital goods front, which grew by a considerable

15.6 per cent in July 2013 as compared to -5.8 per cent in

Apr-July

Weight July-12 May-13 Jun-13 July-13 FY13 FY14

General 1000.0 -0.1 -2.8 -1.8 -0.2 -0.2

Manufacturing 755.3 0.0 -3.6 -1.7 -0.6 -0.2

Mining 141.6 -3.5 -5.9 -4.3 -2.0 -4.0

Electricity 103.2 2.8 6.2 0.0 5.5 3.9

Use-Based

Basic 456.8 1.0 -0.9 -1.5 2.7 0.2

Capital 88.3 -5.8 -2.6 -5.8 -16.8 1.8

Intermediates 156.9 0.1 1.0 1.3 0.6 1.8

Consumer Goods 298.1 0.7 -7.1 -1.9 3.1 -2.0

-Durables 84.6 0.8 -18.4 -10.4 6.1 -12.0

-Non durables 213.5 0.6 3.0 5.7 0.6 6.8

2.6

3.0

-2.3

5.2

1.7

15.6

2.4

-0.9

-9.3

6.8

Source: CSO

Sectoral Growth (y-o-y, %)

OutlookCII is happy to note the return of industrial growth to the positive terrain in July 2013, which marks a break from the

past two months of negative growth. This is welcome, though it is too early to presume that a recovery is underway.

However, manufacturing sector has been performing below its potential for quite some time now, hence well-

thought-out short and medium term action plans are needed to accelerate the growth momentum of the sector.

WPI Inflation Accelerates on Higher Food Prices

High fruits & vegetable prices coupled with high inland-

fish prices drove the primary food inflation sharply up to

18.2 per cent as compared to 11.9 per cent in the last

month. Consequently, primary inflation increased to 11.7

per cent in the reporting month as compared to 9 per

cent in the month before despite sharp deceleration in

its non-food and mineral sub components. Fuel inflation

on the other hand remained stable at 11.3 per cent in

August 2013. Encouragingly, non-food manufacturing

inflation, which is widely regarded as the proxy for

demand-side pressures in the economy came down to

1.9 per cent from 2.4 per cent in the month before. Total

manufacturing inflation too stood at 1.9 per cent during

the month.

Headline WPI-based inflation climbed to 6-month high of

6.1 per cent in August 2013 as compared to 5.8 per cent in

the previous month mainly on account of spiralling food

prices. Total food inflation (primary + manufacturing)

accelerated sharply to 12.4 per cent in August 2013 as

compared to 9.5 per cent in the month before. The

average inflation for the first five months of the fiscal

stands at 5.3 per cent as compared to 7.6 per cent in the

same period last year. The sequential momentum of

seasonally-adjusted month-on-month series also

showed pick up. Combined CPI inflation for the month of

August 2013 stood at 9.52 per cent as compared to 9.64

per cent in the previous month.

General 100.0 8.0 5.2 5.8 7.6 5.3

Primary 20.1 11.2 8.8 9.0 10.3 8.1

- Food 14.3 9.3 10.3 11.9 10.4 11.0

-Non-Food 4.3 14.1 7.7 5.5 8.8 5.3

-Minerals 1.5 18.1 1.3 -2.4 12.3 -4.1

Fuel 14.9 8.7 7.5 11.3 10.5 9.2

-Petrol 1.1 9.5 -6.9 1.2 10.5 -0.9

-High Speed 4.7 0.5 23.4 26.3 5.0 23.8Diesel

Manufacturing 65.0 6.4 2.9 2.8 5.6 2.9

-Food 10.0 9.3 6.4 5.0 6.9 5.4

-Non-food 55.0 5.8 2.2 2.4 5.4 2.4

April-Aug

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

6.1

11.7

18.2

1.1

-7.2

11.3

3.2

27.6

1.9

1.7

1.9

Source: Office of Economic Advisor

Sectoral Components of Inflation

Outlook While on the one hand, high food prices drove inflation higher during the month, non-food manufacturing (core)

inflation subsided further. This has complicated the task of the Central Bank further as there is clear evidence of

abatement of demand-side pressures, which makes the case for a rate cut to spur growth, but on the other hand,

supply-side issues have driven total inflation higher. We would urge the RBI to cut rates as it is well known that

monetary policy is not an effective tool for curbing inflation caused due to supply-side bottlenecks.

19 AUGUST-SEPTEMBER 2013

Page 21: Economy Matters, August - September 2013

18ECONOMY MATTERS

the previous month. The sector recorded positive

growth after remaining in the negative territory for

three consecutive months. Consumer goods continue to

remain in negative territory for the third consecutive

month, primarily on account of consumer durables.

Overall consumer goods sector showed de-growth to

the tune of 0.9 per cent in July 2013 as compared to -1.9

per cent in the previous month. The continued poor

performance by consumer durables in the last eight

months, 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

continued to show a robust performance, growing by

6.8 per cent in July 2013 as compared to 5.7 per cent in

the previous month.

On the sectoral front, manufacturing grew at a relatively

robust 3 per cent, as compared to two previous

consecutive months of negative growth. As per the

industry classification, of the 22 industries, 11 showed

positive growth, mainly led by electrical machinery,

wearing apparel, luggage & footwear and tanning of

leather products. In contrast, regulatory and

environmental issues continued to plague the mining

sector, as it contracted by 2.3 per cent in July 2013.

Electricity sector, meanwhile, showed a strong rebound

of 5.2 per cent after the surprise stagnant growth last

month.

On the use based front, the most significant surprise was

on the capital goods front, which grew by a considerable

15.6 per cent in July 2013 as compared to -5.8 per cent in

Apr-July

Weight July-12 May-13 Jun-13 July-13 FY13 FY14

General 1000.0 -0.1 -2.8 -1.8 -0.2 -0.2

Manufacturing 755.3 0.0 -3.6 -1.7 -0.6 -0.2

Mining 141.6 -3.5 -5.9 -4.3 -2.0 -4.0

Electricity 103.2 2.8 6.2 0.0 5.5 3.9

Use-Based

Basic 456.8 1.0 -0.9 -1.5 2.7 0.2

Capital 88.3 -5.8 -2.6 -5.8 -16.8 1.8

Intermediates 156.9 0.1 1.0 1.3 0.6 1.8

Consumer Goods 298.1 0.7 -7.1 -1.9 3.1 -2.0

-Durables 84.6 0.8 -18.4 -10.4 6.1 -12.0

-Non durables 213.5 0.6 3.0 5.7 0.6 6.8

2.6

3.0

-2.3

5.2

1.7

15.6

2.4

-0.9

-9.3

6.8

Source: CSO

Sectoral Growth (y-o-y, %)

OutlookCII is happy to note the return of industrial growth to the positive terrain in July 2013, which marks a break from the

past two months of negative growth. This is welcome, though it is too early to presume that a recovery is underway.

However, manufacturing sector has been performing below its potential for quite some time now, hence well-

thought-out short and medium term action plans are needed to accelerate the growth momentum of the sector.

WPI Inflation Accelerates on Higher Food Prices

High fruits & vegetable prices coupled with high inland-

fish prices drove the primary food inflation sharply up to

18.2 per cent as compared to 11.9 per cent in the last

month. Consequently, primary inflation increased to 11.7

per cent in the reporting month as compared to 9 per

cent in the month before despite sharp deceleration in

its non-food and mineral sub components. Fuel inflation

on the other hand remained stable at 11.3 per cent in

August 2013. Encouragingly, non-food manufacturing

inflation, which is widely regarded as the proxy for

demand-side pressures in the economy came down to

1.9 per cent from 2.4 per cent in the month before. Total

manufacturing inflation too stood at 1.9 per cent during

the month.

Headline WPI-based inflation climbed to 6-month high of

6.1 per cent in August 2013 as compared to 5.8 per cent in

the previous month mainly on account of spiralling food

prices. Total food inflation (primary + manufacturing)

accelerated sharply to 12.4 per cent in August 2013 as

compared to 9.5 per cent in the month before. The

average inflation for the first five months of the fiscal

stands at 5.3 per cent as compared to 7.6 per cent in the

same period last year. The sequential momentum of

seasonally-adjusted month-on-month series also

showed pick up. Combined CPI inflation for the month of

August 2013 stood at 9.52 per cent as compared to 9.64

per cent in the previous month.

General 100.0 8.0 5.2 5.8 7.6 5.3

Primary 20.1 11.2 8.8 9.0 10.3 8.1

- Food 14.3 9.3 10.3 11.9 10.4 11.0

-Non-Food 4.3 14.1 7.7 5.5 8.8 5.3

-Minerals 1.5 18.1 1.3 -2.4 12.3 -4.1

Fuel 14.9 8.7 7.5 11.3 10.5 9.2

-Petrol 1.1 9.5 -6.9 1.2 10.5 -0.9

-High Speed 4.7 0.5 23.4 26.3 5.0 23.8Diesel

Manufacturing 65.0 6.4 2.9 2.8 5.6 2.9

-Food 10.0 9.3 6.4 5.0 6.9 5.4

-Non-food 55.0 5.8 2.2 2.4 5.4 2.4

April-Aug

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

6.1

11.7

18.2

1.1

-7.2

11.3

3.2

27.6

1.9

1.7

1.9

Source: Office of Economic Advisor

Sectoral Components of Inflation

Outlook While on the one hand, high food prices drove inflation higher during the month, non-food manufacturing (core)

inflation subsided further. This has complicated the task of the Central Bank further as there is clear evidence of

abatement of demand-side pressures, which makes the case for a rate cut to spur growth, but on the other hand,

supply-side issues have driven total inflation higher. We would urge the RBI to cut rates as it is well known that

monetary policy is not an effective tool for curbing inflation caused due to supply-side bottlenecks.

19 AUGUST-SEPTEMBER 2013

Page 22: Economy Matters, August - September 2013

20ECONOMY MATTERS

Trade Deficit Narrows on Sharp Spurt in Exports Growth

Meanwhile, the cumulative value of exports for the

period April-August FY2014 came in at US$124.4 billion,

higher than US$119.7 billion recorded during same

period last year. Imports contracted by 0.7 per cent in

August 2013, lower than a decline of 6.2 per cent in July

2013, mirroring the continued subdued domestic

demand in the economy, impact of imports getting

costlier in the wake of depreciating rupee against the US

dollar and the curtailed imports of non-productive items

like gold. Imports also contracted in month-over-month

terms, printing US$37.1 billion in August as against

USD$38.1 billion in July.

Exports stabilised further in August 2013, as global

demand improved. Imports declined reflecting the slow

domestic demand scenario, thus resulting in narrowing

of the monthly trade deficit. However, these may be

early days still to pass any judgement on the

sustainability of the exports momentum in the months

to come.

In August 2013, exports were valued at US$26.1 billion,

up a robust 13 per cent as compared with same period

last year. This is the highest monthly increase this fiscal

and augurs well for the future economic prospects.

11.8 13.0

28.8

-0.7

40

30

20

10

0

-10

-20

Jan/

12

Feb

/12

Mar

/12

Apr

/12

May

/12

Jun/

12

Jul/1

2

Aug

/12

Sep

/12

Oct

/12

Nov

/12

Dec

/12

Jan/

13

Feb

/13

Mar

/13

Apr

/13

May

/13

Jun/

13

Jul/1

3

Aug

/13

y-o-y%

Exports Imports

Source: Ministry of Commerce

External Sector Performance

Oil imports were higher by 17.9 per cent on a y-o-y basis.

Non-oil imports declined by 10.4 per cent-standing at

US$21.9 billion during the month.

As exports rose and imports fell during the month, the

trade deficit narrowed to US$10.9 billion from a deficit of

US$12.3 billion in July. On a cumulative basis, trade

deficit came in at US$73.4 billion in April-August FY14,

slightly lower than a deficit of US$74.7 billion during the

same period in FY13.

Within imports, oil and related products accounted for

US$15.1 billion worth of imports in August 2013 as

compared to US$12.7 billion in the previous month. The

higher oil import bill is attributable to the high

international oil prices during the month due the

ongoing geopolitical tensions in Syria. The Indian crude

oil basket price rose to US$110.1/bbl in late August as

compared to US$105/bbl in July and US$101.0/bbl in June.

OutlookGoing ahead, exports are likely to find some support amidst signs of economic recovery in both the US and the Euro

zone. Besides, a weaker Rupee is also likely to aid exports. However, on the negative side, elevated crude oil prices

pose risks to the oil import bill.

v

v

v

v

v

v

Services projected to grow at 6.6 per cent in 2013-14

as against 7.1 per cent in 2012-13.

WPI inflation by end March 2014 will be around 5.5

per cent as against the average of 7.4 per cent in 2012-

13 and 5.7 per cent at end March 2013.

Current Account Deficit projected at US$70 billion

(3.8 per cent of GDP) in 2013-14 against an estimated

US$88.2 billion (4.8 per cent of GDP) in 2012-13.

Net Capital flows projected at US$61.4 billion (3.4 per

cent of GDP) in the current year against an estimated

US$89.4 billion in the last fiscal, the second highest

level to date.

Investment and Savings rate projected at 34.7 per

cent and 31 per cent of GDP respectively in 2013-14.

Some of the measures suggested by the council to

improve economic conditions in the medium to long

term include improving manufacturing capabilities,

lowering current account deficit and encouraging

foreign investment amongst other measures.

In its revised economic forecast for the current fiscal, PM

Economic Advisory Council (PMEAC) lowered its GDP

forecast from 6.4 per cent to 5.3 per cent. Though

growth has been revised downwards, it is still higher

than the 5 per cent growth posted last year. As per the

council, the main reasons for the higher forecast in the

current year is the sharp increase in agriculture output

coupled with expected pick-up in growth of other

sectors also in the second half of the year owing to slew

of policy measures announced in the last couple of

months. Following are the key highlights from the

council's other forecasts:

Agriculture projected to grow at 4.8 per cent in 2013-

14 as against 1.9 per cent in 2012-13 owing to a good

monsoon which had a huge positive impact on

sowing activity.

Industry projected to grow at 2.7 per cent in 2013-14

as against 2.1 per cent in 2012-13. Manufacturing

sector projected to grow at 1.5 per cent in the current

fiscal as against 1 per cent in the last fiscal.

v

v

PMEAC Cuts GDP Forecast to 5.3 per cent

Dr. Raghuram Rajan Takes Over as the New RBI Governorview that it is mainly the supply constraints that have

unleashed the forces of inflation, especially in food. As

the governor has appropriately emphasized on a policy

that will promote inclusive growth and development, it

is even more critical to address the supply bottlenecks

through a well coordinated monetary and fiscal policy.

With a view to encourage investors to take positions

domestically and provide depth and profits to our

economy, CII welcomes the intention of the new RBI

governor to steadily liberalize the domestic market, and

ease the restrictions on investment and positions

taking. This will also help the country by way of boosting

confidence of foreign investors in the Indian economy.

CII is also happy that the new governor will be taking

several steps to help the households, who remain

vulnerable to the vagaries of the market. Among these

important measures, the decision of RBI to issue

Inflation Indexed Savings Certificates linked to the CPI

New Index to retail investors by end-November 2013, is

welcome and is in line with CII recommendations.

CII welcomes the new governor and is confident that he

will take the necessary pro-reform measures in the

months to come in order to re-invigorate growth in the

economy and keep the inflationary expectations low.

