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Economy Matters December 2016

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Page 1: Economy Matters December 2016
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FOREWORD

DECEMBER 2016

The forthcoming Union Budget will be presented against the backdrop of heightened expecta-tions that the government would unravel reform-centric policies and action plan which would rejuvenate our growth drivers and transform the economy. In 2017, industry expects a reform-

ist and visionary budget from the government. We would like to see a cut in corporate and personal income tax rates accompanied by higher public investments for which the resources will be made avail-able through various means such as disinvestment and asset recycling. The recent demonetisation of high value notes is expected to yield an increase in tax revenue as well as an increase in the tax base. Challenges such as slack domestic and global demand would need to be addressed, and urgent policy action is needed so that the economy can achieve a sustained and inclusive growth of around 8 per cent in the near future.

On the domestic front, the contraction in industrial output in October 2016 is a matter of concern. How-ever, going forward, normal monsoons, which should improve rural demand, along with the lagged im-pact of interest rate reductions and 7th pay commission handouts are expected to cushion demand in the future and boost industrial activity. In a bright spot for the economy, both the inflation indices are ebbing down, providing relief to the policymakers. The softening of CPI and WPI inflation is attributed essentially to downward drift in the momentum of food prices assisted by favourable monsoon which has led to record food-grain output in the kharif season. The fall in prices could also be partly reflective of the demonetisation impact, which has led to lower demand in the economy due to a cash crunch. The moderate inflation scenario has rightly facilitated the RBI decision to retain the accommodative policy stance and will encourage RBI to further reduce rates.

US Federal Reserve expectedly raised interest rate by 25 bps in first week of December 2016 — its first (and only) rate hike in 2016 and the second since the monetary policy normalization cycle began in December 2015. The Federal Open Market Committee (FOMC) judged that in light of realized and expected labour market conditions, as well as the progress on the inflation front, it was deemed ap-propriate to hike the Fed Funds rate. Given the resumption of the normalisation process, future policy moves are likely to be dependent on incoming data prints, which will remain critical. Any expansionary fiscal stimulus from the incoming regime at the White House may spur inflation, and cause a faster pace of rate hikes than anticipated.

Chandrajit BanerjeeDirector General, CII

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EXECUTIVE SUMMARY

ECONOMY MATTERS 4

Focus of the Month: Towards a Growth-Oriented Budget

The forthcoming Union Budget will be presented

against the backdrop of heightened expectations that

the government would unravel reform-centric policies

and action plan which would rejuvenate our growth

drivers and transform the economy. No doubt, the

economy in general has done quite well in FY17 with a

normal monsoon heralding a bountiful crop harvest,

private consumption holding up well and sharp mod-

eration witnessed in inflation indices. However, with

economic growth expected to momentarily lose mo-

mentum in the second half of this fiscal on account of

the demonetization drive, there is widespread anticipa-

tion that the government will take bold and pragmatic

measures to mitigate and reverse the downside risks to

growth. What is more certain areas like weak private

sector investments, mounting NPAs and low credit off

take by industry also call for urgent policy action in or-

der that the economy achieves a sustained and inclusive

growth of 8 per cent and above in the near future.

Domestic TrendsIndustrial output contracted in October 2016, declin-ing by 1.9 per cent as compared to 0.7 per cent in the previous month. Mining and manufacturing segments remained a cause for concern with capital goods con-tinuing to weigh on the headline print. However, go-ing forward, normal monsoons, which should improve rural demand, along with the lagged impact of interest rate reductions and 7th pay commission handouts are expected to cushion demand in future and boost in-dustrial activity. There may be short-term disruptions on account of government’s recent demonetisation move as it impacts the cash based transactions, which are a large part of the Indian economy. However, in the medium-term the impact of this demonetisation will be largely positive for economic growth. Meanwhile, both WPI and CPI inflation moderated in November 2016, providing relief to the policymakers. The soften-ing of CPI and WPI inflation was attributed essentially to downward drift in the momentum of food prices as-

sisted by favourable monsoon which has led to record food-grain output in the kharif season. The fall in prices could also be partly reflective of the demonetisation im-pact, which has led to lower demand in the economy due to a cash crunch. The moderate inflation scenario has rightly facilitated the RBI decision to retain the ac-commodative policy stance and will encourage RBI to further reduce rates.

Corporate PerformanceThe corporate results at the end of the second quarter of fiscal year 2017 brought a reason for cheer for the manufacturing sector which saw an improvement in both its bottom-line and top-line. The sector, which was buoyed by a significant fall in input costs following the collapse of global commodity prices, registered a sharp pickup in profitability growth in 2QFY17 as compared to the same quarter a year ago. Worryingly, both bottom-line and top-line of services sector firms continued to remain weak so far. The analysis factors in the financial performance of a balanced panel of 1670 manufactur-ing companies (excluding oil and gas companies) and 948 service firms extracted from the CMIE’s Prowess database.

Global TrendsIn line with market expectations, US Federal Reserve

hiked its key Fed fund target rate by 25 bps to between

0.50-0.75 per cent in its monetary policy review meeting

held on December 14th, 2016. There were no dissenters

to this decision. The Federal Open Market Committee

(FOMC) judged that in light of realized and expected la-

bour market conditions, as well as the progress on the

inflation front, it was deemed appropriate to hike the

Fed Funds rate. The stance of monetary policy remains

accommodative, thereby supporting some further

strengthening in labor market conditions and a return

to 2 per cent inflation. Notably, the Fed commentary

has turned decidedly hawkish — with several referenc-

es to fiscal expansionary stance under the new Trump

administration and the resultant likelihood of a tighter

monetary policy.

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Towards a Growth-Oriented Budget

DECEMBER 2016

1. Revive Investments

a) Accelerate PSU Disinvestment

• It is pivotal to raise funds from Public Sector Units (PSU) divestment. In the Union Budget FY17, the government had fixed the disinvestment target at Rs 56,500 crore for 2016-17, out of which Rs 36,000 crore was to come from minority stake sale in PSUs and Rs 20,500 crore from strategic sales. In the first seven months of the current fiscal so far, government has collected Rs 21,409.8 crore (which amounts to 38 per cent of the total budgeted tar-get) so far.

• By 31st December 2017, government should try to di-vest/ privatize 100 companies including the 74 iden-tified by NITI Aayog. This is critical for the govern-ment to meet its disinvestment target for the year.

b) Implement Kelkar Committee Recommendations on Public Private Partnership (PPP)

• The key is dispute resolution with the many stuck PPP projects. The government should target re-dressal of all existing disputes in PPPs through dis-pute resolution Mechanism by 31st December 2017.

The forthcoming Union Budget will be presented against the backdrop of heightened expectations that the government would unravel reform-cen-

tric policies and action plan which would rejuvenate our growth drivers and transform the economy. No doubt, the economy in general has done quite well in FY17 with a normal monsoon heralding a bountiful crop harvest, private consumption holding up well and a sharp mod-eration witnessed in inflation indices.

However, with economic growth expected to momen-tarily lose momentum in the second half of this fiscal on account of the demonetization drive, there is wide-spread anticipation that the government will take bold and pragmatic measures to mitigate and reverse the downside risks to growth. What is more certain areas like weak private sector investments, mounting NPAs and low credit off take by industry also call for urgent policy action in order that the economy achieves a sus-tained and inclusive growth of 8 per cent and above in the near future. Against this backdrop, following are the CII’s pre-budget recommendations for Union Budg-et 2017-18 to the government:

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c) Asset recycling

• The government should recycle existing govern-ment assets. Example, railways had opened up development of railway stations on PPP basis. It will be interesting if 50 rail stations under development around the country could fructify by December 2017 and this should be announced in the budget since the railway budget is now included.

2. Employment: Reducing the effec-tive cost of creating good quality jobs

The economy has created many jobs in informal ser-vices and contract jobs. However, the moot issue is the quality of employment generated.

• For existing firms: The government should extend the policy frame work provided for textile and ap-parels to all sectors. This provides for fixed-term employment and State provision of employers Provident Fund (PF) contribution in the first year.

• For new firms: The need is to move from subsidies and incentives to removing the burden of state reg-ulation on start-ups. This can enable creation of 10 million start-ups in next 5 years by allowing these new start-ups to comply with regulations through self-declaration for all interface with the state for the first 5 years. The definition of a start-up shall be any firm less than 5 years old with no further qualifi-cation.

3. Innovation led Economy

• CII recommends building a National Technology strategy between government and industry.

• There is need to substantially increase investment in technology by firms doing in-house R&D. Public investment in research in the higher education sec-

tor is 0.04 per cent of GDP which needs to increase ten-fold in order to reach the global average of 0.4 per cent. Similarly, private sector investment in in-house R&D which is currently 0.3 per cent of GDP needs to increase five-fold in order to reach the global average of 1.5 per cent.

• CII recommends creating a National Innovation Fund with a corpus of at least Rs. 10,000 crores. The government has Rs 8,000 crores in the Consoli-dated Fund of India collected through Cess on tech-nology imports which can be used for this purpose. This should be awarded to the firms on the basis of competitive proposals judged by peer review.

• The state provides abundant funds for research in autonomous laboratories which currently stands around Rs 90,000 crore. However, there should be an increase in funds to finance research in public higher education institutions. The increase would take research in higher education from Rs 5000 crore to Rs 15,000 crore.

4. Reduction in Corporate Tax Rate and withdrawal of all incentives

CII has proposed that corporate tax be brought down to 18 per cent including all surcharges and cess. In re-turn all tax incentives, concessions could be removed and there would be no need of grandfathering of the previous incentives. CII’s calculation of Profit Before Tax (PBT) and tax foregone in 2014-15 indicates an ef-fective rate of 19.8 per cent without any tax incentives/ concessions. We believe that in the past when corpo-rate tax has been lowered, corporate tax collection has gone up. An 18 per cent corporate tax should therefore not lead to revenue loss to the government and at a stroke move us away from a high tax, high concession regime. This will help bring India in line with the most attractive international investment destinations such as Singapore, Sri Lanka, UK and Turkey. Additionally, it will also send a powerful message to Indian industry and global investors that India is an attractive investment destination and a huge enabler for Make in India.

