ECONOMY MATTERS 2

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FOREWORD

JULY - AUGUST 2014

US economy is slowly but steadily limping towards recovery. Growth in economic activity has rebounded in recent months. Labor market indicators have generally shown further im-provement. Household spending appears to be rising moderately and business fixed invest-ment has resumed its advance, while the recovery in the housing sector has remained slow. Despite acknowledging the rebound in growth, the US Federal Reserve has made it amply clear that it has no plans to raise interest rates anytime soon though it announced a further reduction to the amount of money it is injecting into the economy through monthly bond purchases. The other major ‘mover & shaker’ of the world economy- China, has been caught on the crossroads of growth and reforms. The second quarter GDP growth witnessed a mar-ginal uptick, though problems concerning the asset quality of the banks have kept the poli-cymakers worried.

On the domestic front, a string of poor economic data has raised the concerns on durability of the economic recovery. IIP growth slowed to 3.4 per cent in June compared to an average 4.2 per cent growth in the previous two months.However, its overall performance in Q1FY15 is signaling a gradual recovery. Retail inflation rose in July driven by a faster price rise in food articles, especially vegetables, fruits, and pulses. However, in some good news, upside risks to inflation from a sub-normal monsoon has moderated with rainfall deficiency narrowing sharply. Moreover, the latest round of RBI inflation expectations survey (Q1FY15) indicates that the number of respondents expecting an increase in inflation over the coming three months as well as one year has declined. This, we feel, should give RBI the necessary leg-room to cut rates, going forward.

Textiles have an overwhelming presence in the socio-economic scenario in India. The sector contributes about 14 per cent to industrial production, 4 per cent to the gross domestic prod-uct (GDP), and 17 per cent to the country’s export earnings. It provides direct employment to over 35 million people. The textiles sector is the second largest provider of employment after agriculture. Thus, the growth and all round development of this industry has a direct bear-ing on the improvement of the economy of the nation. However, this age-old industry in the country is facing many challenges for its survival and sustainability too. In this context, we cover this crucial sector in this month’s ‘Focus of the Month’, providing an in-depth analysis of the sector by experts.

Chandrajit BanerjeeDirector General, CII

3 JULY - AUGUST 2014

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EXECUTIVE SUMMARY

JULY - AUGUST 2014

Global TrendsThe US economy rebounded with a growth rate of 2.4 per cent on a yearly basis, in the second quarter of the current fiscal year, as compared to 1.8 per cent in the same quarter in the previous year, sending out posi-tive signals to the rest of the world. The surge reflected positive contributions from personal consumption ex-penditures, private inventory investment, exports, non-residential fixed investment, state government spend-ing, and residential fixed investment. In another major developed economy, China, the gross domestic product witnessed a marginal improvement to 7.5 per cent in the second quarter of the current year, compared with 7.4 per cent in the first quarter. While agricultural pro-duction showed good momentum, industrial produc-tion grew steadily.

Domestic TrendsThe fiscal deficit in the first quarter of 2014-15 (1QFY15 henceforth) stood at Rs 2.97 lakh crore which translates into 56.1 per cent of the budgeted figure for the entire financial year. The jump in fiscal deficit in the 1QFY15 was underpinned by rise in expenditure growth and con-traction in revenue growth during the said quarter. In some more sombre news for the economy, after grow-ing at a modest pace in the last two months, industrial production growth eased to 3.4 per cent in June 2014. WPI based inflation, however provided some cheer as it slowed down to a five-month low of 5.2 per cent in July 2014 from 5.4 per cent in the previous month, at a time when retail inflation (as measured by CPI) accelerated. Reserve Bank of India (RBI) kept the key policy rates un-changed in its third bi-monthly monetary policy review held on August 5, 2014, citing the upward risks still hov-ering over inflation in the wake of sub-par monsoons.