Dr. Raghuram Rajan assumed charge as rdthe 23 Governor of the Reserve Bank of

India on September 4, 2013. Prior to this,

he was the Chief Economic Advisor,

Ministry of Finance, Government of

India and the Er ic J . Gleacher

Distinguished Service Professor of Finance at the

University of Chicago's Booth School. Between 2003 and

2006, Dr. Rajan was the Chief Economist and Director of

Research at the International Monetary Fund. The new

governor takes over at a very critical stage for the

economy which saw Rupee touching historic lows in

addition to the perceived fiscal dominance over

monetary policy in recent times. Covering these critical

areas in his maiden speech, Dr. Rajan, expressed

confidence that monetary policy, in coordination with

fiscal policy, will not only be able to address the macro

economic issues facing the country currently but will

also provide platform for sustaining the high growth

with inclusiveness in medium to long term.

Dr. Rajan rightly recognized the need for taming

inflationary expectations by taking measures based on

the understanding of the dynamics of originating

sources like the value of currency, supply-side

constraints and demand pressures. CII has been of the

21 AUGUST-SEPTEMBER 2013

Page 23: Economy Matters, August - September 2013

20ECONOMY MATTERS

Trade Deficit Narrows on Sharp Spurt in Exports Growth

Meanwhile, the cumulative value of exports for the

period April-August FY2014 came in at US$124.4 billion,

higher than US$119.7 billion recorded during same

period last year. Imports contracted by 0.7 per cent in

August 2013, lower than a decline of 6.2 per cent in July

2013, mirroring the continued subdued domestic

demand in the economy, impact of imports getting

costlier in the wake of depreciating rupee against the US

dollar and the curtailed imports of non-productive items

like gold. Imports also contracted in month-over-month

terms, printing US$37.1 billion in August as against

USD$38.1 billion in July.

Exports stabilised further in August 2013, as global

demand improved. Imports declined reflecting the slow

domestic demand scenario, thus resulting in narrowing

of the monthly trade deficit. However, these may be

early days still to pass any judgement on the

sustainability of the exports momentum in the months

to come.

In August 2013, exports were valued at US$26.1 billion,

up a robust 13 per cent as compared with same period

last year. This is the highest monthly increase this fiscal

and augurs well for the future economic prospects.

11.8 13.0

28.8

-0.7

40

30

20

10

0

-10

-20

Jan/

12

Feb

/12

Mar

/12

Apr

/12

May

/12

Jun/

12

Jul/1

2

Aug

/12

Sep

/12

Oct

/12

Nov

/12

Dec

/12

Jan/

13

Feb

/13

Mar

/13

Apr

/13

May

/13

Jun/

13

Jul/1

3

Aug

/13

y-o-y%

Exports Imports

Source: Ministry of Commerce

External Sector Performance

Oil imports were higher by 17.9 per cent on a y-o-y basis.

Non-oil imports declined by 10.4 per cent-standing at

US$21.9 billion during the month.

As exports rose and imports fell during the month, the

trade deficit narrowed to US$10.9 billion from a deficit of

US$12.3 billion in July. On a cumulative basis, trade

deficit came in at US$73.4 billion in April-August FY14,

slightly lower than a deficit of US$74.7 billion during the

same period in FY13.

Within imports, oil and related products accounted for

US$15.1 billion worth of imports in August 2013 as

compared to US$12.7 billion in the previous month. The

higher oil import bill is attributable to the high

international oil prices during the month due the

ongoing geopolitical tensions in Syria. The Indian crude

oil basket price rose to US$110.1/bbl in late August as

compared to US$105/bbl in July and US$101.0/bbl in June.

OutlookGoing ahead, exports are likely to find some support amidst signs of economic recovery in both the US and the Euro

zone. Besides, a weaker Rupee is also likely to aid exports. However, on the negative side, elevated crude oil prices

pose risks to the oil import bill.

v

v

v

v

v

v

Services projected to grow at 6.6 per cent in 2013-14

as against 7.1 per cent in 2012-13.

WPI inflation by end March 2014 will be around 5.5

per cent as against the average of 7.4 per cent in 2012-

13 and 5.7 per cent at end March 2013.

Current Account Deficit projected at US$70 billion

(3.8 per cent of GDP) in 2013-14 against an estimated

US$88.2 billion (4.8 per cent of GDP) in 2012-13.

Net Capital flows projected at US$61.4 billion (3.4 per

cent of GDP) in the current year against an estimated

US$89.4 billion in the last fiscal, the second highest

level to date.

Investment and Savings rate projected at 34.7 per

cent and 31 per cent of GDP respectively in 2013-14.

Some of the measures suggested by the council to

improve economic conditions in the medium to long

term include improving manufacturing capabilities,

lowering current account deficit and encouraging

foreign investment amongst other measures.

In its revised economic forecast for the current fiscal, PM

Economic Advisory Council (PMEAC) lowered its GDP

forecast from 6.4 per cent to 5.3 per cent. Though

growth has been revised downwards, it is still higher

than the 5 per cent growth posted last year. As per the

council, the main reasons for the higher forecast in the

current year is the sharp increase in agriculture output

coupled with expected pick-up in growth of other

sectors also in the second half of the year owing to slew

of policy measures announced in the last couple of

months. Following are the key highlights from the

council's other forecasts:

Agriculture projected to grow at 4.8 per cent in 2013-

14 as against 1.9 per cent in 2012-13 owing to a good

monsoon which had a huge positive impact on

sowing activity.

Industry projected to grow at 2.7 per cent in 2013-14

as against 2.1 per cent in 2012-13. Manufacturing

sector projected to grow at 1.5 per cent in the current

fiscal as against 1 per cent in the last fiscal.

v

v

PMEAC Cuts GDP Forecast to 5.3 per cent

Dr. Raghuram Rajan Takes Over as the New RBI Governorview that it is mainly the supply constraints that have

unleashed the forces of inflation, especially in food. As

the governor has appropriately emphasized on a policy

that will promote inclusive growth and development, it

is even more critical to address the supply bottlenecks

through a well coordinated monetary and fiscal policy.

With a view to encourage investors to take positions

domestically and provide depth and profits to our

economy, CII welcomes the intention of the new RBI

governor to steadily liberalize the domestic market, and

ease the restrictions on investment and positions

taking. This will also help the country by way of boosting

confidence of foreign investors in the Indian economy.

CII is also happy that the new governor will be taking

several steps to help the households, who remain

vulnerable to the vagaries of the market. Among these

important measures, the decision of RBI to issue

Inflation Indexed Savings Certificates linked to the CPI

New Index to retail investors by end-November 2013, is

welcome and is in line with CII recommendations.

CII welcomes the new governor and is confident that he

will take the necessary pro-reform measures in the

months to come in order to re-invigorate growth in the

economy and keep the inflationary expectations low.

Dr. Raghuram Rajan assumed charge as rdthe 23 Governor of the Reserve Bank of

India on September 4, 2013. Prior to this,

he was the Chief Economic Advisor,

Ministry of Finance, Government of

India and the Er ic J . Gleacher

Distinguished Service Professor of Finance at the

University of Chicago's Booth School. Between 2003 and

2006, Dr. Rajan was the Chief Economist and Director of

Research at the International Monetary Fund. The new

governor takes over at a very critical stage for the

economy which saw Rupee touching historic lows in

addition to the perceived fiscal dominance over

monetary policy in recent times. Covering these critical

areas in his maiden speech, Dr. Rajan, expressed

confidence that monetary policy, in coordination with

fiscal policy, will not only be able to address the macro

economic issues facing the country currently but will

also provide platform for sustaining the high growth

with inclusiveness in medium to long term.

Dr. Rajan rightly recognized the need for taming

inflationary expectations by taking measures based on

the understanding of the dynamics of originating

sources like the value of currency, supply-side

constraints and demand pressures. CII has been of the

21 AUGUST-SEPTEMBER 2013

Page 24: Economy Matters, August - September 2013

The rules have prescribed different margins for services

viz., software development, ITeS, KPO, contract R&D,

etc. A noteworthy aspect is that service providers

bearing insignificant risk are only eligible to opt for the

rules. The factors mentioned for identification of

taxpayers with 'insignificant risk', inter-alia, includes

performance of economically significant functions,

provisions of funds/capital and ownership of intangibles

by foreign principal, etc. Hence, distinction in mark-up

percentage between various services, presumably on

the basis of high-end vs. low-end nature of activities,

could lead to enhancing disputes on characterisation of

taxpayers.

The mark-up percentages prescribed in the rules may

not meet the taxpayers' expectations (based on

industry average margin trends and prevalent

commercial rates) and opting for the prescribed

margins under the rules may overshadow the expected

benefits. Similarly, the safe harbour interest rate for

loans would range from 11 per cent to 13 per cent

(applying the SBI base rate as on 30 June 2013), which

clearly is on a higher side. Also, the margin provided for

auto components industry, which in particular has been

going through a challenging phase, appears high. Since

several rulings of the Income tax Appellate Tribunals

have accepted lower percentage of mark-up or interest

to be at arm's length, the rates specified in the rules may

not find favour with the taxpayers.

Whilst the step by the CBDT is a positive move, it is

expected that the revenue authorities during audits,

APA/MAP negotiations will not consider the safe harbor

margins. An issuance of a binding circular clarifying that

safe harbour rates should be strictly applied only to

taxpayers who opt for the rules and should not be

generically extended to other assessees (who do not

opt for the rules) would provide a sense of relief to

taxpayers. There is no doubt that the release of the long-

awaited Safe Harbour rules is a step in the right direction

and the certainty and administrative convenience

offered by the rules would be an additional incentive

that will increase the attractiveness of India as an

investment jurisdiction.

Manufacture and export of core and non-core auto

components - Cost plus mark-up of 12 per cent and 8.5

per cent respectively; same as the draft rules

Interest on loans sourced in Indian Rupees extended to

Wholly-Owned non-resident subsidiaries (WOS) - State

Bank of India (SBI) base rate plus 150 basis points for

loans up to INR 50 crores and, SBI base rate plus 300

basis points for loans exceeding INR 50 crores i.e. INR

0.5 billion.

Guarantee fee on explicit corporate guarantees on

behalf of WOS - 2 per cent per annum where the amount

guaranteed does not exceed INR 100 crores i.e. INR 1

billion and 1.75 per cent in case the amount guaranteed

exceeds INR 100 crores and the credit rating of the WOS

is of adequate to highest safety as carried out by an

agency registered with the Securities and Exchange

Board of India.

The issuance of detailed Safe Harbour rules is a welcome

measure. The removal of upper threshold limits for

eligibility of opting for safe harbour rules will give an

opportunity to taxpayers at large to opt for the rules. As

regards the period, application of the rules for five years

(instead of 2 years as in the draft rules) is another

positive development. It is expected that the rules

would help overcome immense potential TP litigation

and create an amicable tax environment.

However, the rules in final form also have certain issues

as were in the draft rules. The rules require the taxpayers

opting for Safe Harbour to comply with the detailed

requirements relating to TP documentation. Such

compulsion would defeat the key benefit of reduced

compliance burden. Once a certain mark-up for a

specified service is acceptable to the tax authorities,

maintaining detailed documentation thereafter may, at

best be of academic importance.

The final rules only cover R&D for software

development and generic pharmaceutical drugs, leaving

out other sectors such as R&D for active pharmaceutical

ingredients, chemicals, agriculture, etc. Further, the

rules only cover loans/guarantee provided by taxpayer

to/for WOS and cover only rupee-sourced loans, thus,

having restricted applicability.

22ECONOMY MATTERS

Draft Safe Harbour Rules – Do They Bridge or Widen the Taxpayer-Exchequer Divide?

The Safe Harbour rules (the rules) were released in draft

form by the Central Board of Direct Taxes (the CBDT) on

14 August 2013. After considering comments from

various stakeholders, the final rules have been issued on

18 September 2013. The rules cover the following

categories/sectors of transactions and prescribe the

below mentioned safe harbour margins/ prices:

Software development and IT-enabled services - Cost

plus mark-up of 20 per cent (provided the value of such

transactions does not exceed INR 500 crores i.e. INR 5

billion); cost plus mark-up of 22 per cent mark in other

cases, i.e. above INR 500 crores; the draft rules had

proposed a threshold limit of INR 100 crores, i e

taxpayers having transactions above INR 100 crores

were not eligible for the Safe Harbour

Knowledge Processes Outsourcing (KPO services) -

Cost plus mark-up of 25 per cent; in the draft rules the

same was proposed as 30 per cent with an upper limit

eligibility threshold of INR 100 crores.

Contract Research & Development (R&D) relating to

software development and generic pharmaceutical

drugs - Cost plus mark-up of 30 per cent and 29 per cent

respectively; same as the margins proposed in the draft

rules

Transfer Pricing (TP) has emerged as one of the key

focal points of high-pitched tax litigation in India.

While outsourcing/captive units have experienced

significant TP adjustments to their profit margins, Indian

parent companies have suffered adjustments on their

intra-group financing arrangements.

The Finance (No. 2) Act, 2009 had introduced Safe

Harbour Provisions in order to reduce the uncertainty

faced by the taxpayers in India. The provisions were also

intended to provide clarity and guidance on the quantity

of taxable profits that should be earned in India as per

the arm's length principle. Safe Harbour is a mechanism

under which the tax authorities accept the transfer

prices declared by taxpayers without undertaking

detailed audit, in certain circumstances. Safe harbour

provisions generally intend to confer benefits like

compliance relief, administrative simplicity and certainty

on the taxpayers and tax administrators. While this

helps the tax payers in reducing compliance cost, tax

authorities can focus their limited resources on bigger

and more complex transactions.

T A X E S

TAXATION

This article has been contributed by Tarun Arora, Senior Director, Shuchi Ray, Director, Deloitte Touche Tohmatsu India Pvt. Ltd. and Manmeet Vij,

Senior Manager, Deloitte Haskins & Sells. Views expressed in the article are those of the authors and not necessarily of CII.

23 AUGUST-SEPTEMBER 2013

Page 25: Economy Matters, August - September 2013

The rules have prescribed different margins for services

viz., software development, ITeS, KPO, contract R&D,

etc. A noteworthy aspect is that service providers

bearing insignificant risk are only eligible to opt for the

rules. The factors mentioned for identification of

taxpayers with 'insignificant risk', inter-alia, includes

performance of economically significant functions,

provisions of funds/capital and ownership of intangibles

by foreign principal, etc. Hence, distinction in mark-up

percentage between various services, presumably on

the basis of high-end vs. low-end nature of activities,

could lead to enhancing disputes on characterisation of

taxpayers.

The mark-up percentages prescribed in the rules may

not meet the taxpayers' expectations (based on

industry average margin trends and prevalent

commercial rates) and opting for the prescribed

margins under the rules may overshadow the expected

benefits. Similarly, the safe harbour interest rate for

loans would range from 11 per cent to 13 per cent

(applying the SBI base rate as on 30 June 2013), which

clearly is on a higher side. Also, the margin provided for

auto components industry, which in particular has been

going through a challenging phase, appears high. Since

several rulings of the Income tax Appellate Tribunals

have accepted lower percentage of mark-up or interest

to be at arm's length, the rates specified in the rules may

not find favour with the taxpayers.

Whilst the step by the CBDT is a positive move, it is

expected that the revenue authorities during audits,

APA/MAP negotiations will not consider the safe harbor

margins. An issuance of a binding circular clarifying that

safe harbour rates should be strictly applied only to

taxpayers who opt for the rules and should not be

generically extended to other assessees (who do not

opt for the rules) would provide a sense of relief to

taxpayers. There is no doubt that the release of the long-

awaited Safe Harbour rules is a step in the right direction

and the certainty and administrative convenience

offered by the rules would be an additional incentive

that will increase the attractiveness of India as an

investment jurisdiction.