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DECEMBER 2016

Time to Steady the Ship and Restore Confidence

In the last couple of years, India’s sound macro-eco-nomic fundamentals supported by strong, construc-tive government policies, benign global commodity

prices, RBI’s focus on curbing inflation and a bountiful monsoon have helped India to be the fastest growing major economy in the world. As the Economic Survey for 2015-16 stated, amidst a gloomy economic land-scape, India stands out as a haven of stability and an outpost of opportunity. However, as the Finance Min-ister prepares to present his fourth Budget this term, he would have to contend with some short term turbu-lence in the comfortable zone that India has been in.

The government’s decision to invalidate old high-value currency notes is guided by the good intent to check the growth of the parallel economy and bring the informal, rural, and cash-based segments of the economy into the fold of formal economy. Though the move will be beneficial for the Indian economy in the long run, at the current juncture when the private investment is already weak, the demonetisation shock will have a negative short-term impact on GDP growth. The contractionary effect of the cash crunch would significantly affect the growth outcomes of the third and the fourth quarters of this financial year.

To counterbalance these adverse developments, the Finance Minister will need to undertake some regula-tory and fiscal stimulus measures that will create a ‘feel-good’ effect, spur demand in the economy and incen-tivise investments, thus reinstating confidence in the economy. The tax buoyancy after the demonetisation and the Income Declaration Scheme should provide the

desired fiscal space to reduce the burden on taxpayers without compromising on the objective of improving the tax-GDP ratio. The lower tax burden coupled with the implementation of GST backed by robust IT infra-structure would also be instrumental in improving tax compliance in India.

To provide more disposable income in the hands of the individual taxpayers, the basic exemption limit of Rs 2.5 lakhs should be revised upwards to Rs 5 lakhs. The tax rate for taxpayers in the income bracket of Rs 5 lakhs to Rs 10 lakhs should be reduced from the current 20 per cent to 10 per cent. A reduction in the tax burden will help push consumption and demand by putting more money in the hands of the taxpayers, particularly in the lower and middle income groups.

Currently, the tax burden on the Indian corporate sec-tor is one of the highest in the world, with the applica-bility of the Minimum Alternative Tax (MAT) at 18.5 per cent and the Dividend Distribution Tax (DDT) at 20.36 per cent adding to the already high corporate income tax rate of 34.6 per cent. More and more countries are moving to a low tax regime to attract investments. The United Kingdom proposes to reduce its corporate tax rate of 20 per cent to 17 per cent in the next four years. The US President-elect has announced a cut in the cor-porate tax rate by half to 15 per cent. Even the com-peting jurisdictions such as Vietnam, Thailand and Phil-ippines are aiming to reduce the corporate tax rates. India, too, needs a lower, more competitive tax rate otherwise the businesses in India could be lured back to the US or diverted to their jurisdictions. The FM has

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promised a reduction in the corporate income tax rate to 25 per cent by the year 2019, to be accompanied by the withdrawal of incentives. The Government has al-ready withdrawn some of the incentives and laid down the roadmap for phasing out the remaining ones. It is now time that a reduction in the corporate tax rate be announced, in line with the global trend.

Over the past months, the Government undertook many positive tax reforms to bring consistency and co-herence in tax policy. Significant clarifications were is-sued to bring clarity and certainty in taxation and steps are being taken to improve ease of compliance and im-prove dispute resolution.

To bring in greater tax certainty, the Government should issue the guidelines for implementation of GAAR at the earliest. The guidelines should include additional exam-ples to provide clarity on where GAAR should or should not be invoked. The guidelines should also clearly high-light that GAAR is not to be invoked if SAAR applies and that it should not override a treaty. Similarly, the draft guiding principles issued in January 2016 for determina-tion of Place of Effective Management (POEM) should be finalised and made public. Ideally, the POEM provi-sions should be made effective from the next financial year, after the final guidelines are known and under-stood by all. In case POEM is applied to consider a for-eign company a resident, the same should be referred to as a specialised panel, as in the case of GAAR.

In the interest of improving ease of doing business, the government must consider withdrawing the Income Computation and Disclosure Standards (ICDS). Taxpay-ers are already grappling with changes like the Com-panies Act and GST and there is scope for litigation on many aspects of ICDS. It merely results in issues such as multiplicity of accounting methods, increased compli-ance burden of multiple records etc., which outweigh its benefits. ICDS at best brings timing differences be-tween accounting and taxable income.

Another provision that is prone to many disputes and needs a review is disallowance under Section 14A. In-come which is subject to distribution tax, for instance dividends, and subsequently exempted in hands of the recipient should be excluded from the scope of section

14A of the Act. Similarly, amendment to Section 72A of the Act to allow benefits of carry forward of losses, pur-suant to amalgamation, to all companies irrespective of their line of business, especially service businesses will provide much relief.

Many competing jurisdictions including Malaysia, China, Indonesia, Brazil, Vietnam and Singapore provide incen-tives to MNCs to set-up global research and develop-ment (R&D) hubs in their territories. The position of the Indian administration, unfortunately, is not very clear. By dissuading companies from moving high value added work to India, Circular 6 acts as a barrier to India developing as an innovation hub. The allegation of PE in case of secondment of expatriates by MNE groups to their Indian subsidiaries dissuades the relocation of their key decision makers to India. To encourage in-vestment in R&D space, Circular 6 should be modified to qualify a R&D centre as a Contract R&D centre and permit it to earn a return on a cost plus basis even if the Centre undertakes an economically significant function (such as conceptualisation and design of the product), gets involved in strategic control and direction of the development or undertakes ‘end-to-end’ R&D. Second-ment cases should be looked at liberally to not allege PE merely because of the presence of expatriates in India, if such expatriates work under the supervision and con-trol of India business.

Another significant dimension that needs attention is the improvement in the current dispute resolution mechanisms. The government has taken many positive steps in this direction, but further measures are needed to bring about a perceptive change. For instance, 108 Advance Pricing Agreements (APAs) have been signed since 2013-14. However, on the bilateral APA front, the absence of Article 9(2) in the tax treaties of some of the countries causes artificial barriers as India does not permit transfer pricing dispute resolution through Mu-tual Agreement Procedures (MAP) and bilateral APAs, which otherwise is a global practice. These artificial barriers should be done away with to make it easier for companies resident in countries like Germany, France, Singapore, Italy and South Korea to access the bilateral APA forum.

Safe Harbour has also not been able to pick up as ex-

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DECEMBER 2016

pected because of the high margins prescribed. The Government should keep more realistic margins in line with the margins agreed under the APA programme. Moreover, the dichotomy created by prescribing two safe harbour margins for software development and IT enabled service i.e., 20 per cent where transaction value does not exceed Rs. 500 crores and 22 per cent where transaction value exceeds Rs. 500 crores, must be re-moved. The mechanisms of the Authority for Advance Ruling and Dispute Resolution Panels need to be made more effective by increasing the number of benches and providing strict timelines for disposal of cases.

No other reform has been as awaited by the industry as the Goods and Services Tax (GST). At the time of writ-ing this article, there was still a stalemate between the Centre and the States over dual control under GST. The industry hopes that these issues will be resolved at the earliest for timely implementation of GST. In the mean-while, certain provisions of the Model GST Law must be reviewed. Service sectors such as banking, insurance, telecom, consulting, airlines etc., which have PAN In-dia operations, and e-commerce companies having a virtual presence in every State without being physically present will be seriously affected by the requirement of State wise multiple registrations. A single centralised

registration should therefore replace the requirement of multiple registrations for such service providers.

Refunds under the Model GST Law are provided only in the case of exports and inverted duty structure. Delay in refunds seriously impacts the working capital flow and the cost of doing business. In line with interna-tional best practices, any form of excess credit should be promptly refunded. The draft GST law is absolutely silent on manner of grandfathering the existing area based exemptions granted to the units under the Excise laws. A clear provision needs to be laid down so that the interest of the existing manufacturers is not preju-dicially affected. The transitory provisions should also clarify how the input credit of the central excise duty (CGST) shall be taken by the trader in the absence of documents evidencing the payment of respective tax.

The Government is taking the right steps to make the economy more transparent, simplify the tax structure and to make India globally competitive. The upcoming Budget should be focused on steadying the ship and re-storing confidence in the economy. It’s time to persis-tently work towards translating the announced reforms into effective implementation and reducing the lag be-tween the policy and on-the-ground action.

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Emerging Strategic Directions of the Union Govern-ment in the Context of the Monetary Policies and Budget 2017

The new Government headed by Mr Narendra Modi swept the Parliamentary polls in 2014 and took over the Government in Delhi. A totally new

set up took over the roles in the Central Government covering the various Ministries and in the last couple of years even the bureaucracy went through a revamping with new faces and a fresh approach to governance.

The Prime Minister had mentioned in his election speeches that he would focus on bringing about a change in the different spheres covering industry, agri-culture and the basic principles of governance. This also covered a promise of eradicating the black money prob-lem in the national economy as well as bringing about a radical change in all operating areas.

True to the above promise, the Government has re-cently demonetized the Rs.500/- and Rs.1000/- notes and is actively trying to digitize the economy. Also, the Government is working towards changing all working areas and assumptions by merging the ‘Railway Budget’ with the ‘General Budget’ and preponing the Budget presentation to the beginning of February for ensuring that all Budget workings are initiated and enforced with effect from the beginning of the financial year i.e. 1st April, 2017. This will also result in avoiding the vote-on-account requirement since earlier the budget was being passed in May/June resulting in non-availability of funds for running the various Government Departments be-tween April and May/June.