Corporate Performance in 1QFY15Indian firms posted an impressive performance in the first quarter of the current fiscal (1QFY15), as net sales and profit rose at the fastest pace in seven quarters, spurring investor optimism that the worst is over for corporate earnings. The net sales of companies (manu-facturing plus services) in the first quarter expanded by 10.0 per cent on a y-o-y basis, up from 5.7 per cent in the comparable period last year. Our analysis is based on the financial performance of 1613 companies (840 Manufacturing and 773 Services and excluding oil & gas companies), using a balanced panel, extracted from the Ace Equity database. On an aggregate basis, growth in

PAT improved significantly to 25.4 per cent in the first quarter as compared to contraction to the tune of 4.5 per cent in the same quarter of last year. This was driv-en by sharp improvement in PAT growth of both manu-facturing and services sector.

Sector in Focus: Jobless Growth and its ImplicationsWith almost 270 million people below the poverty line, India confronts the huge task of reviving growth and raising incomes. Its best asset is its human talent, but to effectively deploy this will require concerted effort at creating jobs and building productivity levels. India’s demographic dividend is a historic opportunity for de-velopment. A number of areas would need to be ad-dressed to create adequate and productive jobs for the expected growth in workforce, estimated at 10 million annually. The key would be to boost growth to 8 per cent plus growth trajectory and revive investments. Above all, it is important to re-examine labour laws and regulations, many of which are misaligned with the cur-rent economic environment and discourage the growth of employment in the organised sector.

Focus of the Month: Rejuvenat-ing the Textiles SectorTextiles is one of the most important sectors of Indian economy, in terms of, its contribution to industrial out-put, employment generation, and the export earnings of the country. India’s dominance in global textiles can be gauged from the fact that the country is second larg-est producer of fibre in the world. It is also counted among the leading textile industries in the world. Abun-dant availability of raw materials such as cotton, wool, silk and jute and skilled workforce has made India a ma-jor sourcing hub. The textile industry in India tradition-ally, after agriculture, is the only industry that has gen-erated huge employment for both skilled and unskilled labor in textiles. The textile industry continues to be the second largest employment generating sector in India. Going forward, the Indian textile industry is poised for strong growth, given the strong domestic consump-tion as well as export demand. However, this age-old industry in the country is facing many challenges for its survival and sustainability too. In this context, we cover this crucial sector in this month’s ‘Focus of the Month’, providing an in-depth analysis of the sector by sectoral experts.

ECONOMY MATTERS 6

GLOBAL TRENDS

Sliver of Hope amidst Concerns for US

The US economy rebounded with a growth rate of 2.4 per cent on a yearly basis, in the second quarter

of the current fiscal year, as compared to 1.8 per cent in the same quarter in the previous year, sending out positive signals to the rest of the world. On a quarterly basis, the headline figure which stood at 4.0 per cent growth came as a breather after a contraction of 2.1 per cent in the previous quarter this year, even more so since, the latest batch of disappointing news from East to West has reinforced the view of sluggish global growth and increased the risk weighing on the U.S. re-covery. The surge in GDP in the second quarter reflect-ed positive contributions from personal consumption expenditures, private inventory investment, exports, non-residential fixed investment and state government spending.

Growth in real personal consumption expenditures stood at 2.3 per cent in the second quarter, remaining at same levels as in the second quarter of 2013. Expendi-ture on durables witnessed softening of growth to 6.9 per cent, as against 7.5 per cent in the same quarter last year. Non-durables showed positive improvement in

growth of expenditure to 2.0 per cent, compared with an increase of 1.4 in the second quarter previous year. Expenditure on services witnessed a slight moderation in growth to 1.7 per cent compared with a growth of 1.8 per cent previously.

Growth in real non-residential fixed investment im-proved hugely to 5.7 per cent in the second quarter, compared with a growth of 1.9 per cent in the second quarter last year. This was largely led by investment in structures which grew massively by 8.0 per cent, com-pared with a contraction of 3.3 per cent previously. In-vestment in equipment too rose by 6.1 per cent, in con-trast to a growth of 3.8 per cent in the second quarter in 2013. Real residential fixed investment witnessed a colossal drop, as the growth stood at a meager 0.9 per cent, in contrast to a growth of 15.2 per cent previously.