Manufacture and export of core and non-core auto

components - Cost plus mark-up of 12 per cent and 8.5

per cent respectively; same as the draft rules

Interest on loans sourced in Indian Rupees extended to

Wholly-Owned non-resident subsidiaries (WOS) - State

Bank of India (SBI) base rate plus 150 basis points for

loans up to INR 50 crores and, SBI base rate plus 300

basis points for loans exceeding INR 50 crores i.e. INR

0.5 billion.

Guarantee fee on explicit corporate guarantees on

behalf of WOS - 2 per cent per annum where the amount

guaranteed does not exceed INR 100 crores i.e. INR 1

billion and 1.75 per cent in case the amount guaranteed

exceeds INR 100 crores and the credit rating of the WOS

is of adequate to highest safety as carried out by an

agency registered with the Securities and Exchange

Board of India.

The issuance of detailed Safe Harbour rules is a welcome

measure. The removal of upper threshold limits for

eligibility of opting for safe harbour rules will give an

opportunity to taxpayers at large to opt for the rules. As

regards the period, application of the rules for five years

(instead of 2 years as in the draft rules) is another

positive development. It is expected that the rules

would help overcome immense potential TP litigation

and create an amicable tax environment.

However, the rules in final form also have certain issues

as were in the draft rules. The rules require the taxpayers

opting for Safe Harbour to comply with the detailed

requirements relating to TP documentation. Such

compulsion would defeat the key benefit of reduced

compliance burden. Once a certain mark-up for a

specified service is acceptable to the tax authorities,

maintaining detailed documentation thereafter may, at

best be of academic importance.

The final rules only cover R&D for software

development and generic pharmaceutical drugs, leaving

out other sectors such as R&D for active pharmaceutical

ingredients, chemicals, agriculture, etc. Further, the

rules only cover loans/guarantee provided by taxpayer

to/for WOS and cover only rupee-sourced loans, thus,

having restricted applicability.

22ECONOMY MATTERS

Draft Safe Harbour Rules – Do They Bridge or Widen the Taxpayer-Exchequer Divide?

The Safe Harbour rules (the rules) were released in draft

form by the Central Board of Direct Taxes (the CBDT) on

14 August 2013. After considering comments from

various stakeholders, the final rules have been issued on

18 September 2013. The rules cover the following

categories/sectors of transactions and prescribe the

below mentioned safe harbour margins/ prices:

Software development and IT-enabled services - Cost

plus mark-up of 20 per cent (provided the value of such

transactions does not exceed INR 500 crores i.e. INR 5

billion); cost plus mark-up of 22 per cent mark in other

cases, i.e. above INR 500 crores; the draft rules had

proposed a threshold limit of INR 100 crores, i e

taxpayers having transactions above INR 100 crores

were not eligible for the Safe Harbour

Knowledge Processes Outsourcing (KPO services) -

Cost plus mark-up of 25 per cent; in the draft rules the

same was proposed as 30 per cent with an upper limit

eligibility threshold of INR 100 crores.

Contract Research & Development (R&D) relating to

software development and generic pharmaceutical

drugs - Cost plus mark-up of 30 per cent and 29 per cent

respectively; same as the margins proposed in the draft

rules

Transfer Pricing (TP) has emerged as one of the key

focal points of high-pitched tax litigation in India.

While outsourcing/captive units have experienced

significant TP adjustments to their profit margins, Indian

parent companies have suffered adjustments on their

intra-group financing arrangements.

The Finance (No. 2) Act, 2009 had introduced Safe

Harbour Provisions in order to reduce the uncertainty

faced by the taxpayers in India. The provisions were also

intended to provide clarity and guidance on the quantity

of taxable profits that should be earned in India as per

the arm's length principle. Safe Harbour is a mechanism

under which the tax authorities accept the transfer

prices declared by taxpayers without undertaking

detailed audit, in certain circumstances. Safe harbour

provisions generally intend to confer benefits like

compliance relief, administrative simplicity and certainty

on the taxpayers and tax administrators. While this

helps the tax payers in reducing compliance cost, tax

authorities can focus their limited resources on bigger

and more complex transactions.

T A X E S

TAXATION

This article has been contributed by Tarun Arora, Senior Director, Shuchi Ray, Director, Deloitte Touche Tohmatsu India Pvt. Ltd. and Manmeet Vij,

Senior Manager, Deloitte Haskins & Sells. Views expressed in the article are those of the authors and not necessarily of CII.

23 AUGUST-SEPTEMBER 2013

Page 26: Economy Matters, August - September 2013

24ECONOMY MATTERS

CORPORATE PERFORMANCE

Industry Under Pressure as Growth Dips Further

The analysis factors in the financial performance during

the first quarter of 2013-14 of a balanced panel of 1664

manufacturing companies (excluding oil and gas

companies) and 1037 service firms extracted from the thAce Equity database as on 29 August 2013.

Growth in net sales on an aggregate basis stood at a

measly 4.8 per cent at the end of first quarter of the

current year, as compared to a healthy 12.2 per cent in

the same quarter a year ago. The growth of net sales for

manufacturing firms moderated sharply to 0.2 per cent

during the quarter as compared to 12.7 per cent in the

same quarter a year ago. Firms in the services sector, on

the other hand, fared somewhat better, with their net

sales growing at a much higher pace of 12.6 per cent as

compared to 11.4 per cent during the comparable time-

period of last year. The low net sales of firms are

reflective of the lack of ample demand in the economy, a

scenario that has been persistent for quite some time

now.

The deepening economic slowdown, rising interest

rates, tight liquidity, declining investments and

depreciating rupee are slowly taking a toll on India Inc's

financial performance with majority of companies

witnessing a decline in net profits for the past few

quarters. The corporate results at the end of first quarter

(April-June) of the current fiscal painted a rather gloomy

picture as the financial performance of Indian

companies deteriorated. A scanty 4.4 per cent GDP

growth in the reporting quarter worsened the cause,

even as the RBI tightened its purse strings in a bid to

stem the downfall in Rupee. While the growth in

expenditure costs stood somewhat curbed, fading

growth of net sales and contraction in PAT added to the

prevalent gloom.

the corresponding period of last year. Interestingly,

growth in interest costs decelerated sharply to 10.0 per

cent in the reporting quarter as against 29.0 per cent in

the same quarter of 2012-13. In a reflection of slowing

production, growth in raw materials cost contracted by

5.7 per cent in the reporting quarter as compared to a

positive growth of 10.5 per cent seen in the same quarter

of last year.

Total expenditure, on an aggregate basis, decelerated to

3.5 per cent in the reporting quarter as against a growth

of 16.5 per cent in the corresponding period of 2012-13.

This came as a breather and fairly cushioned the severe

impact of lower net sales growth during the quarter.

Amongst the various components of total expenditure,

the growth in wages & salaries stood at 14.7 per cent in

the first quarter as compared to 15.1 per cent recorded in

Growth in Net Sales (y-o-y%)

Aggregate Manufacturing Services

FY13Q1 12.2 12.7 11.4

FY13Q2 9.9 8.8 11.8

FY13Q3 7.0 6.5 7.9

FY13Q4 4.5 2.1 9.1

FY14Q1 4.8 0.2 12.6

Source: Ace Equity database & CII calculations

Growth in Net Sales (y-o-y%)

Growth in Expenditure (y-o-y%)

10.5

-5.7

15.114.7

29.0

10.0

FY

13Q

1

FY

13Q

2

FY

13Q

3

FY

13Q

4

FY

14Q

1

FY

13Q

1

FY

13Q

2

FY

13Q

3

FY

13Q

4

FY

14Q

1

FY

13Q

1

FY

13Q

2

FY

13Q

3

FY

13Q

4

FY

14Q

1

Services & Raw Materials Wages & Salaries Interest Payments

Source: Ace Equity database & CII calculations

corresponding quarter of last year.

On an aggregate basis, PAT declined by 5.9 per cent in

the April-June 2013 quarter as compared to a growth of

3.2 per cent in the same quarter of last fiscal. Growth in

operating profits (profits earned from a firm's core

business operations excluding investments and the

effects of depreciation, interest and taxes) on an

aggregate basis saw moderation to 5.1 per cent in the

April-June, 2013 quarter as compared to a growth 11.3

per cent in the first quarter of last year. PAT growth

decelerated at a much faster rate than growth in

operating profits due mainly to high interest rates

prevailing in the economy.

While moderation in growth of expenditure has to some

extent mitigated the impact of the current bout of

economic crisis characterized by falling growth in net

sales, the reduction was not large enough to provide

cushion to the bottom-line of the firms. Consequently,

there was de-growth witnessed in profit-after-tax (PAT)

on an aggregate basis in the first quarter of 2013-14. The

sharpest contraction in PAT growth was seen in

manufacturing sector firms, which saw its PAT declining

by 12.6 per cent in the first quarter of the current fiscal as

compared to a contraction of 14.5 per cent in the same

quarter of last year. For the services sector, PAT growth

moderated to 0.7 per cent in the reporting quarter as

against a growth of 29.3 per cent seen in the

25 AUGUST-SEPTEMBER 2013

Page 27: Economy Matters, August - September 2013

24ECONOMY MATTERS

CORPORATE PERFORMANCE

Industry Under Pressure as Growth Dips Further

The analysis factors in the financial performance during

the first quarter of 2013-14 of a balanced panel of 1664

manufacturing companies (excluding oil and gas

companies) and 1037 service firms extracted from the thAce Equity database as on 29 August 2013.

Growth in net sales on an aggregate basis stood at a

measly 4.8 per cent at the end of first quarter of the

current year, as compared to a healthy 12.2 per cent in

the same quarter a year ago. The growth of net sales for

manufacturing firms moderated sharply to 0.2 per cent

during the quarter as compared to 12.7 per cent in the

same quarter a year ago. Firms in the services sector, on

the other hand, fared somewhat better, with their net

sales growing at a much higher pace of 12.6 per cent as

compared to 11.4 per cent during the comparable time-

period of last year. The low net sales of firms are

reflective of the lack of ample demand in the economy, a

scenario that has been persistent for quite some time

now.

The deepening economic slowdown, rising interest

rates, tight liquidity, declining investments and

depreciating rupee are slowly taking a toll on India Inc's

financial performance with majority of companies

witnessing a decline in net profits for the past few

quarters. The corporate results at the end of first quarter

(April-June) of the current fiscal painted a rather gloomy

picture as the financial performance of Indian

companies deteriorated. A scanty 4.4 per cent GDP

growth in the reporting quarter worsened the cause,

even as the RBI tightened its purse strings in a bid to

stem the downfall in Rupee. While the growth in

expenditure costs stood somewhat curbed, fading

growth of net sales and contraction in PAT added to the

prevalent gloom.

the corresponding period of last year. Interestingly,

growth in interest costs decelerated sharply to 10.0 per

cent in the reporting quarter as against 29.0 per cent in

the same quarter of 2012-13. In a reflection of slowing

production, growth in raw materials cost contracted by

5.7 per cent in the reporting quarter as compared to a

positive growth of 10.5 per cent seen in the same quarter

of last year.

Total expenditure, on an aggregate basis, decelerated to

3.5 per cent in the reporting quarter as against a growth

of 16.5 per cent in the corresponding period of 2012-13.

This came as a breather and fairly cushioned the severe

impact of lower net sales growth during the quarter.

Amongst the various components of total expenditure,

the growth in wages & salaries stood at 14.7 per cent in

the first quarter as compared to 15.1 per cent recorded in

Growth in Net Sales (y-o-y%)

Aggregate Manufacturing Services

FY13Q1 12.2 12.7 11.4

FY13Q2 9.9 8.8 11.8

FY13Q3 7.0 6.5 7.9

FY13Q4 4.5 2.1 9.1

FY14Q1 4.8 0.2 12.6

Source: Ace Equity database & CII calculations

Growth in Net Sales (y-o-y%)

Growth in Expenditure (y-o-y%)

10.5

-5.7

15.114.7

29.0

10.0

FY

13Q

1

FY

13Q

2

FY

13Q

3

FY

13Q

4

FY

14Q

1

FY

13Q

1

FY

13Q

2

FY

13Q

3

FY

13Q

4

FY

14Q

1

FY

13Q

1

FY

13Q

2

FY

13Q

3

FY

13Q

4

FY

14Q

1

Services & Raw Materials Wages & Salaries Interest Payments

Source: Ace Equity database & CII calculations

corresponding quarter of last year.

On an aggregate basis, PAT declined by 5.9 per cent in

the April-June 2013 quarter as compared to a growth of

3.2 per cent in the same quarter of last fiscal. Growth in

operating profits (profits earned from a firm's core

business operations excluding investments and the

effects of depreciation, interest and taxes) on an

aggregate basis saw moderation to 5.1 per cent in the

April-June, 2013 quarter as compared to a growth 11.3

per cent in the first quarter of last year. PAT growth

decelerated at a much faster rate than growth in

operating profits due mainly to high interest rates

prevailing in the economy.

While moderation in growth of expenditure has to some

extent mitigated the impact of the current bout of

economic crisis characterized by falling growth in net

sales, the reduction was not large enough to provide

cushion to the bottom-line of the firms. Consequently,

there was de-growth witnessed in profit-after-tax (PAT)

on an aggregate basis in the first quarter of 2013-14. The

sharpest contraction in PAT growth was seen in

manufacturing sector firms, which saw its PAT declining

by 12.6 per cent in the first quarter of the current fiscal as

compared to a contraction of 14.5 per cent in the same

quarter of last year. For the services sector, PAT growth

moderated to 0.7 per cent in the reporting quarter as

against a growth of 29.3 per cent seen in the

25 AUGUST-SEPTEMBER 2013

Page 28: Economy Matters, August - September 2013

26ECONOMY MATTERS

Growth in PAT (y-o-y%)

Manufacturing Services Aggregate Manufacturing Services Aggregate

FY13Q1 FY13Q2 FY13Q3 FY13Q4 FY14Q1

Growth in PBDIT (y-o-y%)

Source: Ace Equity database & CII calculations

FY13Q1 FY13Q2 FY13Q3 FY13Q4 FY14Q1

3.2

20.1

9.9

-5.9

40

20

0

-20-12.6

11.3 13.3

6.0

0.15.1

and thus also on aggregate basis in the reporting

quarter. The fall in margins mirrored the sharp decline in

profitability that the firms have had to confront in the

reporting quarter.

Our analysis shows that both net margin (ratio of PAT

and net sales) and gross margins (ratio of PBDIT and net

sales) fell across manufacturing as well as service firms,

Gross Margin Net Margin

Source: Ace Equity database & CII calculations

Manufacturing Services Aggregate

20.3 20.619.4 19.9

20.4

FY13Q1 FY13Q2 FY13Q3 FY13Q4 FY14Q1

Manufacturing Services Aggregate

FY13Q1 FY13Q2 FY13Q3 FY13Q4 FY14Q1

8.4 9.17.9 8.1 7.6

some moderation in expenditure costs. Net sales and

PAT growth, however, continue to remain a sore point,

indicating that there is still a long way to go before

revival in aggregate demand gains traction.