It is obvious from the above that a breath of freshness is coming in for the various activities of the Govern-ment which has not happened in the past. However, the operating problems in the effective implementation of the demonetization policy are still continuing and

it is expected that the said problems would get over in the next few months so that the economy can get kick-started from the set back in November. It is worth mentioning that the demonetization strategy had to be covered in a ‘veil of secrecy’ for the obvious reason that issues relating to terrorist funding, counterfeit currency and fall-outs of the black money economy were sought to be addressed.

The Central Budget has now assumed a very critical role in respect of the direction that the Government wishes to provide for unshackling of the Indian economy to move into a higher growth trajectory in the next few years. For instance, the proposed introduction of the Na-tional GST is now virtually certain which is expected to reduce the complications in the realm of indirect taxes, so that the multiplicity of levies like excise duty, service tax and local taxes are replaced by a new model of sales tax which is expected to result in improving the compli-cations and disputes. In fact, the high level of comput-erization in the designing of GST network will by itself result in cutting down the tax-on-tax phenomenon and help in seamless transition for the various products and services in the country. This also will help in ensuring that all transactions are captured for the consequential adjustment of the taxes paid at the earlier levels and this in turn will definitely result in the reduction of the black economy. Consequently, the seeds will be sown for improvement in the GDP, which is expected to go up by 1-2 per cent. The Government has also announced the focus on the ‘Make-in-India’ concept which should also aid in bringing back manufacturing operations to the country. A related suggestion is to change the mot-to from ‘Make-in-India’ to ‘Made-in-India’. This change would result in enhancing the branding of Indian manu-

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DECEMBER 2016

facturing as an inherently valuable concept with focus on quality which by itself would result in bringing back more manufacturing to India.

In respect of Direct Taxes, demonetization has on its own created some operating problems since India has been historically a cash economy and the said Rs.500 and Rs.1000/- notes accounted for over 85 per cent of the cash in the system i.e. around Rs.15 lakh crore. Therefore, the replacement of the said currencies by new notes will take some time. Parallely, the Govern-ment has also instituted a number of measures for digitization of the transactions to the maximum extent possible and this will definitely help in the long run. The Government has started providing incentives digital payments so that all transactions are brought into the official channels.

A number of economists have opined that the return of the demonetized Rs.500/1000 notes should be less than the Rs.15 lakh crores currency in circulation on a total basis and this would help in RBI extinguishing the liabil-ity for the said shortfall, which in turn could be used to give a special dividend to the Government. As per in-formation available till 10th December, 2016, Rs.12.44 lakh crores of the demonetized currency have already been returned back to the RBI. However, this method-ology for determination of the success or failure of de-monetization may not be the ideal formula. In fact, the Government has already brought about a new Taxation Amendment Law for providing a window for a new In-come Disclosure Scheme. This will help in getting back the black money into the official system after payment of a higher rate of taxes and penalty. This appears to be a very good move to ensure that the unreported cash economy can smoothly move in to the main economy and therefore, the ideal position would be one in which the entire Rs.15 lakh crore of Rs.500/Rs.1000 currency could move into the official channels. The consequential taxes would by itself result in generating additional rev-enue for the Government and the black currency would start contributing to the official economy in terms of investments and growth. Further, the individual banks would get additional liquidity which would by itself help in their ability to give loans to all sectors at a lower in-terest rate for growth and inflation would also come down.

The Black Economy is actually not restricted only to the currency form. It also exists in respect of gold and real estate in addition to foreign moneys stashed abroad. It is imperative that the Government takes further meas-

ures to address the above areas, so that there are no gaps in the administration of the said problem. It may be noted that the Government has already brought about the new laws and regulations in respect of Bena-mi Transactions (Prohibition) Amendment Act, 2016 and Insolvency and Bankruptcy Code, 2016 and it is earnest-ly hoped that the menace of the Black Economy gets finally addressed by this multi-pronged approach.

The abovementioned strategic measures initiated by the Central Government should now be strengthened by new measures in the coming Budget for 2017. It is suggested that the Government introduces special measures for kick starting the economy. This could take the form of a stimulus package for 2017-18 cov-ering various sectors of the national economy as was done in 2008-09. However, this time it could include reduced rates of Indirect Taxes, whether in the form of GST or otherwise depending on the final introduction of the said GST Law. Other measures would include lower rates of interest on loans for various critical ar-eas like auto sector, agriculture and investments in in-frastructure. There could also be in the form of special subsidies in the important areas of the economy. For Direct Taxes, the Government has already mentioned that incentives would be reduced and it would be in the form of investment-linked deductions as opposed to profit- linked deductions for critical infrastructural ar-eas like power (including wind and solar power) roads, highways, ports etc.. This will create more purchasing power for individuals and availability of increased funds for investment in hands of Corporates. Moreover, with the broadening and expansion of the tax base, the tax rates could be brought down for both individuals and corporates, which would incentivise and recharge the national economy.

The Government has already initiated various steps in the last couple of years by setting up the Easwar Com-mittee for simplification of Income Tax Laws, the Ashok Lahiri Committee for reduction of operating issues in In-come Tax, the Standing Committee on TDS for ensuring the smooth administration of tax deduction at source, extensive computerization in respect of return filing, processing, issue of circulars by CBDT for reduction of tax disputes etc..

It is expected that all the above measures would help in bringing about greater growth and buoyancy in the national economy and help in unleashing the country in the global stage so that India can take its rightful place in the world.

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Managing Publicly Held Land as an Asset and for Pub-lic Interest 1

India’s public land holdings are vast and valuable. One of the government’s most significant tangible assets, whether in the hands of central ministries, state gov-

ernments, or local bodies, they occupy substantial acre-age in high value urban areas and around major ports. A pilot inventory of public lands in the Ahmedabad Municipal Corporation2 indicates that 32 per cent of all developed and developable land — excluding road net-work, water bodies, and railway lines — is public land with the Corporation. Indeed, the Union Government departments and organizations are the largest land-owners in the country.3 There is no definitive publicly available inventory of central land holdings, but a study of published sources indicates that these holdings are very large and potentially underutilized.4 The 13 Major Port Trusts hold around 100,000 hectares of land in all. The Airports Authority of India controls 20,400 hectares of high-value land surrounding major airports. Indian Railways has identified 43,000 hectares of its massive landholdings as unnecessary for railway service, and estimated the value of this excess land at some US$40 billion. The Ministry of Defence is India’s largest land-owner. Its holdings amount to over 700,000 acres, of which about 0.7 lakh acres are in cantonments — many of them in prime urban areas. In 2006 and 2007, the Metropolitan Mumbai Regional Development Authority (MMRDA) leased out 13 hectares of land in the Bandra Kurla complex in Mumbai for about Rs. 5000 crores, or

roughly ten times the MMRDA annual infrastructure budget and five times the Mumbai Municipal Corpora-tion budget!5

Public lands in urban areas are highly valuable public resources that deserve open and efficient management following good international practice. The monetary value locked up in government held, but unused land cries out for efficient and effective land management. A commonly held view in India is that land is a scarce, highly valuable and a finite resource. Continued acquisi-tion of private lands for public purpose has become a contentious and socially divisive issue. But any govern-ment seeking to expropriate large tracts of new land for public purpose should manage its existing land hold-ings in a way that not only brings in direct government revenue but also helps indirectly to sustain economic activity in and around these areas.

India is a rapidly modernizing and urbanizing society, a society that is experiencing pressures from many dif-ferent directions to invest in public services, human capital and general welfare. Effective management of public land represents an opportunity to respond to these urgent needs. This should be part of a strategy for managing the government’s balance sheet in public interest. Disposing of surplus lands could free up fiscal resources for investments in other much needed public assets, such as long lived infrastructure networks that can bring benefits to society for years to come.

1 This is drawn from a project done by IDF in 2013. The project was sponsored by PPIAF and World Bank, and was titled Formulation of a Public Policy Framework for Monetizing Excess Public Lands

2 See chapter entitled “Inventory of Public Lands in Ahmedabad, Gujarat, India” in report cited in footnote 1. 3 Chawla et al. (May 2011), Government of India, Cabinet Secretariat, Report of The Committee on Allocation of Natural Resources4 See chapter entitled “Capturing the Value Of Public Land for Urban Infrastructure: Centrally Controlled Landholdings” in the Report cited in

footnote 1.5 See chapter entitled Unlocking Land Values to Finance Urban Infrastructure in the Report cited in footnote 1

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Some of the necessary steps towards this goal are out-lined below. The relevant question here is not whether to release surplus government lands; this is happening and will continue. The operative question is whether the governance arrangements for management of pub-lic lands can be improved to ensure that alienation of these assets better serves the public purpose. The first lesson from international experience is that individual governmental agencies rarely, if ever, identify excess lands voluntarily to permit redisposition of lands no longer needed for their service function. Successful utilization of public lands has mostly happened when a strong centralized government agency has mandat-ed the identification and redisposition of excess lands to ensure proactive management of these assets. The costs of holding onto lands allocated to government departments and agencies are very small. Decentral-ized agencies have little incentive, therefore, to get rid of them.

Second, there must be a reliable and consistent inven-tory of public lands that allows scrutiny by higher level authorities of public land holdings, in particular Finance Ministries/Departments, to ensure that valuable assets are not held indefinitely when they could be converted to other use, public or private. The absence of a regu-larly updated, centralized, and consistent inventory of public lands also leaves considerable scope for aliena-tion through sale, grant, or most likely leasing, of valu-able lands without scrutiny of these transactions.