Overall, the analysis of the results obtained so far reveals

that there seems be no news to cheer for the India Inc

amidst this weak macroeconomic scenario, except for

Capital Goods

Production Trend in Capital Goods

Sector

Analyzing the yearly performance of the capital goods

segment, below table shows a sharp moderation in

growth of the sector since 2007-08 (July to June). Owing

to the global financial crisis, the growth in capital goods

sector plunged from 48 per cent in 2007-08 to 4 per cent

in 2008-09. With the quick turnaround of the economy,

growth prospects for the sector improved in the next

two years. However, the sector went in for a sharp

contraction in 2011-12 (-9 per cent) and 2012-13 (-2.2 per

cent). The negative growth recorded by the sector over

the last two years is a serious concern and its revival is

crucial for the economy to resume its high growth

trajectory.

It is interesting to note that all sub-sectors of the capital

goods segment have witnessed rapid deterioration in

growth performance over the last two years. Machinery

& equipment, which is an important indicator of the

health of the other sectors of economy, has recorded

contraction over two consecutive years. Given that it

plays a crucial role in up scaling the pace of the economy,

directly and indirectly, every effort should be made to

reverse the downtrend in this sector.

Introduction

apital goods sector is of strategic importance for

the Indian economy. Being large and diverse in

nature and playing a critical role in production process,

the sector has high multiplier effect on the overall

growth of the economy. The sector not only determines

the pace of economic expansion but also gets

influenced by the same. As the demand for the sector's

output is derived from the demand for other sectors of

the economy, its own performance provides an

important clue to the future. By analyzing the recent

trends in production and imports of lead components of

capital goods sector, one can, therefore, explain the

growth prospects of related sectors of the economy and

also comment on the need for policy intervention, if any.

While the performance of capital goods sector is

generally considered as a barometer of the growth

prospects of the economy going forward, it also helps to

assess the need for encouraging efficiency and

production of the sector to encourage demand from its

end users.

C

SECTOR IN FOCUS

27 AUGUST-SEPTEMBER 2013

30

15

0

-15

40

20

0

20

10

0

Page 29: Economy Matters, August - September 2013

26ECONOMY MATTERS

Growth in PAT (y-o-y%)

Manufacturing Services Aggregate Manufacturing Services Aggregate

FY13Q1 FY13Q2 FY13Q3 FY13Q4 FY14Q1

Growth in PBDIT (y-o-y%)

Source: Ace Equity database & CII calculations

FY13Q1 FY13Q2 FY13Q3 FY13Q4 FY14Q1

3.2

20.1

9.9

-5.9

40

20

0

-20-12.6

11.3 13.3

6.0

0.15.1

and thus also on aggregate basis in the reporting

quarter. The fall in margins mirrored the sharp decline in

profitability that the firms have had to confront in the

reporting quarter.

Our analysis shows that both net margin (ratio of PAT

and net sales) and gross margins (ratio of PBDIT and net

sales) fell across manufacturing as well as service firms,

Gross Margin Net Margin

Source: Ace Equity database & CII calculations

Manufacturing Services Aggregate

20.3 20.619.4 19.9

20.4

FY13Q1 FY13Q2 FY13Q3 FY13Q4 FY14Q1

Manufacturing Services Aggregate

FY13Q1 FY13Q2 FY13Q3 FY13Q4 FY14Q1

8.4 9.17.9 8.1 7.6

some moderation in expenditure costs. Net sales and

PAT growth, however, continue to remain a sore point,

indicating that there is still a long way to go before

revival in aggregate demand gains traction.

Overall, the analysis of the results obtained so far reveals

that there seems be no news to cheer for the India Inc

amidst this weak macroeconomic scenario, except for

Capital Goods

Production Trend in Capital Goods

Sector

Analyzing the yearly performance of the capital goods

segment, below table shows a sharp moderation in

growth of the sector since 2007-08 (July to June). Owing

to the global financial crisis, the growth in capital goods

sector plunged from 48 per cent in 2007-08 to 4 per cent

in 2008-09. With the quick turnaround of the economy,

growth prospects for the sector improved in the next

two years. However, the sector went in for a sharp

contraction in 2011-12 (-9 per cent) and 2012-13 (-2.2 per

cent). The negative growth recorded by the sector over

the last two years is a serious concern and its revival is

crucial for the economy to resume its high growth

trajectory.

It is interesting to note that all sub-sectors of the capital

goods segment have witnessed rapid deterioration in

growth performance over the last two years. Machinery

& equipment, which is an important indicator of the

health of the other sectors of economy, has recorded

contraction over two consecutive years. Given that it

plays a crucial role in up scaling the pace of the economy,

directly and indirectly, every effort should be made to

reverse the downtrend in this sector.

Introduction

apital goods sector is of strategic importance for

the Indian economy. Being large and diverse in

nature and playing a critical role in production process,

the sector has high multiplier effect on the overall

growth of the economy. The sector not only determines

the pace of economic expansion but also gets

influenced by the same. As the demand for the sector's

output is derived from the demand for other sectors of

the economy, its own performance provides an

important clue to the future. By analyzing the recent

trends in production and imports of lead components of

capital goods sector, one can, therefore, explain the

growth prospects of related sectors of the economy and

also comment on the need for policy intervention, if any.

While the performance of capital goods sector is

generally considered as a barometer of the growth

prospects of the economy going forward, it also helps to

assess the need for encouraging efficiency and

production of the sector to encourage demand from its

end users.

C

SECTOR IN FOCUS

27 AUGUST-SEPTEMBER 2013

30

15

0

-15

40

20

0

20

10

0

Page 30: Economy Matters, August - September 2013

28ECONOMY MATTERS

automobile sector in slow track. While efforts can be

made to revive the automobile production by direct

policy intervention, it would also be helpful to enhance

the cost competitiveness of "other transport

equipment" to attract additional demand from its end

users.

Similarly, sharp growth deterioration witnessed by

'other transport equipment' signifies the downtrend in

the automobile sector, another engine of growth for the

economy. Slowing income growth, rising fuel prices,

uncertainty relating to growth recovery and high credit

cost have been among the major factors keeping the

Year Machinery & Office, accounting & Electrical machinery Radio, TV and Other Capital

equipment n.e.c. computing machinery & apparatus n.e.c. communication transport Goods

equipment & equipment (Aggregate)

apparatus

2007-08 19.6 6.3 183.8 87.5 -0.7 48.1

2008-09 -8.4 -11.3 33.0 15.7 4.9 4.1

2009-10 25.0 5.2 -0.6 18.4 31.4 10.4

2010-11 20.3 9.3 11.2 7.4 22.0 15.0

2011-12 -1.9 -3.8 -30.3 10.5 9.0 -9.1

2012-13 -7.4 -17.2 20.3 -2.9 1.1 -2.2

Average 7.9 -1.9 36.2 22.8 11.3 11.1

Source: CSO

Average Annual Growth in IIP of Capital Goods Sector (July to June, y-o-y%)

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

corresponding IIP for capital goods since June 2007.

Production growth in capital goods sector, which

constitutes less than 9 per cent share in overall weights

in IIP, has moved in tandem with the overall growth of

manufacturing index. Being the derived nature of

demand for capital goods, its growth trend, in general,

has preceded that of manufactured goods. In below

figure, it can be seen that production growth of capital

goods sector assumed a sharp downward spiral during

June 2007 to Nov 2009, and the growth in

manufacturing sector followed suit with a time lag. After

this, the capital goods sector exhibited a vigorous

recovery till June 2011, albeit with a large volatility,

coinciding with high growth performance of the

manufacturing sector. Capital goods sector since July

2011 has largely stayed in negative zones, bringing to halt

the expansion in manufacturing output.

Sharp moderation in growth of 'Radio, TV and

Communication equipment & apparatus' over the last

two years is again the result of economic slowdown led

by fall in demand. The fate of the sector largely depends

upon the measures that could help in revival of demand

for durables. The negative growth of 'office, accounting

& commuting machinery' sector over the last two years

is indicative of slowing business activities, and could

mirror declining job prospects as well.

Interrelationship between Capital

Goods and Manufacturing Sectors

The production performance of capital goods sector is

directly linked to the growth performance of the

manufacturing sector. Close relationship between the

two sectors of the economy is discernible from the

monthly Index of Industrial Production (IIP) for

especially true for the period of 2000s, when

manufacturing sector recorded robust performance,

supported by the elevated growth of capital imports.

This is where there is a scope for domestic capital goods

sector to fill the gap.

Showing large dependence on imports of capital goods,

the growth in manufacturing output has also moved

closely with the growth in imports of capital goods (see

below figure). Whenever there was high growth

registered by the manufacturing sector, it was backed

by large imports of capital goods and vice versa. This is

Monthly Growth in Capital Goods and Manufacturing IIP since June 2007

70

56

42

28

14

0

-14

-28

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Manufacturing Capital goodsSource: CSO

50

40

30

20

10

0

-10

-20

-30

-40

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

Manf. Output Imports of Capital Goods

Yearly Growth in Capital Goods Imports and Manufacturing Output since 1989-90 (%)

Source: CSO

billion in 2001 to US$79 billion in 2012. Even as the

domestic production of capital goods sector has

witnessed contraction in the last two years, imports of

capital goods managed to maintain growth momentum

and grew by an average of 12 per cent per year in the last

two years. Relatively low protection against imports and

growing pressure on the part of exporters to reduce

prices in the wake of global slowdown could be among

Trend in Imports of Capital Goods

In keeping with the pace of overall economic growth

and lack of development of domestic capital goods

sector, the imports of capital goods have witnessed

sharp increase over the last decade or so, supported by a

relatively low rate of customs duty in the range of 0.0-7.5

per cent. The imports jumped up by 10 times from US$7.9

29 AUGUST-SEPTEMBER 2013

Page 31: Economy Matters, August - September 2013

28ECONOMY MATTERS

automobile sector in slow track. While efforts can be

made to revive the automobile production by direct

policy intervention, it would also be helpful to enhance

the cost competitiveness of "other transport

equipment" to attract additional demand from its end

users.

Similarly, sharp growth deterioration witnessed by

'other transport equipment' signifies the downtrend in

the automobile sector, another engine of growth for the

economy. Slowing income growth, rising fuel prices,

uncertainty relating to growth recovery and high credit

cost have been among the major factors keeping the

Year Machinery & Office, accounting & Electrical machinery Radio, TV and Other Capital

equipment n.e.c. computing machinery & apparatus n.e.c. communication transport Goods

equipment & equipment (Aggregate)

apparatus

2007-08 19.6 6.3 183.8 87.5 -0.7 48.1

2008-09 -8.4 -11.3 33.0 15.7 4.9 4.1

2009-10 25.0 5.2 -0.6 18.4 31.4 10.4

2010-11 20.3 9.3 11.2 7.4 22.0 15.0

2011-12 -1.9 -3.8 -30.3 10.5 9.0 -9.1

2012-13 -7.4 -17.2 20.3 -2.9 1.1 -2.2

Average 7.9 -1.9 36.2 22.8 11.3 11.1

Source: CSO

Average Annual Growth in IIP of Capital Goods Sector (July to June, y-o-y%)

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

corresponding IIP for capital goods since June 2007.

Production growth in capital goods sector, which

constitutes less than 9 per cent share in overall weights

in IIP, has moved in tandem with the overall growth of

manufacturing index. Being the derived nature of

demand for capital goods, its growth trend, in general,

has preceded that of manufactured goods. In below

figure, it can be seen that production growth of capital

goods sector assumed a sharp downward spiral during

June 2007 to Nov 2009, and the growth in

manufacturing sector followed suit with a time lag. After

this, the capital goods sector exhibited a vigorous

recovery till June 2011, albeit with a large volatility,

coinciding with high growth performance of the

manufacturing sector. Capital goods sector since July

2011 has largely stayed in negative zones, bringing to halt

the expansion in manufacturing output.

Sharp moderation in growth of 'Radio, TV and

Communication equipment & apparatus' over the last

two years is again the result of economic slowdown led

by fall in demand. The fate of the sector largely depends

upon the measures that could help in revival of demand

for durables. The negative growth of 'office, accounting

& commuting machinery' sector over the last two years

is indicative of slowing business activities, and could

mirror declining job prospects as well.

Interrelationship between Capital

Goods and Manufacturing Sectors

The production performance of capital goods sector is

directly linked to the growth performance of the

manufacturing sector. Close relationship between the

two sectors of the economy is discernible from the

monthly Index of Industrial Production (IIP) for

especially true for the period of 2000s, when

manufacturing sector recorded robust performance,

supported by the elevated growth of capital imports.

This is where there is a scope for domestic capital goods

sector to fill the gap.

Showing large dependence on imports of capital goods,

the growth in manufacturing output has also moved

closely with the growth in imports of capital goods (see

below figure). Whenever there was high growth

registered by the manufacturing sector, it was backed

by large imports of capital goods and vice versa. This is

Monthly Growth in Capital Goods and Manufacturing IIP since June 2007

70

56

42

28

14

0

-14

-28

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Manufacturing Capital goodsSource: CSO

50

40

30

20

10

0

-10

-20

-30

-40

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

Manf. Output Imports of Capital Goods

Yearly Growth in Capital Goods Imports and Manufacturing Output since 1989-90 (%)

Source: CSO

billion in 2001 to US$79 billion in 2012. Even as the

domestic production of capital goods sector has

witnessed contraction in the last two years, imports of

capital goods managed to maintain growth momentum

and grew by an average of 12 per cent per year in the last

two years. Relatively low protection against imports and

growing pressure on the part of exporters to reduce

prices in the wake of global slowdown could be among

Trend in Imports of Capital Goods

In keeping with the pace of overall economic growth

and lack of development of domestic capital goods

sector, the imports of capital goods have witnessed

sharp increase over the last decade or so, supported by a

relatively low rate of customs duty in the range of 0.0-7.5

per cent. The imports jumped up by 10 times from US$7.9

29 AUGUST-SEPTEMBER 2013

Page 32: Economy Matters, August - September 2013

30ECONOMY MATTERS

value of rupee against US dollar plunges to record new

lows on regular basis. Further, the import duty could be

raised to the WTO base rate to regulate unnecessary

imports like has been done for gold.

the major reasons that allowed imports to maintain its

momentum. In the wake of widening current account

deficit, when the government and RBI are making all out

efforts to curb avoidable imports, huge import of capital

goods is causing a drain on foreign reserves, even as the

these two items together constitute less than 22 per

cent of total imports, overall expansion in imports of

capital goods continue to remain healthy. Three largest

sub-sectors of capital goods imports - electrical

equipment, telecommunication equipments, and

industrial equipments - constituting half of the total

imports of capital goods in 2012 - saw imports growing in

double-digits, which could mean good prospects of

growth in end users of these sectors.

Interestingly, majority of the capital goods sub-sectors

have shown consistent and healthy growth in imports in

recent years; even over the last two years when

economic growth in the country moderated

substantially (see below table). The only sectors

exhibiting poor growth performance in imports since

2007 are Railway/Tramway equipment (-5.7 per cent),

and industry special machine (3.8 per cent). Given that

India's sources of capital goods imports are

concentrated in just a few countries. This is evident from

the fact that just the top ten sources contributed nearly

80 per cent of capital goods imports in 2012-13; of these,

the top 5 countries - China, Germany, Japan, US, and

Korea Rep. - accounted for 63 per cent of the total

imports of capital goods. China is by far the largest

exporter of capital goods to India.

India is heavily dependent upon the imports of capital

goods for meeting the domestic demand. This is evident

from the fact that imports constituted 29 per cent of

domestic demand for capital goods in 2010-11. Earth

moving equipment, machine tools, metallurgical

machinery and textiles machinery are sub-sectors that

are particularly weak in self reliance with 48 to 87 per

cent demand being met by imports.

7.9 10.314.7

19.8

28.2

40.8

47.9

64.658.1

63.8

76.7 79.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Trend in Imports of Capital Goods (US$, billion)

Source: UN Comtrade

Year Power Industry Metal Industrial Office/data Telecom Electrical Road Railway/ Total generating special working equipment proc ms etc equipment vehicles tramway Capitalequipment machine machinery machines equipment equipment Goods

2007 3.1 6.9 2.5 6.8 4.2 9.9 6.5 1.9 6.1 47.9

2008 4.0 8.3 3.5 9.2 4.5 7.3 7.6 3.2 17.2 64.6

2009 3.9 6.8 2.5 7.7 4.3 11.6 9.9 2.7 8.7 58.1

2010 4.9 7.1 2.8 9.5 5.3 13.6 9.4 4.0 7.2 63.8

2011 6.1 8.9 3.6 12.2 6.8 14.6 14.1 5.0 5.2 76.7

2012 6.0 8.5 4.0 12.2 7.6 13.5 13.7 5.0 8.6 79.0

Avg 14.8 3.8 7.8 12.1 13.4 11.5 17.2 20.6 -5.7 9.3AnnualGrowth(%)

Source: UN Comtrade

Trend in Imports of Major Components of Capital Goods Sector (US$, billion)

Electrical equipment

17.3%

Telecomms etc equipment

17.1%

Industrial equipment nes

15.4%

Railway/tramway equipmnt 10.8%

Industry special

machine10.8%

Office/dat proc machines

9.6%

Metalworking machinery 5.1%

Road vehicles6.3%

Power generating equipmt 7.5%

Sectoral Share of Capital Goods Imports (2012)

Source: UN Comtrade

China31%

Germany9%

Japan 8%United States8%

Korea, Rep. 7%

Singapore 4%

Italy 3%

Malaysia 3%

Thailand 3%

France 3%

Others21%

Composition of Imports of Capital Goods from Top-10 Countries (2012)

Source: UN Comtrade

31 AUGUST-SEPTEMBER 2013

Page 33: Economy Matters, August - September 2013

30ECONOMY MATTERS

value of rupee against US dollar plunges to record new

lows on regular basis. Further, the import duty could be

raised to the WTO base rate to regulate unnecessary

imports like has been done for gold.

the major reasons that allowed imports to maintain its

momentum. In the wake of widening current account

deficit, when the government and RBI are making all out

efforts to curb avoidable imports, huge import of capital

goods is causing a drain on foreign reserves, even as the

these two items together constitute less than 22 per

cent of total imports, overall expansion in imports of

capital goods continue to remain healthy. Three largest

sub-sectors of capital goods imports - electrical

equipment, telecommunication equipments, and

industrial equipments - constituting half of the total

imports of capital goods in 2012 - saw imports growing in

double-digits, which could mean good prospects of

growth in end users of these sectors.

Interestingly, majority of the capital goods sub-sectors

have shown consistent and healthy growth in imports in

recent years; even over the last two years when

economic growth in the country moderated

substantially (see below table). The only sectors

exhibiting poor growth performance in imports since

2007 are Railway/Tramway equipment (-5.7 per cent),

and industry special machine (3.8 per cent). Given that

India's sources of capital goods imports are

concentrated in just a few countries. This is evident from

the fact that just the top ten sources contributed nearly

80 per cent of capital goods imports in 2012-13; of these,

the top 5 countries - China, Germany, Japan, US, and

Korea Rep. - accounted for 63 per cent of the total

imports of capital goods. China is by far the largest

exporter of capital goods to India.

India is heavily dependent upon the imports of capital

goods for meeting the domestic demand. This is evident

from the fact that imports constituted 29 per cent of

domestic demand for capital goods in 2010-11. Earth

moving equipment, machine tools, metallurgical

machinery and textiles machinery are sub-sectors that

are particularly weak in self reliance with 48 to 87 per

cent demand being met by imports.

7.9 10.314.7

19.8

28.2

40.8

47.9

64.658.1

63.8

76.7 79.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Trend in Imports of Capital Goods (US$, billion)

Source: UN Comtrade

Year Power Industry Metal Industrial Office/data Telecom Electrical Road Railway/ Total generating special working equipment proc ms etc equipment vehicles tramway Capitalequipment machine machinery machines equipment equipment Goods

2007 3.1 6.9 2.5 6.8 4.2 9.9 6.5 1.9 6.1 47.9

2008 4.0 8.3 3.5 9.2 4.5 7.3 7.6 3.2 17.2 64.6

2009 3.9 6.8 2.5 7.7 4.3 11.6 9.9 2.7 8.7 58.1

2010 4.9 7.1 2.8 9.5 5.3 13.6 9.4 4.0 7.2 63.8

2011 6.1 8.9 3.6 12.2 6.8 14.6 14.1 5.0 5.2 76.7

2012 6.0 8.5 4.0 12.2 7.6 13.5 13.7 5.0 8.6 79.0

Avg 14.8 3.8 7.8 12.1 13.4 11.5 17.2 20.6 -5.7 9.3AnnualGrowth(%)

Source: UN Comtrade

Trend in Imports of Major Components of Capital Goods Sector (US$, billion)

Electrical equipment

17.3%

Telecomms etc equipment

17.1%

Industrial equipment nes

15.4%

Railway/tramway equipmnt 10.8%

Industry special

machine10.8%

Office/dat proc machines

9.6%

Metalworking machinery 5.1%

Road vehicles6.3%

Power generating equipmt 7.5%

Sectoral Share of Capital Goods Imports (2012)

Source: UN Comtrade

China31%

Germany9%

Japan 8%United States8%

Korea, Rep. 7%

Singapore 4%

Italy 3%

Malaysia 3%

Thailand 3%

France 3%

Others21%

Composition of Imports of Capital Goods from Top-10 Countries (2012)

Source: UN Comtrade

31 AUGUST-SEPTEMBER 2013

Page 34: Economy Matters, August - September 2013

32ECONOMY MATTERS

This raises a pertinent question: why should we not

make attempts to cut imports of capital goods by

encouraging its domestic production, which would not

only help in saving foreign exchange but also create

much needed value addition and employment within

the economy. This is especially critical in the context of

sharp eroding value of rupee against the US dollar which

is going to impact the imports of capital goods

adversely. In order to ensure the sector's progressive

development and to drive it to the next level of growth,

there are numbers of measures that need to be taken,

as mentioned in the following section.

Measures to Boost Domestic Capital

Goods Sector

o Leverage domestic demand - To leverage large

domestic demand that exists in India, there is a need

for developing significant collaboration between

users and producers of capital goods sector.

o Harmonize tax, duty structures, and FTAs - Indian

capital goods manufacturers are affected by current

duty structure that has created an unequal playing

field between domestically manufactured goods

and imported goods. Further, in certain cases, Free

Trade Agreements (FTAs) are also being exploited to

the disadvantage of domestic capital goods

manufacturers. Exports from countries such as China

are routed through these FTA countries to secure

greater advantage over local manufacturers. There

is, therefore, a need harmonize tax and duty

structure and ensure that FTAs don't inflict injuries to

the domestic capital goods sector.

o Addressing the issue of inverted duty structure - In

the current duty structure for intermediate and

finished goods, there are certain anomalies, which at

times, make the domestic capital goods costlier. At

the same time, import duty on finished goods turns

out to be lower in many instances, thereby creating

an advantage for imports over domestic production.

Such cases exist in various capital goods segments,

calling for urgent policy attention.

o Restricting imports of second hand machinery -

There is a need to curb the large imports of second

hand machinery in several sectors in India, including

machine tools and textile machinery. Policy needs to

be shaped to limit import of second hand equipment

to provide impetus to local manufacturing.

o Bridging the technology gap and increasing the

depth of capabilities of domestic capital goods

manufacturers - Indian capital goods sector needs to

plan and invest in developing the "next generation"

products in order to shorten the prevailing

technology gap between domestic manufacturers

and foreign players.

Imports Domestic

Split of Demand between Imports and Domestic Production (2010-11)

thSource: Report of the Working Group on Capital Goods & Engineering Sector for the 12 Five Year Plan, October 2011

9%

24%

26%

31%

35%

48%

51%

71%

87%

29%

91%

76%

74%

69%

65%

52%

49%

29%

13%

71%

Process plant equipment

Engineering Goods

Heavy Electrical Equipment

Dies, Moulds and Tools

Plastic Machinery

Textile Machinery

Earth Moving Equipment

Machine Tools

Metallurgical Machinery

Overall

Odemand met by imports

ver 50 per cent

Conclusion

The negative growth recorded by the capital goods sector over the last two years is a matter of concern. To blame

the economic slowdown alone for the same would be incorrect as the imports of capital goods in the country have

continued to remain buoyant. Poor performance, therefore, has much to do with the low cost competitiveness of

the sector, which has magnified in the face of the economic slowdown. While revival of manufacturing growth is

critical for capital goods sector, its healthy growth performance too can help the revival process. This is especially

true in the backdrop of the sharp erosion in value of rupee against the US dollar, which is going to impact the

imports of capital goods in the country adversely, besides adding to the problem of current account deficit.

To make the domestic capital goods sector competitive, it is critical that we provide the right mix of fiscal

incentives, infrastructure and skilled personnel and develop domestic capabilities across the value chain in the

sector. Measures such as rationalizing the local tax structure, reducing the cost of credit, time bound fiscal

incentives, putting check on avoidable imports of second hand machinery, addressing the issue of inverted duty

structure, and facilitating skill development facilities for a competent workforce would go a long way in helping

the sector.

33 AUGUST-SEPTEMBER 2013

Global Taxation Summit 2013

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

thSummit 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 sponsorship opportunities, please contact:

Page 35: Economy Matters, August - September 2013

32ECONOMY MATTERS

This raises a pertinent question: why should we not

make attempts to cut imports of capital goods by

encouraging its domestic production, which would not

only help in saving foreign exchange but also create

much needed value addition and employment within

the economy. This is especially critical in the context of

sharp eroding value of rupee against the US dollar which

is going to impact the imports of capital goods

adversely. In order to ensure the sector's progressive

development and to drive it to the next level of growth,

there are numbers of measures that need to be taken,

as mentioned in the following section.

Measures to Boost Domestic Capital

Goods Sector

o Leverage domestic demand - To leverage large

domestic demand that exists in India, there is a need

for developing significant collaboration between

users and producers of capital goods sector.

o Harmonize tax, duty structures, and FTAs - Indian

capital goods manufacturers are affected by current

duty structure that has created an unequal playing

field between domestically manufactured goods

and imported goods. Further, in certain cases, Free

Trade Agreements (FTAs) are also being exploited to

the disadvantage of domestic capital goods

manufacturers. Exports from countries such as China

are routed through these FTA countries to secure

greater advantage over local manufacturers. There

is, therefore, a need harmonize tax and duty

structure and ensure that FTAs don't inflict injuries to

the domestic capital goods sector.

o Addressing the issue of inverted duty structure - In

the current duty structure for intermediate and

finished goods, there are certain anomalies, which at

times, make the domestic capital goods costlier. At

the same time, import duty on finished goods turns

out to be lower in many instances, thereby creating

an advantage for imports over domestic production.

Such cases exist in various capital goods segments,

calling for urgent policy attention.

o Restricting imports of second hand machinery -

There is a need to curb the large imports of second

hand machinery in several sectors in India, including

machine tools and textile machinery. Policy needs to

be shaped to limit import of second hand equipment

to provide impetus to local manufacturing.

o Bridging the technology gap and increasing the

depth of capabilities of domestic capital goods

manufacturers - Indian capital goods sector needs to

plan and invest in developing the "next generation"

products in order to shorten the prevailing

technology gap between domestic manufacturers

and foreign players.

Imports Domestic

Split of Demand between Imports and Domestic Production (2010-11)

thSource: Report of the Working Group on Capital Goods & Engineering Sector for the 12 Five Year Plan, October 2011

9%

24%

26%

31%

35%

48%

51%

71%

87%

29%

91%

76%

74%

69%

65%

52%

49%

29%

13%

71%

Process plant equipment

Engineering Goods

Heavy Electrical Equipment

Dies, Moulds and Tools

Plastic Machinery

Textile Machinery

Earth Moving Equipment

Machine Tools

Metallurgical Machinery

Overall

Odemand met by imports

ver 50 per cent

Conclusion

The negative growth recorded by the capital goods sector over the last two years is a matter of concern. To blame

the economic slowdown alone for the same would be incorrect as the imports of capital goods in the country have

continued to remain buoyant. Poor performance, therefore, has much to do with the low cost competitiveness of

the sector, which has magnified in the face of the economic slowdown. While revival of manufacturing growth is

critical for capital goods sector, its healthy growth performance too can help the revival process. This is especially

true in the backdrop of the sharp erosion in value of rupee against the US dollar, which is going to impact the

imports of capital goods in the country adversely, besides adding to the problem of current account deficit.

To make the domestic capital goods sector competitive, it is critical that we provide the right mix of fiscal

incentives, infrastructure and skilled personnel and develop domestic capabilities across the value chain in the

sector. Measures such as rationalizing the local tax structure, reducing the cost of credit, time bound fiscal

incentives, putting check on avoidable imports of second hand machinery, addressing the issue of inverted duty

structure, and facilitating skill development facilities for a competent workforce would go a long way in helping

the sector.

33 AUGUST-SEPTEMBER 2013

Global Taxation Summit 2013

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

thSummit 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 sponsorship opportunities, please contact:

Page 36: Economy Matters, August - September 2013

34ECONOMY MATTERS

SPECIAL ARTICLE

Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill, 2013

Over a period of time, land acquisition has emerged

as a critical constraint in India's industrialization,

given pressures on limited land-mass for multiple uses.

In order to remove the impediments to land acquisition,

it is essential that it must take place in a manner that fully

protects the interests of land-owners and also of those

whose livelihoods depend on the land being acquired.

Under our Constitution, land is a State subject but land

acquisition is a Concurrent subject. So far, the basic law

governing the land acquisition process has been the

Land Acquisition Act, 1894. Although it has been

amended from time to time, it is painfully evident that

the basic law has become archaic. Against this backdrop,

review of the outdated Land Acquisition Act of 1894 in

the country could not have come at a more appropriate

time. After passage from both the Houses of the

Parliament, the "Right to Fair Compensation and

Transparency in Land Acquisition, Rehabilitation and

Resettlement Bill, 2013" is currently awaiting the assent

of the President of India and will become a new law

within next three months. In this article we discuss the

key provisions of the new bill and how it would bring

about a change in the existing land acquisition scenario.

Some of the key provisions of the new legislation, which

has been passed by the Parliament on 6 September, 2013

are listed below:

The Bill provides for an expanded definition of public

purpose that includes infrastructure projects,

including: (i) all activities listed by the Government

as infrastructure projects in its notification dated

March 27, 2012, excluding private hospitals, private

educational institutions and private hotels; (ii)

projects related to agriculture, agro-processing,

cold storage facilities; (iii) industrial corridors or

mining activities, national investment and

manufacturing zones as designated in the National

M a n u f a c t u r i n g P o l i c y ; ( i v ) G o v e r n m e n t

administered or Government aided educational and

research institutions; (v) sports, health care,

transport or space program projects; and (vi) any

other infrastructural facilities notified by the Central

Government after tabling the notification in the

Parliament.

Key Provisions

vDefinition of Public Purpose

-Key Provisions of the New Legislation

Further, public purpose also includes acquisition of

land for use by: (a) Public-Private Partnership

Projects (PPPs), where ownership of land continues

to vest with the Government; and (b) private

companies, for the purposes mentioned above.