Third, successful experiences from countries with a federal structure point towards a separation of man-agement arrangements for state and federal level land assets. All of this must begin with a comprehensive in-ventory of public lands. A good inventory should record (a) location and dimensions of each land parcel (b) legal title and any restrictions on development (c) current use and future planned use, if part of a public develop-ment plan and (d) valuation by parcels of economic sig-nificance. Such an exercise should be carried out by all departments in a ministry and by all agencies depend-ing on a ministry for their funding, as well as, by all pub-lic sector undertaking (PSU) owned wholly or partly by government.6 Consistency and comprehensiveness are

more important than introducing sophisticated techno-logical platforms that may slow down the creation of the desired inventory. These must then be made pub-licly accessible. A publicly accessible inventory of public lands is an essential element in accountability.

Fourth, create a centralized process for identifying ex-cess or surplus public lands. Once a list of “surplus” land has been identified and made public, market forces and perhaps other agents of government can focus on the most attractive or useful surplus parcels and express demand for them.

Fifth, create administrative and financial incentives for excess land disposition and sound asset management. One way of achieving this is to place the onus on gov-ernment agencies to justify why they should hold any land parcels, by requiring them to demonstrate their necessary role in the agency’s public service provision. Regardless of whether the land is ultimately disposed of, or not, such an exercise identifies the extent to which land is held as an asset by the government.

Sixth, institute an annual land audit using the principle of value for money in identifying excess public lands. Land held by government should be viewed as an in-put into the provision of the public service for which the landholding agency is responsible. All public land-holdings therefore should regularly be reviewed, with the goal of divesting those properties not necessary or cost-effective for service provision. Property having no efficient use is to be put on the open market at full value (whether for rent, lease or outright sale). Such an audit and its underlying principle will also help in acquisition and allocation of public lands.

And finally, once the audit system is in place, the actual management of the surplus land and the generation of its value must be undertaken by specialized agencies, with a well-defined public interest objective (which, in most cases will involve land value maximization in some form) and clear indicators for evaluating their perfor-mance which, in turn, will have to be incentivised. This is not rocket science but requires political will and lead-ership that enables a government to work in the public interest.

6 Minority owned government PSU’s may cause some complexities but government should use its powers even as a minority shareholder to per-suade the agency to participate voluntarily. It is likely to be in the interests of all shareholders to know the location and be able to make decisions on how to manage these assets with a sense of their potential value. Well managed PSUs are unlikely to have large excess lands and should have nothing to hide.

(View expressed are personal)

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EXIM Performance Analysis: Last Five Years

DECEMBER 2016

The trade deficit for India has continued to follow the declining trend since FY12, on the back of fall-ing global oil prices. While the performance of

the dollar value of aggregate exports has been soften-

ing, mirroring the global slowdown, that of aggregate imports is being curtailed at higher rates on the back of falling oil prices. Oil, holding the top spot amongst importing sectors, also saw a major fall in imports in terms of dollar value as prices had been declining since early 2011. Gems & Jewellery, the second top importing sector has also seen a reduction in its dollar value of im-ports since FY15.

to US$381 billion from US$489 billion in FY12 and US$448 billion in FY15. Exports have shown a less dramatic per-formance, lying at US$262 billion in FY16 from US$306 billion in FY12 and US$310 billion in FY15. In the April to October period during the current fiscal year, trade defi-cit decreased to US$53 billion from US$78 billion in the

Trade deficit at its lowest in last five fiscalyears as exports see a double-digit contrac-tion over FY15

The total deficit for the country dropped to as low as US$119 billion in FY16, from a level of US$183 billion in FY12 and US$138 billion in FY15. Imports in FY16 dropped

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comparable period in FY2016. Exports recorded a near-flat growth in April-October in FY2017, 0.2 per cent; this was however a marked improvement over the steep contraction in exports to the tune of 17.1 per cent in the

comparable period in FY2016. Imports softened from US$233 billion in April-October in FY2016 to US$209 bil-lion in the same period in FY2017.

the lowest at US$19.6 billion in November 2015, while in October 2016, exports stood at US$23.2 billion. Trade deficit was at its highest levels at US$20.2 billion in Oc-tober 2012, during the period of analysis – April 2011 to October 2016, and witnessed a trough at US$4.4 billion in March 2016 earlier this year, while in October 2016, trade deficit levels were to the tune of US$10.4 billion.

The dollar value of aggregate imports in October 2016 stood at US$33.6 billion, as compared to the peak of US$45.3 billion in May 2011 and above US$25.8 billion in April 2016, when they were at the lowest during the pe-riod of analysis – April 2011 to October 2016. During the same period, aggregate exports witnessed their high-est dollar value at US$30.5 billion in March 2013, and

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DECEMBER 2016

LackofdiversificationofIndianexportbas-ket is plaguing the Indian export perfor-manceThe sector-wise pattern in exports has not seen notice-able changes in past three fiscal years. The top three ex-porting sectors – engineering goods, gems & jewellery and textiles – contribute to over half the dollar value of aggregate exports, while next three – oil, agriculture and drugs & pharmaceuticals – add the next quarter to

the tally. This limited diversification of India’s export basket has led to a stagnant trend in export perfor-mance, as a dismal performance in these sectors sways the dollar value of aggregate Indian exports. During the last fiscal year, all these six sectors have witnessed a contraction in the dollar value of their exports, with the exception of drugs & pharmaceuticals. However, the drugs & pharmaceuticals sector has also seen a contrac-tion in exports during April to October period of FY17.

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Engineering goods has been a top exporter since FY14, contributing one fourth of dollar value of aggregate In-dian exports. While this proportion has been fairly con-stant, in FY16, engineering exports saw a contraction to the tune of 14.8 per cent in its dollar value, as compared to a double-digit growth of 13.9 per cent in FY15. This is a major cause of worry as engineering goods comprise a major chunk of aggregate exports. The situation has improved only to a limited extent in the April to October period in the current fiscal. The contraction in that pe-riod stood at 1.3 per cent as compared to de-growth of 11.3 per cent in the comparable period in FY16.

Gems & jewellery, contributing around 15 per cent of to-tal dollar value of exports in FY16, witnessed a further contraction to the tune of 4.6 per cent in its dollar value of exports as compared to a de-growth of 0.9 per cent in FY15. In the April to October period in FY17, the sector witnessed dramatic improvement in growth rate to the tune of 14.5 per cent as compared to a negative growth rate of 6.4 per cent in the comparable period in FY16.

Textiles, which contributed around 13 per cent of total dollar value of aggregate exports during FY16, also saw its share diminishing by 2.3 per cent in FY16, as com-pared to a growth of 5.6 per cent in the previous fiscal year. The growth rate declined further in April to Octo-ber period of current fiscal year to a negative rate of 4.4 per cent as compared to a contraction of 0.4 per cent in the same period in FY16. Agriculture, contributing to 8 per cent of dollar value of aggregate exports during FY16, saw a contraction of 18.3 per cent in FY16 as com-

pared to a de-growth of 4.8 per cent in 2015. In fact, for eight of the top 10 exporting sectors, growth rates lay in the negative territory. While this was, in some part, a result of the falling demand due to slowdown in global economies, the importance of these commodity groups in the aggregate Indian export basket affected aggre-gate export growth adversely.

Drugs & pharmaceuticals industry, unlike all the rest, was expanding its dollar value of exports till FY16. The absence of product patents, till its revision in 2005, had helped India build the capacity to manufacture generic drugs, resulting in high export growth figures. April to October period in FY17 however saw a negative growth rate to the tune of 2.1 per cent in this sector on account of a steep fall in prices. This happened because of grow-ing consolidation of the distribution business in the world’s largest markets, especially the US, while the supply side of generic drugs remains competitive. Also drug multinationals have pressured governments into tightening the norms to discourage bulk exports from abroad, sounding bad news for the Indian pharmaceu-ticals industry.

Iron-ore exports, that were large because of demand from China, have been slowing down in each fiscal year since FY14 due to slowdown in China. Increasing domes-tic demand of crude and petroleum within the country has reduced the exports in the oil sector as well, in each fiscal year since FY14. Although handicraft exports have been performing consistently well since FY14, their meager contribution of 0.7 per cent, during FY16, fails to make a dent in the aggregate export basket.

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DECEMBER 2016

The dollar value imports in Oil and Gems & Jewellery sectors continues to contract

During FY16, the top three importing sectors – oil, gems & jewellery and electronic goods – contributed to a lit-tle less than half the total dollar value of aggregate im-ports, while the next three sectors – machinery, chemi-cals and base metals – added the next quarter to the tally. While the list of top ten importing sectors has not seen major inclusions or exclusions over last three fiscal years, the proportions have seen noticeable changes. The proportion of oil in the dollar value of aggregate imports has declined from 36 per cent in FY14 to 22 per cent in FY16. Electronic goods comprised 11 per cent of the dollar value of aggregate imports in FY16 as com-pared to 7 per cent in FY14.

The observation that – while oil has seen a large decline in proportion of imports, the change has been not so dramatic for other sectors – reflects that the decline in the dollar value of aggregate imports as a denominator is in tandem with the decline in dollar value of imports

of oil. In other words, oil has been a near sole contribu-tor to curtailing of imports and trade deficit. While the dollar value of aggregate imports contracted by 15.0 per cent in FY16 and that of all other sectors with the excep-tion of oil contracted by only 3.8 per cent in the same fiscal year, oil imports alone witnessed contraction to the tune of 40.0 per cent in dollar value during FY16. It is noteworthy, however, as prices have been correcting, imports have contracted only 15.4 per cent in the April to October period of FY17 as compared to a contraction of 41.9 per cent in the comparable period in FY16.