The new legislation requires the concerned

Government to conduct a Social Impact Analysis

(SIA) prior to every acquisition of land. The SIA has

to be conducted in consultation with the Panchayat

at the village level and at the Municipality or

municipal corporation at the urban level.

Further, the SIA has to be completed within six

months from the date of its commencement and will

take into account, amongst other factors, the social

impact of the project on the overall costs of the

project vis-a-vis the benefits of the project. The SIA

report will be made available in the local language at

the offices of the Panchayat, Municipality as the

case may be.

The SIA will be evaluated by an Expert Group, which

has to look at whether the project serves any public

purpose; or the social costs and adverse social

impacts outweigh the potential benefits. It is

required to submit its recommendation within two

months of its constitution.

The provisions of this Act relating to consent shall

apply when the appropriate Government acquires

land for the following purposes, namely:-

(a) For public private partnership projects, where

the ownership of the land continues to vest with

the Government, for public purpose and

(b) for private companies for public purpose,

provided that in the case of acquisition for- (i)

Private companies, the prior consent of at lest

eighty per cent of affected families; and

(ii) Public Private Partnership projects, the prior

consent of at least seventy per cent of affected

families shall be obtained through a process as

may be prescribed by the appropriate

Government.

The process of obtaining the consent shall be

carried out along with the Social Impact

Analysis (SIA) study.

vSocial Impact Analysis (SIA)

vConsent for Land Acquisition

vCompensation to Land Owners

vRehabilitation & Resettlement (R&R)

Entitlements

As per the new legislation, the market value of the

acquired land shall be based on the (i) market value

specified in the Indian Stamp Act for the registration

of sale deeds; or (ii) average of the top 50 per cent

of all the sale deeds in the similar type of land

situated in the vicinity; whichever is higher. Once the

market value is computed, it shall be multiplied by a

factor (1-2) for rural areas, based on the distance of

the said land from urban areas. Once the total

compensation is arrived at, the Collector shall

impose a 100 per cent Solatium on it for both rural as

well as urban areas. Further, the Collector shall

award an amount at the rate of 12 per cent per

annum on the market value from the period

commencing from date of publication of the SIA till

the date of the award of the Collector or the date of

taking possession of the land, whichever is earlier.

One of the key provisions of the new legislation is

that families owning the land or whose livelihood is

affected as a result of land acquisition shall be

entitled for a specified R&R package, which has

been elaborated in the Schedule II. Affected family

in such cases would include -

(i) A family whose land or other immovable

property has been acquired;

(ii) A family which does not own any land but a

member or members of such family may be

agricultural labourers, tenants including any

form of tenancy or holding of usufruct right,

share-croppers or artisans or who may be

working in the affected area for three years

prior to the acquisition of the land, whose

primary source of livelihood stand affected by

the acquisition of land;

(iii) The Scheduled Tribes and other traditional

forest dwellers that have lost any of their forest

rights recognised under the Scheduled Tribes

and Other Traditional Forest Dwellers

(Recognition of Forest Rights) Act, 2006 due to

acquisition of land;

(iv) Family whose primary source of livelihood for

three years prior to the acquisition of the land is

dependent on forests or water bodies and

35 AUGUST-SEPTEMBER 2013

Page 37: Economy Matters, August - September 2013

34ECONOMY MATTERS

SPECIAL ARTICLE

Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill, 2013

Over a period of time, land acquisition has emerged

as a critical constraint in India's industrialization,

given pressures on limited land-mass for multiple uses.

In order to remove the impediments to land acquisition,

it is essential that it must take place in a manner that fully

protects the interests of land-owners and also of those

whose livelihoods depend on the land being acquired.

Under our Constitution, land is a State subject but land

acquisition is a Concurrent subject. So far, the basic law

governing the land acquisition process has been the

Land Acquisition Act, 1894. Although it has been

amended from time to time, it is painfully evident that

the basic law has become archaic. Against this backdrop,

review of the outdated Land Acquisition Act of 1894 in

the country could not have come at a more appropriate

time. After passage from both the Houses of the

Parliament, the "Right to Fair Compensation and

Transparency in Land Acquisition, Rehabilitation and

Resettlement Bill, 2013" is currently awaiting the assent

of the President of India and will become a new law

within next three months. In this article we discuss the

key provisions of the new bill and how it would bring

about a change in the existing land acquisition scenario.

Some of the key provisions of the new legislation, which

has been passed by the Parliament on 6 September, 2013

are listed below:

The Bill provides for an expanded definition of public

purpose that includes infrastructure projects,

including: (i) all activities listed by the Government

as infrastructure projects in its notification dated

March 27, 2012, excluding private hospitals, private

educational institutions and private hotels; (ii)

projects related to agriculture, agro-processing,

cold storage facilities; (iii) industrial corridors or

mining activities, national investment and

manufacturing zones as designated in the National

M a n u f a c t u r i n g P o l i c y ; ( i v ) G o v e r n m e n t

administered or Government aided educational and

research institutions; (v) sports, health care,

transport or space program projects; and (vi) any

other infrastructural facilities notified by the Central

Government after tabling the notification in the

Parliament.

Key Provisions

vDefinition of Public Purpose

-Key Provisions of the New Legislation

Further, public purpose also includes acquisition of

land for use by: (a) Public-Private Partnership

Projects (PPPs), where ownership of land continues

to vest with the Government; and (b) private

companies, for the purposes mentioned above.

The new legislation requires the concerned

Government to conduct a Social Impact Analysis

(SIA) prior to every acquisition of land. The SIA has

to be conducted in consultation with the Panchayat

at the village level and at the Municipality or

municipal corporation at the urban level.

Further, the SIA has to be completed within six

months from the date of its commencement and will

take into account, amongst other factors, the social

impact of the project on the overall costs of the

project vis-a-vis the benefits of the project. The SIA

report will be made available in the local language at

the offices of the Panchayat, Municipality as the

case may be.

The SIA will be evaluated by an Expert Group, which

has to look at whether the project serves any public

purpose; or the social costs and adverse social

impacts outweigh the potential benefits. It is

required to submit its recommendation within two

months of its constitution.

The provisions of this Act relating to consent shall

apply when the appropriate Government acquires

land for the following purposes, namely:-

(a) For public private partnership projects, where

the ownership of the land continues to vest with

the Government, for public purpose and

(b) for private companies for public purpose,

provided that in the case of acquisition for- (i)

Private companies, the prior consent of at lest

eighty per cent of affected families; and

(ii) Public Private Partnership projects, the prior

consent of at least seventy per cent of affected

families shall be obtained through a process as

may be prescribed by the appropriate

Government.

The process of obtaining the consent shall be

carried out along with the Social Impact

Analysis (SIA) study.

vSocial Impact Analysis (SIA)

vConsent for Land Acquisition

vCompensation to Land Owners

vRehabilitation & Resettlement (R&R)

Entitlements

As per the new legislation, the market value of the

acquired land shall be based on the (i) market value

specified in the Indian Stamp Act for the registration

of sale deeds; or (ii) average of the top 50 per cent

of all the sale deeds in the similar type of land

situated in the vicinity; whichever is higher. Once the

market value is computed, it shall be multiplied by a

factor (1-2) for rural areas, based on the distance of

the said land from urban areas. Once the total

compensation is arrived at, the Collector shall

impose a 100 per cent Solatium on it for both rural as

well as urban areas. Further, the Collector shall

award an amount at the rate of 12 per cent per

annum on the market value from the period

commencing from date of publication of the SIA till

the date of the award of the Collector or the date of

taking possession of the land, whichever is earlier.

One of the key provisions of the new legislation is

that families owning the land or whose livelihood is

affected as a result of land acquisition shall be

entitled for a specified R&R package, which has

been elaborated in the Schedule II. Affected family

in such cases would include -

(i) A family whose land or other immovable

property has been acquired;

(ii) A family which does not own any land but a

member or members of such family may be

agricultural labourers, tenants including any

form of tenancy or holding of usufruct right,

share-croppers or artisans or who may be

working in the affected area for three years

prior to the acquisition of the land, whose

primary source of livelihood stand affected by

the acquisition of land;

(iii) The Scheduled Tribes and other traditional

forest dwellers that have lost any of their forest

rights recognised under the Scheduled Tribes

and Other Traditional Forest Dwellers

(Recognition of Forest Rights) Act, 2006 due to

acquisition of land;

(iv) Family whose primary source of livelihood for

three years prior to the acquisition of the land is

dependent on forests or water bodies and

35 AUGUST-SEPTEMBER 2013

Page 38: Economy Matters, August - September 2013

36ECONOMY MATTERS

vAdditional Compensation to Original land

Owner

vProcess of Land Acquisition

vReturn of Unutilized Land

vAcquisition of Irrigated Multi Cropped

Land

vLeasing of Land

Bill stipulates that 40 per cent of appreciated land

value (profit) should be shared with original land

owners in cases where - Any land more than the

threshold stipulated by the State Government

which has been purchased through private

negotiations on or after 5 September 2011 and

acquired by the Government within three (3) years

of commencement of this Bill; and whenever the

ownership of any land acquired under this Act is

transferred to any person for consideration,

without any development having taken place on

such land in proportion to the value at which the

land was acquired within a period of 5 years from the

date of acquisition. For both the cases, benefit shall

accrue only on the first sale or transfer that occurs

after the conclusion of the acquisition proceedings.

The entire process of land acquisition, starting from

Social Impact Analysis (SIA) to possession of land by

the concerned Collector (after ensuring full

payment of compensation as well as rehabilitation

and resettlement entitlements are paid or tendered

to the entitled persons) would take a minimum time

of 56 months (see Table 1).

The New Bill stipulates that any acquired land, if not

used for 5 years should be returned to owner or to

the State Land Bank in case the land owner does not

return the original compensation, as the case may

be.

The new legislation stipulates certain limits on

acquisition of Multi-Cropped Land to be determined

by the appropriate Government considering the

relevant State specific factors and circumstances.

The new legislation permits the State Government

to exercise the option of taking the land on lease

instead of acquiring the land.

includes gatherers of forest produce, hunters,

fisher folk and boatmen and such livelihood is

affected due to acquisition of land;

(v) A member of the family who has been assigned

land by the State Government or the Central

Government under any of its schemes and such

land is under acquisition;

(vi) A family residing on any land in the urban areas

for preceding three years or more prior to the

acquisition of the land or whose primary source

of livelihood for three years prior to the

acquisition of the land is affected by the

acquisition of such land;

The Bill provides that R&R will be mandatory in case

of private purchase of land above a certain

threshold, which shall be determined by individual

State Governments after considering the relevant

state specific factors. Further, it is also stipulated

that it is mandatory to file an application with the

concerned Collector before acquisition of such land,

notifying him of - (a) intent to purchase; (b) purpose

for which such purchase is being made; and (c)

particulars of lands to be purchased.

No land use change shall be permitted in such cases

if rehabilitation and resettlement is not complied

with in full.

The proposed Bill has a provision of Retrospective in

cases where - (i) notification has been issued but no

award under Section 11 of the L.A. Act 1894 has been

made; (ii) an award under Section 11 on the L.A. Act

of 1894 has been made 5 years or more prior to the

commencement of this New Bill but the physical

possession of the land has not been taken or the

compensation has not been paid; and (iii) more than

50 per cent of land owners have not accepted the

compensation.

vResettlement & Rehabilitation (R&R) in

case of Private Purchase of Land

vRetrospective Applicability of the New

Bill

37 AUGUST-SEPTEMBER 2013

Q. Do you think the proposed Bill will raise the cost of

acquiring land? If yes, by how much?

Q. Apart from the cost, what is industry's view on the

process of land acquisition as stipulated in the new

Bill?

A. As per the proposed provisions in the new Bill, CII

estimates predict that cost of land acquisition in the

country is likely to increase by 3-3.5 times.

At a time when economy is trying to recover from the

slowdown and National Manufacturing Policy (NMP)

has set an ambitious target of creating 100 million

jobs by 2025, enhanced cost of land acquisition could

severely affect the viability of industrial projects

across the board and erode competitiveness of Indian

manufacturing sector.

We in CII had suggested that since the proposed

formula in the new Bill to calculate market value of

the land already has 'Multiplier' to take care of under-

valuation of land, 'Solatium' should be dropped and if

at all it has to be retained, it should be reduced from

the proposed 100 per cent to 30 per cent. Similarly,

R&R provisions should have been worked out

separately for each category of affected families,

depending upon their losses, with the ultimate

objective of improving their quality of lives, post land

acquisition.

A. The process of land acquisition, starting from the

Social Impact Analysis (SIA) up to the possession of

the Land by the Collector, as proposed in the new Bill

is highly complex and time taking, stretching up to a

minimum of 56 Months. This elaborate process needs

to be simplified by either eliminating few processes or

Q. Do you think the proposed Right to Fair

Compensation and Transparency in Land Acquisition,

Rehabilitation and Resettlement Bill, 2013 is a step in

the right direction?

A. We in CII have always believed that India has and can

have enough land for all its requirements -

Agricultural, Industrial & Domestic, provided they are

used judiciously and 'Supply' is managed efficiently. It

is in this background that review of the archaic Land

Acquisition Act of 1894 has come at a very

appropriate time.

Right to Fair Compensation and Transparency in Land

Acquisition, Rehabilitation and Resettlement Bill,

2013, which is currently awaiting President's formal

approval is a milestone since it is the first ever attempt

to combine Resettlement of project affected people

and their Rehabilitation (R&R) with land acquisition.

This becomes even more important in the wake of the

fact that last decade has witnessed several cases of

land acquisition, especially in Government projects

where compensation to the project affected people

has not been fair and resettlement and rehabilitation

measures for the affected people have not been

proper.

Besides, the fact that Government would continue to

acquire land for the Industry, as proposed in the new

legislation, is heartening as we have always

maintained that Government should have a

prominent role in land acquisition as agglomerating

land from numerous owners is not a task which

corporate sector can do effectively, especially in the

absence of proper land records and small & scattered

land-holdings in the country.

Mr B MuthuramanChairman, CII National Task Force on Land Acquisition

Past President, CII and Vice Chairman, Tata Steel Limited

CII View PointLARR Bill: A Step Forward, Yet Industry Has Concerns

Page 39: Economy Matters, August - September 2013

36ECONOMY MATTERS

vAdditional Compensation to Original land

Owner

vProcess of Land Acquisition

vReturn of Unutilized Land

vAcquisition of Irrigated Multi Cropped

Land

vLeasing of Land

Bill stipulates that 40 per cent of appreciated land

value (profit) should be shared with original land

owners in cases where - Any land more than the

threshold stipulated by the State Government

which has been purchased through private

negotiations on or after 5 September 2011 and

acquired by the Government within three (3) years

of commencement of this Bill; and whenever the

ownership of any land acquired under this Act is

transferred to any person for consideration,

without any development having taken place on

such land in proportion to the value at which the

land was acquired within a period of 5 years from the

date of acquisition. For both the cases, benefit shall

accrue only on the first sale or transfer that occurs

after the conclusion of the acquisition proceedings.

The entire process of land acquisition, starting from

Social Impact Analysis (SIA) to possession of land by

the concerned Collector (after ensuring full

payment of compensation as well as rehabilitation

and resettlement entitlements are paid or tendered

to the entitled persons) would take a minimum time

of 56 months (see Table 1).

The New Bill stipulates that any acquired land, if not

used for 5 years should be returned to owner or to

the State Land Bank in case the land owner does not

return the original compensation, as the case may

be.