Gems & jewellery, which contributed to as much as 15 per cent to the total dollar value of imports in FY16, saw a contraction in imports of 9.8 per cent in dollar value as compared to a growth of 7.6 per cent in the previous fiscal year. In the April to October period of the current fiscal, imports contracted further to the tune of 20.4 per cent as compared to a negative growth rate of 6.4 per cent in the comparable period in FY16.

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Six of the top ten importing sectors witnessed a con-traction in the dollar value of imports. In the April to October period of the current fiscal as many as nine of the ten sectors witnessed a contraction in imports. Growth in the dollar value of import of electronic goods softened in FY16 and stood at 9.8 per cent as compared to 15.5 per cent in FY15. In the April to October period of FY17, contraction of 1.8 per cent was witnessed howev-er, as compared to a growth rate of 9.5 per cent in simi-lar period in previous fiscal. Machinery saw a contrac-tion to the tune of 5.4 per cent in FY16 as compared to a growth of 8.6 per cent in FY15. The downward trend is persistent as the sector saw a contraction of 15.0 per cent in April to October period of FY17 as compared to

1.3 per cent growth in comparable period in FY16. Chem-icals witnessed a higher growth of 3.0 per cent in FY16 as compared to a growth of 1.9 per cent a year ago. In the April to October period of FY17 however, the sector slipped into negative territory and contracted by 2.0 per cent as compared to a 2.2 per cent growth in April to October period in FY16. Base metals, which constituted 6 per cent of the aggregate imports in FY16 in terms of dollar value, saw a contraction of 8.6 per cent in FY16 in its dollar value of imports as compared to a growth of 25.1 per cent in FY15 as prices of base metals corrected. The trend persists as the sector saw a contraction of 17.2 per cent in April to October period of FY17 as compared to 3.1 per cent de-growth in comparable period in FY16.

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DOMESTIC TRENDS

DECEMBER 2016

The monthly performance of major sectors, in the first two quarters of FY17, apart from oil and gems & jew-ellery which are on a clear declining trend, has been mixed. Electronic goods and chemicals have seen a somewhat sustained level of imports during April 2016 to October 2016. Imports in machinery, base metals, ores & minerals, transport equipment and agriculture have softened during the same period – the first two quarters of FY17.

Aftermath: Rising oil prices sound warning bells for India

Export performance has become a cause for serious concern especially as out of top ten sectors – which comprised around 90 per cent of dollar value of aggre-gate exports during FY16– eight have registered a con-traction in dollar value of exports. While momentarily, imports seem to provide some cushion to the widening

Industrial output contracted in October 2016, declin-ing by 1.9 per cent as compared to 0.7 per cent in the previous month. Mining and manufacturing segments remained a cause for concern with capital goods con-tinuing to weigh on the headline print. Consumer goods recorded a contraction as well during the month. The

Manufacturing sector growth once again slips into negative territory

The manufacturing sector, which has the highest weight among all the industrial output sub-sectors, once again slipped into the negative territory — contracting by 2.4

deficit, it is important to note that the OPEC decision on 30th November 2016 to reduce oil production has sent oil prices into a rally resulting in apprehensions about the continuation of the gains accrued from low oil prices. A potential ban on gold import will help ease the situation and reduce imports to some extent; gold prices have already been falling since July 2016. The best course would be to take preventive actions as soon as possible, before the trade deficit plunges into a wide gap again. These would include diversification of ex-ports basket, lobbying for better prices for agricultural products in the international markets, curtailing oil con-sumption by promoting renewable energy devices and encouraging further not just the Make in India initiative but also focusing on use of indigenous raw materials and exporting finished products as compared to semi-finished produce so as to fetch best prices especially in industries like electronic goods, agriculture and gems & jewellery.

recent weakness in IIP has already shown up in lower than expected GDP growth in Q2FY17. On a cumulative basis, factory output in April-October 2016 contracted by 0.3 per cent compared to 4.8 per cent growth in the same period a year-ago.

per cent in October 2016 as compared to 0.9 per cent growth in September 2016. In terms of industries, 12 out of the 22 industry groups (as per 2- digit NIC-2004) in the manufacturing sector showed negative growth during October 2016 as compared to the corresponding month of the previous year. For the April-October 2016

Industrial Output Contracts Once Again

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period, the sector’s output contracted by 1.0 per cent, as against a growth of 5.1 per cent in the same period a year ago. Mining & quarrying sector continued to re-main in the negative territory for the third consecutive month, declining by 1.1 per cent in October 2016, while electricity sector posted an anemic growth of 1.1 per cent in the reporting month as compared to 2.4 per cent in the previous month.

Capital goods continue to remain a key drag on the overall IIP

According to use-based classification, capital goods con-tinued to remain a key drag on the overall IIP. Capital goods witnessed the twelfth straight month of contrac-tion in the month of October 2016. The sector posted a contraction of 25.9 per cent in October as compared to a decline of 21.6 per cent in the previous month. Within this sector, rubber insulated cables was the major lag-gard. The continued decline in the output of the capital goods sector has raised doubts about the recovery of investment cycle in the country. To be sure, industrial

production excluding the output of the capital goods sector stood at 1.9 per cent during the month as com-pared to 4.3 per cent in the previous month. Going for-ward, capital expenditure by the Government will be crucial to support recovery in this segment.

Consumer goods growth also contracts dur-ing the month

Consumer goods growth entered the negative territory for the first time in 6 months in October 2016. Within this category, consumer durables witnessed a sharp slowdown at 0.2 per cent as compared to double-digit growth of 13.9 per cent in September 2016. Consumer non-durables contracted by 3.0 per cent as compared to 0.1 per cent growth evidenced in the previous month. This segment has been depressed for most of the year. While better monsoon and pay panel awards were ex-pected to aid this sector, the recent demonetisation move of the government is anticipated to bring sub-dued gains for this sector.

In contrast, core sector output improves for the second consecutive month in October 2016

The output of eight core infrastructure industries im-proved to 6.6 per cent in October 2016 on a year-on-year basis as compared to 5.0 per cent in September 2016, thanks to a sharp rise in refinery production and

a pick-up in cement production. The cumulative output rose to 4.9 per cent in April-October 2016 over the cor-responding period of last year. The index measures the output in eight infrastructure sectors – steel, cement, coal, refinery products, natural gas, crude oil, fertilisers and electricity generation. It has a 38 per cent weight in the Index of Industrial Production (IIP).

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DECEMBER 2016

OutlookThe contraction in industrial output in October 2016 is a matter of concern. However, going forward, normal mon-soons, which should improve rural demand, along with the lagged impact of interest rate reductions and 7th pay commission handouts, are expected to cushion demand in future and boost industrial activity. There may be short-term disruptions on account of government’s recent demonetisation move as it impacts the cash based transac-tions, which are a large part of the Indian economy. However, in the medium-term the impact of this demonetisa-tion will be largely positive for economic growth.

Cement output quickened to 6.2 per cent in October 2016 compared with a 5.5 per cent rise in September 2016. Refinery products output expanded sharply to 15.1 per cent in October 2016 as compared to 9.3 per cent in

the previous month. The same three sectors continued to contract in October 2016 as in August and September 2016 - coal, crude oil and natural gas.

Wholesale Price Index (WPI) based inflation continued its downward trajectory as it slowed down to 3.2 per cent in November 2016 as compared to 3.4 per cent in the previous month mainly due to a squeeze in cash availability which in turn impacted prices of perishable commodities. CPI inflation too edged lower to 3.6 per cent in November 2016 from 4.2 per cent previously on the back of lower food prices even as core inflation re-mained sticky. CPI food inflation cooled further to 2.6 per cent from 3.7 per cent previously. Within this seg-ment, vegetables inflation and pulses led the steepest fall in November 2016 as compared to October 2016. Pulses inflation fell to 0.2 per cent as compared to 4.1 per cent in the previous month. Government measures to address structural issues in pulses have cooled down

prices in this segment. While concerns in pulses infla-tion have lessened off-late, recent areas of concerns like sugar and cereals still remain. To be sure, inflation in sugar has continued to remain in double-digits for 8 consecutive months. Meanwhile, CPI core inflation stood unchanged at 4.9 per cent.

Retail inflation for November 2016 is presently within RBI’s comfort zone wherein CPI is within the 4 per cent level with a two-percentage point-band on either side. The moderate inflation scenario has rightly facilitated the RBI decision to retain the accommodative policy stance in the recent Monetary Policy. CII expects the WPI inflation for November 2016 to also follow the trail of CPI inflation so that the overall inflation trajectory continues to remain benign.

Inflation Ebbing Down Slowly

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Food and non-food articles inflation pullsdowninflationinprimaryarticles

Amongst the WPI sub-categories, inflation in primary articles eased sharply to 1.1 per cent in November 2016 as against 3.3 per cent growth posted in October 2016. Within primary articles, inflation in both food and non-food sub categories witnessed a moderation in out-put during the reporting month. For instance, primary food inflation slowed to 1.5 per cent (as compared to 4.3 per cent in October 2016) while non-food inflation stood at -0.1 per cent (as compared to 1.1 per cent in Oc-tober 2016). The main reason behind the deceleration in primary food inflation was the steep fall in vegeta-ble prices which dropped to -24.1 per cent in November 2016 against -9.97 per cent increase in October 2016. . However, inflation in mineral category quickened to 1.2 per cent during the reporting month as compared to a contraction during the previous month.

Fuel inflation accelerates; upward risks insight

In contrast, inflation in the fuel group of WPI acceler-ated to 7.2 per cent in November 2016 from 6.2 per cent in the previous month. Inflation in both, petrol and diesel group, quickened to 5.5 per cent (from 3.6 per cent in October 2016) and 19.5 per cent (19.3 per cent

in October 2016) respectively in October 2016. Going forward, with the Organization of the Petroleum Ex-porting Countries (OPEC) announcing an agreement in November 2016 to cut back on output in an attempt to lift global prices back up, we can expect some upward pressure on global crude oil prices. This in turn will push up domestic fuel inflation as well. Crude oil prices re-cently hit an 18-month high of US$56.44 per barrel.

Non-food manufacturing inflation remainssticky

Similarly, Inflation in the manufactured group quick-ened to 3.0 per cent in November 2016 as compared to 2.7 per cent posted in the previous month. Manufactur-ing food inflation, which had moved to double-digits in July 2016 marginally increased to 10.7 per cent in the reporting month from 10.5 per cent in the previous month. Meanwhile, manufacturing non-food inflation (popularly called as core inflation and a proxy for de-mand-side pressures in the economy) remained sticky at 1.4 per cent in November 2016 as compared to 1.0 per cent in October 2016. With core inflation recording an increase after a prolonged period of deflation, there are indications that demand is returning to the economy. However, the recent demonetisation move of the gov-ernment is expected to curb some demand pressures.

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DECEMBER 2016

OutlookBoth WPI and CPI inflation moderated in November 2016, providing relief to the policymakers. The softening of CPI and WPI inflation was attributed essentially to a downward drift in the momentum of food prices assisted by favourable monsoon which has led to record food-grain output in the kharif season. The fall in prices could also be partly reflective of the demonetisation impact, which has led to lower demand in the economy due to a cash crunch. The moderate inflation scenario has rightly facilitated the RBI decision to retain the accommodative policy stance and will encourage RBI to further reduce rates.

In a surprise move, the Reserve Bank of India (RBI) maintained status-quo and kept all the policy rates un-changed in its fifth third bi-monthly monetary policy review held on December 7th, 2016. The Central Bank, while flagging uncertainties from the recent demon-etization move, noted that it will wait and watch to see how these factors pan out. However, the decision of the Monetary Policy Committee (MPC) was in con-

sonance with the objective of containing consumer price index (CPI) inflation at 5 per cent by Q4FY17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth. The repo rate remains unchanged at 6.25 per cent while reverse repo rate and Marginal Standing Facility (MSF) rate currently stand unchanged at 5.75 per cent and 6.75 per cent re-spectively.

RBI Keeps Policy Rates Unchanged, Maintains an Accommodative Stance

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RBI takes notes of a gradual but steady growth recovery

On the growth front, the Central Bank highlighted that the output of real Gross Value Added (GVA) in Q2 of 2016-17 turned out to be lower than projected on ac-count of a deeper than expected slowdown in indus-trial activity. Investment spending still remains in the negative territory. Moreover, the growth outlook of the third quarter was clouded by the still unfolding ef-fects of the withdrawal of the high denomination legal tender. In view of latter, RBI noted that the downside risks to growth in the near-term have risen which could travel through two major channels: (a) short-run disrup-tions in economic activity in cash-intensive sectors such as retail trade, hotels & restaurants and transportation, and in the unorganised sector; (b) aggregate demand compression associated with adverse wealth effects. Hence, it pared its GVA growth forecast for 2016-17 from 7.6 per cent to 7.1 per cent, with evenly balanced risks.

However, the Central Bank sounds a cau-tiousnoteoninflation

On the inflation front, RBI added that the downside to inflation has increased since the last policy, but risks re-main as the impact of rising global oil prices and rupee depreciation on imported inflation and the effect of the 7th Pay Commission payouts on consumer demand will be visible soon. Going forward, inflation in categories such as housing, transport, trade in household goods and consumer services — including ‘eating out’ which relies mostly on cash transactions- will most likely see

a downward pressure in the coming months. Conse-quently, as per the RBI, the withdrawal of high denomi-nation legal tender could result in a possible temporary reduction in inflation of the order of 10-15 basis points in Q3FY17. Taking these factors into account, headline inflation is projected at 5 per cent in Q4 of 2016-17 with risks tilted to the upside but lower than in the October policy review.

Demonetisation impact felt on liquidity con-ditions

The policy acknowledged the surge in systemic liquid-ity as a result of the move to replace specified bank notes. However, this is likely to be seen as transitory and the objective of moving liquidity towards neutral-ity remains in place. A slew of steps were taken by the RBI to manage the excess liquidity entering the banking system post the demonetisation move announced by the government on 8th November, 2016. To be sure, the currency in circulation plunged by Rs 7.4 trillion up to December 2, 2016; consequently, net of replacements, deposits surged into the banking system, leading to a massive increase in its excess reserves. The Reserve Bank scaled up its liquidity operations through variable rate reverse repo auctions of a wide range of tenors from overnight to 91 days, absorbing liquidity (net) of Rs 5.2 trillion. From the fortnight beginning November 26, an incremental Cash Reserve Ratio (CRR) of 100 per cent was applied on the increase in Net Demand and Time Liabilities (NDTL) between September 16, 2016 and November 11, 2016 as a temporary measure to drain excess liquidity from the system.

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DECEMBER 2016

OutlookRBI’s decision to maintain a status-quo in policy rates is reflective of the primacy given to restraining inflationary expectations in the monetary policy discourse even while maintaining an accommodative stance. The recent global developments have also persuaded the RBI to maintain the status quo. With banks now flush with liquidity post de-monetisation, CII hopes that lending activity can be facilitated at a time when credit to industry is at a six- year low. Employment-intensive sectors such as the auto, consumer durables and housing industry and the SME sector, which are presently facing cash crunch, need to be revived quickly.

Current account deficit (CAD) for the second quarter of the current fiscal (2QFY17) stood slightly higher at US$3.4 billion or 0.6 per cent of GDP as compared to US$0.3 billion or 0.1 per cent of GDP in the previous quarter mainly due to higher trade deficit and lower invisibles. However, in the same quarter last year, CAD stood sharply higher at US$8.5 billion which translates into 1.7 per cent of GDP. The contraction in CAD on a year-on-year (y-o-y) basis could be primarily attributable to a lower trade deficit (US$25.6 billion) brought about by a larger decline in merchandise imports relative to exports. However, rising crude oil prices may put some pressure on trade deficit going forward. Crude prices reached an 18-month high at US$56.44 per barrel on 12th December, 2016 after members of the Organiza-tion of the Petroleum Exporting Countries (OPEC) and

oil producers outside the group led by Russia agreed to reduce output. On a cumulative basis, the CAD nar-rowed to 0.3 per cent of GDP in H1 of 2016-17 from 1.5 per cent in H1 of 2015-16 on the back of the contraction in the trade deficit.

Invisiblerelatedflowslowerin2QFY17

Invisibles related flows were lower at US$22.2 billion in 2QFY17 as compared to US$29.2 billion in the same quarter last year. Component wise, net services re-ceipts moderated on y-o-y basis, primarily owing to the fall in earnings from software, financial services and charges for intellectual property rights. Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to US$15.2 billion, hav-ing declined by 10.7 per cent from their level a year ago.

quarter last year mainly on account of higher net for-eign investment. The net foreign investments were fired up by a healthy jump in foreign direct investment (FDI) component during the quarter. Meanwhile, port-

Higher direct foreign investment cushions capital account

Net capital account increased sharply to US$12.7 billion in 2QFY17 as compared to US$7.6 billion in the same

Current Account Deficit Widens in 2QFY17

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folio flows witnessed an inflow of US$6.1 billion as com-pared to an outflow to the tune of US$3.4 billion in the same quarter in the previous year. Buoyant IPO market domestically and ample liquidity globally supported portfolio related flows during the quarter.

We expect CAD to come below 1 per cent of GDP in FY17. The key risk to the outlook is volatility in portfo-lio related flows and deceleration in remittance related inflows. From a longer term perspective, although the external sector performance remains favorable, the

Robust foreign investment and lower current account deficit supported BoP to remain in positive territory. In Q2 of 2016-17, foreign exchange reserves (on BoP ba-sis) increased by US$8.5 billion as against a decline of US$0.9 billion in Q2 of last year

sustainability of the same is still doubtful in view of the global headwinds like uncertainty from Trump presiden-cy, Italy referendum etc. still hovering over the horizon. Sustaining the positive momentum of exports perfor-mance will be crucial in this regard.

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CORPORATE PERFORMANCE

Corporate Performance of Manufacturing Sector Shows Improvement

DECEMBER 2016

The corporate results at the end of the second quarter of fiscal year 2017 brought a reason for cheer for the manufacturing sector which saw

an improvement in both its bottom-line and top-line. The sector, which was buoyed by a significant fall in in-puts costs following the collapse of global commodity prices, registered a sharp pickup in profitability growth in 2QFY17 as compared to the same quarter a year ago. Worryingly, both bottom-line and top-line of services sector firms continued to remain weak so far. The anal-ysis factors in the financial performance of a balanced panel of 1670 manufacturing companies (excluding oil and gas companies) and 948 service firms extracted from the CMIE’s Prowess database.

Bottom-lineoffirmsonanaggregatebasisregistersastellarperformancein2QFY17

In 2QFY17, the bottom-line of the manufacturing firms registered a growth of 28.3 per cent as compared to 13.6 per cent in the same quarter a year ago. Net sales of manufacturing firms also grew by 3. 9 per cent in 2QFY17 as compared to a contraction of 1.4 per cent in 2QFY16. Thanks to the slump in commodity prices in the past few years, manufacturing firms were able to im-prove their profitability fairly easily. But they no longer have this advantage at present. In fact, after the recent decision by the Organization of the Petroleum Export-ing Countries (OPEC) to cut production, Brent crude futures rallied by 15 per cent in the week till 2nd Decem-ber, posting their biggest weekly gain in over five years. Moreover, the demonetisation move of the govern-ment is also expected to hit both sales and profitability of firms going forward.