The new legislation stipulates certain limits on

acquisition of Multi-Cropped Land to be determined

by the appropriate Government considering the

relevant State specific factors and circumstances.

The new legislation permits the State Government

to exercise the option of taking the land on lease

instead of acquiring the land.

includes gatherers of forest produce, hunters,

fisher folk and boatmen and such livelihood is

affected due to acquisition of land;

(v) A member of the family who has been assigned

land by the State Government or the Central

Government under any of its schemes and such

land is under acquisition;

(vi) A family residing on any land in the urban areas

for preceding three years or more prior to the

acquisition of the land or whose primary source

of livelihood for three years prior to the

acquisition of the land is affected by the

acquisition of such land;

The Bill provides that R&R will be mandatory in case

of private purchase of land above a certain

threshold, which shall be determined by individual

State Governments after considering the relevant

state specific factors. Further, it is also stipulated

that it is mandatory to file an application with the

concerned Collector before acquisition of such land,

notifying him of - (a) intent to purchase; (b) purpose

for which such purchase is being made; and (c)

particulars of lands to be purchased.

No land use change shall be permitted in such cases

if rehabilitation and resettlement is not complied

with in full.

The proposed Bill has a provision of Retrospective in

cases where - (i) notification has been issued but no

award under Section 11 of the L.A. Act 1894 has been

made; (ii) an award under Section 11 on the L.A. Act

of 1894 has been made 5 years or more prior to the

commencement of this New Bill but the physical

possession of the land has not been taken or the

compensation has not been paid; and (iii) more than

50 per cent of land owners have not accepted the

compensation.

vResettlement & Rehabilitation (R&R) in

case of Private Purchase of Land

vRetrospective Applicability of the New

Bill

37 AUGUST-SEPTEMBER 2013

Q. Do you think the proposed Bill will raise the cost of

acquiring land? If yes, by how much?

Q. Apart from the cost, what is industry's view on the

process of land acquisition as stipulated in the new

Bill?

A. As per the proposed provisions in the new Bill, CII

estimates predict that cost of land acquisition in the

country is likely to increase by 3-3.5 times.

At a time when economy is trying to recover from the

slowdown and National Manufacturing Policy (NMP)

has set an ambitious target of creating 100 million

jobs by 2025, enhanced cost of land acquisition could

severely affect the viability of industrial projects

across the board and erode competitiveness of Indian

manufacturing sector.

We in CII had suggested that since the proposed

formula in the new Bill to calculate market value of

the land already has 'Multiplier' to take care of under-

valuation of land, 'Solatium' should be dropped and if

at all it has to be retained, it should be reduced from

the proposed 100 per cent to 30 per cent. Similarly,

R&R provisions should have been worked out

separately for each category of affected families,

depending upon their losses, with the ultimate

objective of improving their quality of lives, post land

acquisition.

A. The process of land acquisition, starting from the

Social Impact Analysis (SIA) up to the possession of

the Land by the Collector, as proposed in the new Bill

is highly complex and time taking, stretching up to a

minimum of 56 Months. This elaborate process needs

to be simplified by either eliminating few processes or

Q. Do you think the proposed Right to Fair

Compensation and Transparency in Land Acquisition,

Rehabilitation and Resettlement Bill, 2013 is a step in

the right direction?

A. We in CII have always believed that India has and can

have enough land for all its requirements -

Agricultural, Industrial & Domestic, provided they are

used judiciously and 'Supply' is managed efficiently. It

is in this background that review of the archaic Land

Acquisition Act of 1894 has come at a very

appropriate time.

Right to Fair Compensation and Transparency in Land

Acquisition, Rehabilitation and Resettlement Bill,

2013, which is currently awaiting President's formal

approval is a milestone since it is the first ever attempt

to combine Resettlement of project affected people

and their Rehabilitation (R&R) with land acquisition.

This becomes even more important in the wake of the

fact that last decade has witnessed several cases of

land acquisition, especially in Government projects

where compensation to the project affected people

has not been fair and resettlement and rehabilitation

measures for the affected people have not been

proper.

Besides, the fact that Government would continue to

acquire land for the Industry, as proposed in the new

legislation, is heartening as we have always

maintained that Government should have a

prominent role in land acquisition as agglomerating

land from numerous owners is not a task which

corporate sector can do effectively, especially in the

absence of proper land records and small & scattered

land-holdings in the country.

Mr B MuthuramanChairman, CII National Task Force on Land Acquisition

Past President, CII and Vice Chairman, Tata Steel Limited

CII View PointLARR Bill: A Step Forward, Yet Industry Has Concerns

Page 40: Economy Matters, August - September 2013

38ECONOMY MATTERS

adversely affect Industries that, by nature, grow in

phases. Instead, we had suggested for a 'Land Use

Plan' framework and align return of land with it,

which can be monitored by the Chief Secretary of the

concerned State on a case-to-case basis.

A. Digitization of Land Records: Over decades, the land

records have been maintained & upgraded manually

on ad-hoc basis with hardly any focus on accuracy and

authenticity. Archaic and un-authentic land records

are the biggest pit-falls and road-blocks in land

acquisition & disbursement of compensation. To

streamline and bring transparency, CII strongly

recommends speedy digitization of land records by

state Government and the availability of these

records on-line. The digitization of land records,

across all States, over a specified time period, with

comprehensive scrutiny would help make land

records transparent, tamper-proof and facilitate

detailed planning of land use for industrial,

agriculture and residential development.

Zoning of Land: Simultaneously with digitization, CII

also recommends ex-ante zoning of land so as to have

a clear mapping, identification and segregation of the

land for various purposes, over a 100 - 150 year

horizon. Updating, digitization and zoning of land

records will be key for achieving success in the

process of systematic development of industrial land.

Set up State Land Bank Corporations: CII

recommends setting up of dedicated Institutions for

acquiring fallow, barren and unproductive as well as

other Lands, ex-ante, for Industrial purposes, as a

transparent and viable solution to the problem. The

job of these State Land Bank Corporations would be

to scientifically acquire large tracts of non-cultivable

and other lands, develop them as Land Banks for the

future and have a transparent mechanism to pass

them on to the private sector.

Q. Does CII have other suggestions for successfully

resolving the issue of Land Acquisition in the long

run?

making them simultaneous, with an objective to

facilitate an acquisition within a minimum time line of

2 years.

A. Industry has specific concerns and suggestions on

some of the key provisions of the proposed new Bill.

First, though Government would continue to acquire

land for Private Sector and PPP Projects, mandatory

consent requirement from affected families - 80 per

cent and 70 per cent for private sector & PPP

respectively appears to be very high and continues to

be a cause of concern. The process of obtaining

consent as provided in the new Bill in itself is long

drawn out, goes through various stages, taking up to

several years. We in CII had suggested that consent

provision should be limited to 60 per cent of the land

owners.

Second, providing for R&R entitlements to affected

families in cases of direct acquisition of land from the

owners above a certain threshold, to be determined

by the States, could also have been avoided. As sellers

would have already bargained for the premium on

land value in cases of direct purchase, we had

suggested laying down of suitable R&R entitlements

only for affected families who lose their livelihood as a

result of such land acquisition.

Third, retrospective applicability of the new

legislation under certain cases has also raised

Industry apprehensions. To avoid delays and

consequent cost escalation, CII had maintained right

from the beginning that where land acquisition

notification under section 11 of LA Act 1894 has

already been issued and the process of award

initiated, land acquisition process should be

continued and not started afresh.

Fourth, the provision as per the new Bill stipulating

return of the unutilized land after 5 years to owner or

to the State Land Bank (SLB), as the case may be could

Q. What are some of the other concerns regarding the

new Bill?

39 AUGUST-SEPTEMBER 2013

Process (Sequential) Detail Minimum Stipulated Time

Social Impact Analysis (SIA) Preparation of Social Impact Analysis(SIA) 6 Months

in consultation with the concerned

Panchayat, Municipality or Municipal

Corporation

Multi-disciplinary Expert Group Appraisal of SIA by an independent multi- 2 Months

disciplinary Expert Group constituted by

the appropriate Government

Preliminary Notification Publication of Preliminary Notification along 12 Months

with the details of land to be acquired and

determination of market value of land

Publication of Declaration Appropriate Government to publish the 12 Months

declaration after Requiring Body deposits

the amount & examining of any objections

Award Collector shall make the award 12 Months

Corrections to Awards Clerical or Arithmetical Corrections to 6 Months

Awards by Collector

Possession of Land Collector shall take possession of land 3 Months for the

(after ensuring full payment of compensation compensation and a period

as well as rehabilitation and resettlement of 6 Months for the

entitlements are paid or tendered to the monetary part of R&R

entitled persons) entitlements

Table 1: Minimum Stipulated Time Frame under Various Processes

Page 41: Economy Matters, August - September 2013

38ECONOMY MATTERS

adversely affect Industries that, by nature, grow in

phases. Instead, we had suggested for a 'Land Use

Plan' framework and align return of land with it,

which can be monitored by the Chief Secretary of the

concerned State on a case-to-case basis.

A. Digitization of Land Records: Over decades, the land

records have been maintained & upgraded manually

on ad-hoc basis with hardly any focus on accuracy and

authenticity. Archaic and un-authentic land records

are the biggest pit-falls and road-blocks in land

acquisition & disbursement of compensation. To

streamline and bring transparency, CII strongly

recommends speedy digitization of land records by

state Government and the availability of these

records on-line. The digitization of land records,

across all States, over a specified time period, with

comprehensive scrutiny would help make land

records transparent, tamper-proof and facilitate

detailed planning of land use for industrial,

agriculture and residential development.

Zoning of Land: Simultaneously with digitization, CII

also recommends ex-ante zoning of land so as to have

a clear mapping, identification and segregation of the

land for various purposes, over a 100 - 150 year

horizon. Updating, digitization and zoning of land

records will be key for achieving success in the

process of systematic development of industrial land.

Set up State Land Bank Corporations: CII

recommends setting up of dedicated Institutions for

acquiring fallow, barren and unproductive as well as

other Lands, ex-ante, for Industrial purposes, as a

transparent and viable solution to the problem. The

job of these State Land Bank Corporations would be

to scientifically acquire large tracts of non-cultivable

and other lands, develop them as Land Banks for the

future and have a transparent mechanism to pass

them on to the private sector.

Q. Does CII have other suggestions for successfully

resolving the issue of Land Acquisition in the long

run?

making them simultaneous, with an objective to

facilitate an acquisition within a minimum time line of

2 years.

A. Industry has specific concerns and suggestions on

some of the key provisions of the proposed new Bill.

First, though Government would continue to acquire

land for Private Sector and PPP Projects, mandatory

consent requirement from affected families - 80 per

cent and 70 per cent for private sector & PPP

respectively appears to be very high and continues to

be a cause of concern. The process of obtaining

consent as provided in the new Bill in itself is long

drawn out, goes through various stages, taking up to

several years. We in CII had suggested that consent

provision should be limited to 60 per cent of the land

owners.

Second, providing for R&R entitlements to affected

families in cases of direct acquisition of land from the

owners above a certain threshold, to be determined

by the States, could also have been avoided. As sellers

would have already bargained for the premium on

land value in cases of direct purchase, we had

suggested laying down of suitable R&R entitlements

only for affected families who lose their livelihood as a

result of such land acquisition.

Third, retrospective applicability of the new

legislation under certain cases has also raised

Industry apprehensions. To avoid delays and

consequent cost escalation, CII had maintained right

from the beginning that where land acquisition

notification under section 11 of LA Act 1894 has

already been issued and the process of award

initiated, land acquisition process should be

continued and not started afresh.

Fourth, the provision as per the new Bill stipulating

return of the unutilized land after 5 years to owner or

to the State Land Bank (SLB), as the case may be could

Q. What are some of the other concerns regarding the

new Bill?

39 AUGUST-SEPTEMBER 2013

Process (Sequential) Detail Minimum Stipulated Time

Social Impact Analysis (SIA) Preparation of Social Impact Analysis(SIA) 6 Months

in consultation with the concerned

Panchayat, Municipality or Municipal

Corporation

Multi-disciplinary Expert Group Appraisal of SIA by an independent multi- 2 Months

disciplinary Expert Group constituted by

the appropriate Government

Preliminary Notification Publication of Preliminary Notification along 12 Months

with the details of land to be acquired and

determination of market value of land

Publication of Declaration Appropriate Government to publish the 12 Months

declaration after Requiring Body deposits

the amount & examining of any objections

Award Collector shall make the award 12 Months

Corrections to Awards Clerical or Arithmetical Corrections to 6 Months

Awards by Collector

Possession of Land Collector shall take possession of land 3 Months for the

(after ensuring full payment of compensation compensation and a period

as well as rehabilitation and resettlement of 6 Months for the

entitlements are paid or tendered to the monetary part of R&R

entitled persons) entitlements

Table 1: Minimum Stipulated Time Frame under Various Processes

Page 42: Economy Matters, August - September 2013

40ECONOMY MATTERS

SPECIAL FEATURE

Green Manufacturing: The Next Big Opportunity

While India's manufacturing sector grew by 2.7 per

cent in 2011-12 and 1 per cent in 2012-13, the first

quarter of this year witnessed a negative figure of -1 per

cent. Since the manufacturing sector contributes to job

creation and exports, it is imperative that it is revived

expeditiously. A key aspect of this endeavor would be to

increase India's capabilities in new and emerging

sectors. Green manufacturing affords a new avenue of

growth apart from the traditional manufacturing

sectors.

The CII Boston Consulting Group report on

Manufacturing - The Next Growth Orbit had identified

green products as the next big area of opportunity for

Indian manufacturing, placing the global value of the

industry at US$190 billion which was expected to grow

by 15 per cent annually.

For the first time, sustainable growth forms a central

strategy in the 12th Plan. The National Action Plan on

Climate Change addresses the need to curtail carbon

emissions in line with the goal of reducing India's

footprint by 20-25 per cent by 2020. This is further

bolstered by the state level action plans where each

state would bring out its models for sustainable

development. Carbon mitigation strategies are being

devised for major emitting sectors such as power,

transport, industry, construction and forestry.

Several sectors offer key opportunities for green

manufacturing. One, in the power sector, super-critical

technologies are recommended for thermal power

plants using coal. Renewable energy has been

emphasized through definite targets in each of the

sectors. Energy efficiency of products, especially

agricultural pump sets, electrical appliances and

industrial equipment is being targeted. Transmission

and distribution systems too need to be aligned with

global best practices. Machinery and equipment for this

sector should be built indigenously, rather than depend

upon imports which are pressurizing our current

account deficit.

The transport sector is overly dependent on road traffic

which is heavily polluting. The share of railways and

water transport needs to be increased through targeted

policies. For example, the Dedicated Rail Freight

Corridors are expected to enhance efficiency and add to

productivity of transport. Similarly, urban transport

would be an area to be considered to reduce carbon

emissions, increase mass transport options, and

improve productivity.

41 AUGUST-SEPTEMBER 2013

National Investment and Manufacturing Zones could

also have a dedicated space for green manufacturing.

The other challenge is to ensure that a cohort of

adequately qualified human resources is created within

a short period of time if India is to take the lead in the

field of green manufacturing. Higher education facilities

should offer dedicated courses for green engineering,

while skill development at Industrial Training Centers

and other skill development centers could also include

requisite coursework.

The third challenge is to ensure that India carves a space

for itself in the global marketplace for green products.