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In contrast, net sales growth is recovering slowlyService sector performance has remained lackluster since last few quarters. Net sales growth of service sector firms contracted by 4.2 per cent in 2QFY17 as compared to 8.1 per cent growth in 2QFY16, reflecting in part the lack of ample demand in the economy. The

After several quarters of disappointments, the Septem-ber quarter results of Indian companies were slightly ahead of expectations. However, before any celebra-tions could kick in, the companies have been hit by the double whammy of a Donald Trump presidency and the Indian government’s demonetisation of high-value cur-rency notes.

Efforts are in force by firms to improve their own pro-

slowing demand in the external markets has been do-ing no good either. In contrast, PAT growth of service sector firms improved to 5.3 per cent in 2QFY17 as com-pared to contraction of 4.9 per cent in the same quarter in the previous year. Once again, the profitability of ser-vice sector firms was cushioned by falling input prices.

duction efficiencies and employ cost effective measures to tide over the current difficult times. Simultaneously, there are also expectations of some serious economic reforms, some of which have already come in form of necessary rate cuts by the RBI, that would elevate the economy, help pick up sales and raise the profitability for the Indian corporate in the months to come.

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POLICY FOCUS

DECEMBER 2016

1. Lok Sabha Passes Disabilities Bill

The Lok Sabha passed on 16th December, 2016 “The Rights of Persons with Disabilities Bill - 2016”. The Bill will replace the existing Persons with Disabilities (PwD) Act, 1995, which was enacted 21 years back. The Rajya Sabha has already passed the Bill on 14.12.2016.

The salient features of the Bill are:

i. Disability has been defined based on an evolving and dynamic concept.

ii. The types of disabilities have been increased from existing 7 to 21 and the Central Government will have the power to add more types of disabilities.

iii. Speech and Language Disability and Specific Learn-ing Disability have been added for the first time. Acid attack victims have been included. Dwarf-ism, muscular dystrophy have has been indicated as separate class of specified disability. The New categories of disabilities also included three blood disorders, Thalassemia, Hemophilia and Sickle Cell disease.

iv. In addition, the Government has been authorized to notify any other category of specified disability.

v. Responsibility has been cast upon the appropriate governments to take effective measures to ensure that the persons with disabilities enjoy their rights equally with others.

vi. Additional benefits such as reservation in higher ed-ucation, government jobs, reservation in allocation of land, poverty alleviation schemes etc. have been provided for persons with benchmark disabilities and those with high support needs.

vii. Every child with benchmark disability between the age group of 6 and 18 years shall have the right to free education.

viii. Government funded educational institutions as well as the government recognized institutions will have to provide inclusive education to the children with disabilities.

ix. For strengthening the Prime Minister’s Accessible India Campaign, stress has been given to ensure ac-

The important policy announcements by the Government in the month of November-December 2016 are covered in this month’s Policy Focus. Our endeavor through this section is to keep our readers abreast of the latest happenings

on the policy front so that they can take an informed decision accordingly.

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POLICY FOCUS

cessibility in public buildings (both Government and private) in a prescribed time-frame.

x. Reservation in vacancies in government establish-ments has been increased from 3 per cent to 4 per cent for certain persons or class of persons with benchmark disability.

xi. The Bill provides for grant of guardianship by Dis-trict Court under which there will be joint decision – making between the guardian and the persons with disabilities.

xii. Broad based Central & State Advisory Boards on Disability are to be set up to serve as apex policy making bodies at the Central and State level.

xiii. Office of Chief Commissioner of Persons with Dis-abilities has been strengthened who will now be as-sisted by 2 Commissioners and an Advisory Commit-tee comprising of not more than 11 members drawn from experts in various disabilities.

xiv. Similarly, the office of State Commissioners of Disa-bilities has been strengthened who will be assisted by an Advisory Committee comprising of not more than 5 members drawn from experts in various dis-abilities.

xv. The Chief Commissioner for Persons with Disabili-ties and the State Commissioners will act as regula-tory bodies and Grievance Redressal agencies and

also monitor implementation of the Act.

xvi. District level committees will be constituted by the State Governments to address local concerns of PwDs. Details of their constitution and the func-tions of such committees would be prescribed by the State Governments in the rules.

xvii. Creation of National and State Fund will be created to provide financial support to the persons with disabilities. The existing National Fund for Persons with Disabilities and the Trust Fund for Empower-ment of Persons with Disabilities will be subsumed with the National Fund.

xviii.The Bill provides for penalties for offences commit-ted against persons with disabilities and also viola-tion of the provisions of the new law.

xix. Special courts will be designated in each district to handle cases concerning violation of rights of PwDs.

The New Act will bring our law in line with the United National Convention on the Rights of Persons with Dis-abilities (UNCRPD), to which India is a signatory. This will fulfill the obligations on the part of India in terms of UNCRD. Further, the new law will not only enhance the Rights and Entitlements of Divyangjan but also provide effective mechanism for ensuring their empowerment and true inclusion into the Society in a satisfactory man-ner.

CII’s Reaction The Rights of persons with Disabilities Bill, 2014 passed by both the houses is a landmark decision towards ensur-ing equal opportunities and accessibility to the Persons with Disabilities and will go a long way in creating inclusive society. The bill takes into fold the Corporate sector to ensure that persons with disabilities are provided with barrier-free access in buildings, transport systems and all kinds of public infrastructure, and are not discriminated against in matters of employment.

Empowerment of Persons with Disabilities (PwDs) has been an important part of CII’s agenda for promoting and enabling inclusion. CII has been working towards mainstreaming PwDs into the workforce, by sensitizing members through a ‘Corporate Code on Disability’, manuals to assist companies with hiring processes, sensitization films to encourage companies; facilitating employment through dedicated recruitment drives across India; and promoting barrier free workplaces to enable access to services and facilities.

“CII is highly committed to bring in transformational change in the society and welcomes the Disability Bill. CII looks forward to further engagement with the government on the new bill. We hope that the guidelines will emerge through a consultative process with all stakeholders and will create a facilitative environment for industry to cre-ate disabled friendly policies, infrastructure and services” Chandrajit Banerjee, Director General, Confederation of India Industry.

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DECEMBER 2016

2. GST Council approves most of draft mod-el Bill

The Goods and Services Tax (GST) Council, comprising the Union finance minister and state representatives, mainly their finance ministers met for two days on 23-24 December, 2016. The Council approved structure of Central Goods & Services Tax (CGST) and State Goods & Services Tax (SGST) laws. The Council also cleared most of the draft model GST Bill. With the sharing of adminis-trative powers a tough nut to crack, the Goods and Ser-vices Tax (GST) Council sidestepped it and devoted pro-ductive time to make the principal Bill of 195 sections, defining the comprehensive indirect tax, foolproof and ready for tabling in Parliament and state assemblies.

3. GovernmentofIndiaRescindsClassifica-tionofCyprusas”notified jurisdictionalarea”

Recently, on 18 November 2016, a revised double taxa-tion avoidance agreement (DTAA) was signed between India and Cyprus (2016 DTAA), which replaced the ear-lier DTAA of 1994. Subsequent to the above, the Cen-tral Board of Direct Taxes (CBDT) of the Government of India (GoI) has now published Notification No. 114 of 2016 dated 14 December 2016 (2016 Notification) in the Gazette of India rescinding Cyprus’ classification as a “Notified Jurisdictional Area” (NJA) under the Indian Tax Laws (ITL). The 2016 Notification rescinds the NJA classification of Cyprus from 1 November 2013, except as respects things done or omitted to be done before such rescission.

4. Cabinet Approves Replacement of ‘Major Port Trusts Act, 1963’

The Union Cabinet, chaired by the Prime Minister, Shri Narendra Modi has approved the proposal of Ministry of Shipping to replace the Major Port Trusts Act, 1963 by the Major Port Authorities Bill, 2016. This will empower the Major Ports to perform with greater efficiency on account of full autonomy in decision making and by modernizing the Institutional structure of Major Ports.

With a view to promote the expansion of port infra-structure and facilitate trade and commerce, the pro-posed bill aims at decentralizing decision making and to infuse professionalism in governance of ports. The new Major Ports Authority Bill, 2016 would help to im-part faster and transparent decision making benefiting the stakeholders and better project execution capabil-ity. The Bill is aimed at reorienting the governance mod-el in central Ports to landlord port model in line with the

successful global practice. This will also help in bringing transparency in operations of Major Ports.

The salient features of the Major Ports Authority Bill are as under:

a. The Bill is more compact in comparison to the Major Port Trusts Act, 1963 as the number of sections has been reduced to 65 from 134 by eliminating over-lapping and obsolete Sections.

b. The new Bill has proposed a simplified composition of the Board of Port Authority which will comprise of 11 members from the present 17 to 19 Members representing various interests.

c. The role of Tariff Authority for Major Ports [TAMP] has been redefined. Port Authority has now been given powers to fix tariff which will act as a refer-ence tariff for purposes of bidding for PPP projects. PPP operators will be free to fix tariff based on mar-ket conditions. The Board of the Port Authority has been delegated the power to fix the scale of rates for other port services and assets including land.

d. An independent Review Board has been proposed to be created to carry out the residual function of the erstwhile TAMP for Major Ports, to look into dis-putes between ports and PPP concessionaires, to review stressed PPP projects and suggest measures to review stressed PPP projects and suggest meas-ures to revive such projects and to look into com-plaints regarding services rendered by the ports/private operators operating within the ports would be constituted.

e. The Boards of the Port Authority have been dele-gated full powers to enter into contracts, planning and development, fixing of tariff except in national interest, security and emergency arising out of inac-tion and default. In the present MPT Act, 1963 prior approval of the Central Government was required in 22 cases.

f. Empowers the Board to make its own Master Plan in respect of the area within the port limits and to construct within port limits Pipelines, Telephones, Communication towers, electricity supply or trans-mission equipment. The Board is empowered to lease land for Port related use for upto 40 years and for any purpose other than the purposes specified in section 22 for upto 20 years beyond which the ap-proval of the Central Government is required.

g. Provisions of CSR & development of infrastructure by Port Authority have been introduced.

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GLOBAL TRENDS

OPEC Decision to have Major Repercussions

On 30th November 2016, the Organization of the Petroleum Exporting Countries (OPEC) an-nounced their first oil production agreement in

eight years. The historic agreement will see oil produc-tion by OPEC nations cut by 1.2 million barrels per day (b/d) to about 32.5 million b/d for six months from the start of January 2017. The agreement also has an option to extend the agreement to the end of 2017. Aggregate production has been stated in terms of the 14 OPEC

members including Indonesia, although Indonesia is no longer a member as of this meeting. Non-OPEC mem-bers including Russia have also agreed to lower produc-tion by 600 thousand barrel per day (kb/d). The heavy lifting though looks set to be done by Saudi Arabia who has agreed to reduce output by 486 kb/d. At the same time the Saudis appear to have softened their stance on Iran somewhat with the latter now freezing production at nominally less than 3.8m b/d and marginally higher than current levels. Iraq, who had previously disputed price cutting, agreed to a cut of 210 kb/d. OPEC will also establish a monitoring committee with the aim of im-proving compliance from the historical record.

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Comparing the agreed reductions among member countriesComparing the agreed reductions in absolute terms, Saudi Arabia is committing to the largest reduction. However, comparing the agreed output ceilings against November 2014 production (before the initiation of the market share maximization strategy), both Saudi Ara-bia and Iraq will hold onto the majority of their gains. Viewed in terms of percentage reductions to baseline levels, OPEC member countries are very tightly grouped around the 4.4 per cent to 4.8 per cent range(not clear), with an average reduction of 4.56 per cent. Indonesia requested for suspension of its OPEC membership be-cause as a net importer of oil, it will struggle to support the deal. Iran wanted exemptions on account of an at-tempt to recapture the market share lost under years of western sanctions. Libya and Nigeria, asked for the same, since exports have been hampered due to vio-lence. The issue of offsetting increases from exempt countries has become all the more pressing because Libya raised its production by 150 kb/d and Nigeria by 180 kb/d in October, while Saudi Arabia has been slow to reduce production from the summer ramp-up. The only factor depressing production in October was main-tenance activity in Angola which lowered output by 170 kb/d to 1.52m b/d.

Thesignificanceofnon-OPECcontributionsOn the subject of non-OPEC contributions to a pur-ported 600 kb/d reduction, meetings are scheduled between OPEC and non-OPEC producers in the current month. According to the OPEC press conference, Oman has offered to contribute by way of cuts of up to 10 per cent in line with the OPEC reduction while Russia has offered a cut of 300 kb/d. However, there is a history of Russian non-compliance and also Russian oil produc-tion is not the output of a single state-owned com-pany but rather a number of at least partially publicly owned companies. Further several new fields are being launched which will contribute meaningfully in 2017. At-tempts to cut production at the brownfields could in turn result in additional costs that oil companies would be unwilling to bear.

A meeting held on 28th September 2016 in Algiers had preceded the one on 30th November 2016 in Vienna. A skeptical view had then been held on the possibility of a production cut. This was because of rising output from Libya and Nigeria, the uncertainty of how the pact might deal with country exemptions and disputes over a distinction between reported and actual production in Iraq. However, a further meeting on 28-29 October was characterized as constructive and fruitful and pro-duction cuts are now underway. The agreement is more bullish than market expectations. First, the 33.0m b/d upper limit in the range, as mentioned by OPEC in an earlier announcement, has been omitted, leaving the 32.5m b/d as the sole target level. Second, the non-OPEC contributions of 600 kb/d have been described as nearly agreed, with Russia and Oman having been named as key contributors. That said while the agree-ment is clearly a big help for the demand-supply rebal-ancing, there remains skepticism that the full non-OPEC reduction will be realized.

The decision continues to command atten-tion across marketsThe agreement has sent oil prices in a rally. By the end of 30th November 2016, West Texas Intermediate (WTI) saw a jump to US$49.41/b from US$45.29/b a day be-fore, registering a steep 9.1 per cent hike. The move for WTI in particular is the biggest one-day gain since 12th February 2016, when it rose by 12.0 per cent in a single day. The price of Brent rose to US$47.95/b on the announcement day as compared to US$44.68/b a day earlier, growing by 7.3 per cent. The prices continued to rise the following day on 1st December 2016 and reg-istered hikes by 12.8 per cent and 17.0 per cent for WTI and Brent respectively as compared to the prices pre-announcement on 29th November 2016. The climb in prices has been unrelenting in recent weeks and on 12th December 2016, the price of WTI closed at US$52.74/b, which is 16.4 per cent upwards of the pre-announce-ment levels. Similarly, Brent closed on the same day at US$53.99/b, a 20.8 per cent hike over the pre-announce-ment levels.

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The price at which WTI closed on 12th December 2016, US$52.74/b, is the peak during the last one year, and is a growth by as much as 101.4 per cent over the lowest levels of US$26.19 on 11th February 2016. Similarly, Brent

Reverberations across asset classes and en-ergy stocks which had been hammered in the aftermath of Global Financial CrisesThe impact of the agreement on oil prices is having profound consequences across several asset classes, with oil producers and explorers benefitting while hurt is being felt across dependent sectors such as airlines. Further to this, the increase in energy costs is likely to be adding to inflationary pressures, placing additional weight on longer-term government bond prices. The biggest feed through to other asset classes from the oil move was in sovereign bond markets where the re-flationary effect had yields spiking higher. The 10-year

closed on 12th December 2016, at an all-time high of US$53.99/b, which is upwards to the tune of 107.6 per cent when compared to its trough at US$26.01/b earlier this year on 20th January 2016.

treasury yields surged 9bps on 30th November 2016 to 2.38 per cent after peaking a little above 2.40 per cent, following the announcement and in the process closed at the highest yield since July 2015. On 12th De-cember, 2016, the yields closed at 2.47 per cent, 18bps higher than the pre- announcement level. The yields are now over 100 bps higher than where they were just 5 months ago. There was a similar move for Emerging Markets (EM) sovereigns. In the Euro zone, too, 10-year Bund yields edged up just over 5 bps to 0.27 per cent following the announcement, and on 12th December 2016, yields stood at 0.39 per cent, 18bps upwards of pre-announcement levels on 29th November 2016.

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DECEMBER 2016

Federal Reserve Bites the Bullet; Hikes Interest RateIn line with market expectations, US Federal Reserve hiked its key Fed fund target rate by 25 bps to between 0.50-0.75 per cent in its monetary policy review meeting held on December 14th, 2016. There were no dissenters to this decision. The Federal Open Market Committee (FOMC) judged that in light of realized and expected la-bour market conditions, as well as the progress on the inflation front, it was deemed appropriate to hike the Fed Funds rate. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 per cent inflation. Notably, the Fed commentary has turned decidedly hawkish — with several referenc-es to fiscal expansionary stance under the new Trump administration and the resultant likelihood of a tighter monetary policy.

On economic growth front, the FOMC noted the moder-ate pace of expansion in economic activity, while men-tioning solid job gains and a decline in the unemploy-ment rate. It however made note of the fact that while household spending had been rising moderately, fixed investment by businesses had remained soft. In the Summary of Economic Projections (SEP) that accompa-nied the statement, the FOMC revised higher its projec-tion for GDP growth for 2016 and 2017, while the unem-

ployment rate projection was revised slightly lower for both years. The latter is in line with the firm recovery seen in the labour market.

On the inflation front, FOMC underlined that inflation had increased since earlier this year but was still below the Committee’s 2 per cent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Moreover, the market-based measures of inflation compensation had moved up con-siderably, but were still low; most survey-based meas-ures of longer-term inflation expectations were little changed, on balance, in recent months.

The median Fed Funds rate projection for 2017 was re-vised higher to 1.375 per cent from 1.125 per cent, while the same for 2018 was raised to 2.125 per cent from 1.875 per cent made earlier. The current dot plot in-dicates a faster pace of rate hikes in 2017 (3 hikes), as compared to the expectation from the September dot plot (2 hikes). Fed Chair, Janet Yellen, mentioned in the accompanying press conference that the broad upward shift in the dot plot may have resulted from participants incorporating fiscal expectations in their Fed Funds rate projections, while emphasizing that the upward revi-sion was a minor change.

Aftermath

As far as the US, which became a net exporter of oil three years ago, is concerned, on a macroeconomic level, the price rise could help nudge the Federal Re-serve towards its long-awaited interest rate hike. Be-sides, OPEC’s attempts to gauge the cost of petroleum could also be nullified by the expected surge in US oil supply under drilling-friendly President-elect Donald Trump. The effect on consumers’ finances as a result of the output cap will likely be a minor dent at the worst and should be outweighed by the benefits to domestic oil producers—nothing like the sort of influence OPEC production cuts have wielded on the U.S. economy in the past.

India, however, needs to take the move with a pinch of salt. The hitherto gains achieved via a curtailed deficit on account of falling dollar value of imports through low oil prices are now set to diminish, and the deficit could ex-acerbate in near future. However, the oil price increase may remain capped due to the following reasons:

• Non-OPEC production remains high – Russian pro-ducers reluctant to cut production.

• Shale output from US coming back at higher prices.

• Demand side remains subdued with continuing downward revisions in global growth prospects.

• China’s Strategic Petroleum Reserve (SPR) is close to full capacity.

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Going forward, FOMC expects that economic condi-tions will evolve in a manner that will warrant only grad-ual increases in the federal funds rate; the federal funds

rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

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