This is one area of exports that should be targeted,

especially when it comes to renewable energy where

India has performed well. Project management

overseas with machinery and equipment sourced from

India could be a step in the right direction with dedicated

lines of credit.

Industry too must assume a key role in inculcating green

and sustainable practices into its DNA. Today, a

company that does not include sustainability into its

systems and processes faces the risk of losing its brand

value, while companies that go in for green

manufacturing are earning kudos from consumers,

translating into better returns.

Key sectors of industry would need to adopt best

environmental practices and green technologies. Iron

and steel, mining, chemicals, heavy machinery and other

sectors that have been identified as subject to high

pollution and emissions need to take special care

towards environmental and green practices. There is a

clear case for small and medium enterprises too to

reduce their carbon footprints and act in a more

environmentally responsible manner.

Industry would need to strengthen its engagement in

research and development for introducing better

models for environmental regulations. It is preferable to

establish partnerships with academic and research

institutions to work jointly on innovations and new

products for commercialization.

Secondly, strong industry action is required against

polluting industries. There should be a system that

would identify polluting factories and units that do not

meet environmental regulations. Third, industry must

comply with environmental rules and regulations so that

government can be light-handed in monitoring

compliances.

With Government and industry working together, green

manufacturing offers new avenues of growth for the

economy.

Two, consumer durables are an important segment

where green products must be expanded. Consumers

themselves are increasingly demanding energy efficient

and resource-light products with little wastage. To meet

this demand, Indian companies would have to develop

capacity as well as go into innovation for building

competitiveness.

Three, urbanization is a key area where green products

must be used. India's urbanization journey is

accelerating as more and more people shift to

productive employment in cities. New cities are being

planned under several initiatives, while growing existing

cities too need to build up urban amenities. The country

has the opportunity to be able to create these new

amenities in a green manner so that our cities are havens

of sustainable practices for comfortable and cost-

effective living conditions for every range of income

class.

In this context, it is increasingly important to expand the

green building movement. The Indian Green Building

Council promoted by CII offers rating and advisory

services and green buildings have caught the

imagination of developers and consumers. Today, 1.45

billion square feet of floor space is certified as green and

over 2100 buildings are designated green buildings.

Four, waste management and pollution are major

concerns which will only gather pace as the economy

expands further. To minimize waste and reduce

pollution, green products, recycling, reuse, etc would

need to be incorporated into our manufacturing

processes.

Five, it is not only new products that must be developed

in a green manner, but also existing products where

innovation should progressively move towards green

and efficient products.

All this requires a dedicated ecosystem that incentivizes

research and development, commercial applications,

and dissemination. A facilitative policy addressed

specifically at green manufacturing as part of the overall

manufacturing promotion policy is required.

It would be useful if Government could create industrial

parks for manufacture of such green products. Such an

infrastructure of parks at key manufacturing hubs of the

country would bring together research facilities,

manufacturing outlets, ratings systems, advisory and

consultancy services, government regulatory bodies

and related support services in a single place. The

industrial park would provide high-class infrastructure

for connectivity, IT and communication, skill

development and other necessities. The current

Page 43: Economy Matters, August - September 2013

40ECONOMY MATTERS

SPECIAL FEATURE

Green Manufacturing: The Next Big Opportunity

While India's manufacturing sector grew by 2.7 per

cent in 2011-12 and 1 per cent in 2012-13, the first

quarter of this year witnessed a negative figure of -1 per

cent. Since the manufacturing sector contributes to job

creation and exports, it is imperative that it is revived

expeditiously. A key aspect of this endeavor would be to

increase India's capabilities in new and emerging

sectors. Green manufacturing affords a new avenue of

growth apart from the traditional manufacturing

sectors.

The CII Boston Consulting Group report on

Manufacturing - The Next Growth Orbit had identified

green products as the next big area of opportunity for

Indian manufacturing, placing the global value of the

industry at US$190 billion which was expected to grow

by 15 per cent annually.

For the first time, sustainable growth forms a central

strategy in the 12th Plan. The National Action Plan on

Climate Change addresses the need to curtail carbon

emissions in line with the goal of reducing India's

footprint by 20-25 per cent by 2020. This is further

bolstered by the state level action plans where each

state would bring out its models for sustainable

development. Carbon mitigation strategies are being

devised for major emitting sectors such as power,

transport, industry, construction and forestry.

Several sectors offer key opportunities for green

manufacturing. One, in the power sector, super-critical

technologies are recommended for thermal power

plants using coal. Renewable energy has been

emphasized through definite targets in each of the

sectors. Energy efficiency of products, especially

agricultural pump sets, electrical appliances and

industrial equipment is being targeted. Transmission

and distribution systems too need to be aligned with

global best practices. Machinery and equipment for this

sector should be built indigenously, rather than depend

upon imports which are pressurizing our current

account deficit.

The transport sector is overly dependent on road traffic

which is heavily polluting. The share of railways and

water transport needs to be increased through targeted

policies. For example, the Dedicated Rail Freight

Corridors are expected to enhance efficiency and add to

productivity of transport. Similarly, urban transport

would be an area to be considered to reduce carbon

emissions, increase mass transport options, and

improve productivity.

41 AUGUST-SEPTEMBER 2013

National Investment and Manufacturing Zones could

also have a dedicated space for green manufacturing.

The other challenge is to ensure that a cohort of

adequately qualified human resources is created within

a short period of time if India is to take the lead in the

field of green manufacturing. Higher education facilities

should offer dedicated courses for green engineering,

while skill development at Industrial Training Centers

and other skill development centers could also include

requisite coursework.

The third challenge is to ensure that India carves a space

for itself in the global marketplace for green products.

This is one area of exports that should be targeted,

especially when it comes to renewable energy where

India has performed well. Project management

overseas with machinery and equipment sourced from

India could be a step in the right direction with dedicated

lines of credit.

Industry too must assume a key role in inculcating green

and sustainable practices into its DNA. Today, a

company that does not include sustainability into its

systems and processes faces the risk of losing its brand

value, while companies that go in for green

manufacturing are earning kudos from consumers,

translating into better returns.

Key sectors of industry would need to adopt best

environmental practices and green technologies. Iron

and steel, mining, chemicals, heavy machinery and other

sectors that have been identified as subject to high

pollution and emissions need to take special care

towards environmental and green practices. There is a

clear case for small and medium enterprises too to

reduce their carbon footprints and act in a more

environmentally responsible manner.

Industry would need to strengthen its engagement in

research and development for introducing better

models for environmental regulations. It is preferable to

establish partnerships with academic and research

institutions to work jointly on innovations and new

products for commercialization.

Secondly, strong industry action is required against

polluting industries. There should be a system that

would identify polluting factories and units that do not

meet environmental regulations. Third, industry must

comply with environmental rules and regulations so that

government can be light-handed in monitoring

compliances.

With Government and industry working together, green

manufacturing offers new avenues of growth for the

economy.

Two, consumer durables are an important segment

where green products must be expanded. Consumers

themselves are increasingly demanding energy efficient

and resource-light products with little wastage. To meet

this demand, Indian companies would have to develop

capacity as well as go into innovation for building

competitiveness.

Three, urbanization is a key area where green products

must be used. India's urbanization journey is

accelerating as more and more people shift to

productive employment in cities. New cities are being

planned under several initiatives, while growing existing

cities too need to build up urban amenities. The country

has the opportunity to be able to create these new

amenities in a green manner so that our cities are havens

of sustainable practices for comfortable and cost-

effective living conditions for every range of income

class.

In this context, it is increasingly important to expand the

green building movement. The Indian Green Building

Council promoted by CII offers rating and advisory

services and green buildings have caught the

imagination of developers and consumers. Today, 1.45

billion square feet of floor space is certified as green and

over 2100 buildings are designated green buildings.

Four, waste management and pollution are major

concerns which will only gather pace as the economy

expands further. To minimize waste and reduce

pollution, green products, recycling, reuse, etc would

need to be incorporated into our manufacturing

processes.

Five, it is not only new products that must be developed

in a green manner, but also existing products where

innovation should progressively move towards green

and efficient products.

All this requires a dedicated ecosystem that incentivizes

research and development, commercial applications,

and dissemination. A facilitative policy addressed

specifically at green manufacturing as part of the overall

manufacturing promotion policy is required.

It would be useful if Government could create industrial

parks for manufacture of such green products. Such an

infrastructure of parks at key manufacturing hubs of the

country would bring together research facilities,

manufacturing outlets, ratings systems, advisory and

consultancy services, government regulatory bodies

and related support services in a single place. The

industrial park would provide high-class infrastructure

for connectivity, IT and communication, skill

development and other necessities. The current

Page 44: Economy Matters, August - September 2013

GLOBAL GDP (y-o-y%)

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

7.6 7.4 7.9 7.7 7.5

2Q12 3Q12 4Q12 1Q13 2Q13

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 0.30.9

2Q12 3Q12 4Q12 1Q13 2Q13

5.4 5.24.7 4.8 4.4

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

2.9

1.7 1.81.4

2.7

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

1.8

1.3

2.52.7

0.2

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

7.7 7.6

6.76.6 6.6

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

4.8 4.65.2

5.86.1

Apr-13 May-13 Jun-13 Jul-13 Aug-13

5.15.7

8.8 9.0

11.7

Apr-13 May-13 Jun-13 Jul-13 Aug-13

8.37.3 7.5

11.3 11.3

Apr-13 May-13 Jun-13 Jul-13 Aug-13

3.7

3.32.9 2.8

1.9

Apr-13 May-13 Jun-13 Jul-13 Aug-13

3.5

1.5

-2.8

-1.8

2.6

Mar-13 Apr-13 May-13 Jun-13 Jul-13

4.3

1.8

-3.6

-1.7

3.0

Mar-13 Apr-13 May-13 Jun-13 Jul-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13

3.54.2

6.2

0.0

5.2

-2.1

-3.4

-5.9

-4.3

-2.3

Mar-13 Apr-13 May-13 Jun-13 Jul-13

ECONOMY MONITOR

43 AUGUST-SEPTEMBER 2013

v

v

Page 45: Economy Matters, August - September 2013

GLOBAL GDP (y-o-y%)

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

7.6 7.4 7.9 7.7 7.5

2Q12 3Q12 4Q12 1Q13 2Q13

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 0.30.9

2Q12 3Q12 4Q12 1Q13 2Q13

5.4 5.24.7 4.8 4.4

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

2.9

1.7 1.81.4

2.7

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

1.8

1.3

2.52.7

0.2

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

7.7 7.6

6.76.6 6.6

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

4.8 4.65.2

5.86.1

Apr-13 May-13 Jun-13 Jul-13 Aug-13

5.15.7

8.8 9.0

11.7

Apr-13 May-13 Jun-13 Jul-13 Aug-13

8.37.3 7.5

11.3 11.3

Apr-13 May-13 Jun-13 Jul-13 Aug-13

3.7

3.32.9 2.8

1.9

Apr-13 May-13 Jun-13 Jul-13 Aug-13

3.5

1.5

-2.8

-1.8

2.6

Mar-13 Apr-13 May-13 Jun-13 Jul-13

4.3

1.8

-3.6

-1.7

3.0

Mar-13 Apr-13 May-13 Jun-13 Jul-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13

3.54.2

6.2

0.0

5.2

-2.1

-3.4

-5.9

-4.3

-2.3

Mar-13 Apr-13 May-13 Jun-13 Jul-13

ECONOMY MONITOR

43 AUGUST-SEPTEMBER 2013

v

v

Page 46: Economy Matters, August - September 2013

EXTERNAL ACCOUNT

Exports (%) Imports (%) Trade Deficit (US$ Bn)

21.7

17.121.1

31.8

18.2

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

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 Net FDI Flows Forex Reserves ECB flows

2.3

0.5

1.0

2.8

4QFY12 2QFY13 3QFY13

4.2

4QFY131QFY13

Core Sector Growth Cement Production Growth Steel Production Growth Commercial VehiclesProduction Growth

1.7

11.0

6.9

-1.1

-4.6

-0.4

11.6

-6.2

13.0

-0.68

17.820.1

12.2 12.3

10.9

1.3

2.8

2.0 2.1 2.2

Mar-13 Apr-13 May-13 Jun-13 Jul-13

Apr-13 May-13 Jun-13 Jul-13 Aug-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13

54.455.0

58.459.8

63.2

Apr-13 May-13 Jun-13 Jul-13 Aug-13

12.5 12.112.8 12.5 12.2

Apr-13 May-13 Jun-13 Jul-13 Aug-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13

4.00 4.00 4.00 4.00 4.00

2.0

5.2

-7.5

-3.0 -2.5

Apr-13 May-13 Jun-13 Jul-13 Aug-13

296.4

287.9284.6

277.2275.5

Apr-13 May-13 Jun-13 Jul-13 Aug-13

3.2

2.3 2.3

0.1

3.1

Mar-13 Apr-13 May-13 Jun-13 Jul-13

8.3

5.2

2.4 2.30.8

Mar-13 Apr-13 May-13 Jun-13 Jul-13

6.6

1.9

4.03.4

7.0

Mar-13 Apr-13 May-13 Jun-13 Jul-13

11.5

2.5

-15.4-17.9 -19.6

Apr-13 May-13 Jun-13 Jul-13 Aug-13

44ECONOMY MATTERS

14.7 15.5 14.617.3 18.4

Apr-13 May-13 Jun-13 Jul-13 Aug-13

7.25 7.25 7.25 7.25 7.50

May-13 Jun-13 Jul-13 Aug-13 Sep-13

Page 47: Economy Matters, August - September 2013

EXTERNAL ACCOUNT

Exports (%) Imports (%) Trade Deficit (US$ Bn)

21.7

17.121.1

31.8

18.2

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

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 Net FDI Flows Forex Reserves ECB flows

2.3

0.5

1.0

2.8

4QFY12 2QFY13 3QFY13

4.2

4QFY131QFY13

Core Sector Growth Cement Production Growth Steel Production Growth Commercial VehiclesProduction Growth

1.7

11.0

6.9

-1.1

-4.6

-0.4

11.6

-6.2

13.0

-0.68

17.820.1

12.2 12.3

10.9

1.3

2.8

2.0 2.1 2.2

Mar-13 Apr-13 May-13 Jun-13 Jul-13

Apr-13 May-13 Jun-13 Jul-13 Aug-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13

54.455.0

58.459.8

63.2

Apr-13 May-13 Jun-13 Jul-13 Aug-13

12.5 12.112.8 12.5 12.2

Apr-13 May-13 Jun-13 Jul-13 Aug-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13

4.00 4.00 4.00 4.00 4.00

2.0

5.2

-7.5

-3.0 -2.5

Apr-13 May-13 Jun-13 Jul-13 Aug-13

296.4

287.9284.6

277.2275.5

Apr-13 May-13 Jun-13 Jul-13 Aug-13

3.2

2.3 2.3

0.1

3.1

Mar-13 Apr-13 May-13 Jun-13 Jul-13

8.3

5.2

2.4 2.30.8

Mar-13 Apr-13 May-13 Jun-13 Jul-13

6.6

1.9

4.03.4

7.0

Mar-13 Apr-13 May-13 Jun-13 Jul-13

11.5

2.5

-15.4-17.9 -19.6

Apr-13 May-13 Jun-13 Jul-13 Aug-13

44ECONOMY MATTERS

14.7 15.5 14.617.3 18.4

Apr-13 May-13 Jun-13 Jul-13 Aug-13

7.25 7.25 7.25 7.25 7.50

May-13 Jun-13 Jul-13 Aug-13 Sep-13

Page 48: Economy Matters, August - September 2013