While the federal government consumption expendi-tures and gross investment growth improved in com-parison on a yearly basis, it continued to witness a con-traction standing at -3.2 per cent as compared to -5.0 per cent previously. Both defense and non-defense components added to this de-growth. The improve-ment in growth of state and local government con-sumption expenditures and gross investment to 0.9 per cent, as compared with 0.4 per cent in the same quar-ter last year, could only partially offset the deficiency in

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GLOBAL TRENDS

JULY - AUGUST 2014

federal expenditure and hence the net government ex-penditure continued to see a contraction.

The marginal increase in growth of exports of goods and services to 3.5 per cent in the second quarter on a yearly basis, on the back of increase in export of in-

dustrial supplies and consumer goods, in contrast to a growth of 2.2 per cent in the second quarter of 2013, was however counterpoised by imports, whose growth stood at 3.9 per cent, with major contributions from food and capital goods, as compared to growth of 1.0 per cent previously.

ECONOMY MATTERS 8

GLOBAL TRENDS

Labor markets witnessed a rosy scenario as the total nonfarm payroll employment increased by 209,000 in July 2014. Job gains occurred in professional and busi-ness services, manufacturing, retail trade, and construc-tion. The unemployment rate stood at 6.2 per cent in July 2014. Over the past 12 months, the unemployment rate and the number of unemployed persons have de-clined by 1.1 per cent and 1.7 million, respectively. The employment-population ratio, at 59.0 per cent, has edged up by 0.3 per cent over the past 12 months.

Professional and business services added 47,000 jobs in July 2014 and 648,000 jobs over the past 12 months. Manufacturing added 28,000 jobs in July 2014. Job gains occurred in motor vehicles and parts (+15,000) and in furniture and related products (+3,000). Over the prior 12 months, manufacturing have added an average of 12,000 jobs per month, primarily in durable goods in-dustries. In July 2014, retail trade employment rose by 27,000. Over the past year, retail trade has added

298,000 jobs. Employment continued to trend up in au-tomobile dealers, food and beverage stores, and gen-eral merchandise stores.

Employment in construction increased by 22,000 in July 2014. Within the industry, employment continued to trend up in residential building and in residential spe-cialty trade contractors. Over the year, construction has added 211,000 jobs. Social assistance added 18,000 jobs over the month and 110,000 over the year.

Mining added 8,000 jobs in July 2014, with the bulk of the increase occurring in support activities for min-ing (+6,000). Over the year, mining employment has risen by 46,000. Employment in leisure and hospitality changed little in July 2014 but has added 375,000 jobs over the year, primarily in food services and drinking places. Employment in other major industries, including wholesale trade, transportation and warehousing, in-formation, financial activities, and government, showed little change in July.

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GLOBAL TRENDS

JULY - AUGUST 2014

While the Federal Reserve has acknowledged that growth has rebounded, it has made clear that it has no plans to raise interest rates anytime soon. It described the chances of faster growth as roughly even with the chances that the expansion would slow down. The U.S. Central Bank announced a further reduction to the amount of money it is injecting into the economy through monthly bond purchases. The Federal Reserve too has said it would continue to ease back on its stimu-lus efforts.

Growth in economic activity has rebounded in recent months. Labor market indicators have generally showed further improvement. The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the hous-

ing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. The FOMC intends to take a balanced ap-proach consistent with its longer-run goals of maximum employment and inflation of 2 per cent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

While concerns abound, the latest growth figures are a positive signal. As the Euro-zone and Asian econo-mies struggle with dismal growth statistics, the United States seems steady enough to be at helm and ferry the rest of the world to recovery.

ECONOMY MATTERS 10

GLOBAL TRENDS

In the first six months, the growth in investment in fixed assets (excluding rural households) softened as the in-crease of 16.3 per cent was 0.3 per cent lesser than that in the first quarter. Specifically, the investment in the state-owned and state holding enterprises saw a rise of 14.8 per cent; growth in private investment improved to

20.1 per cent, accounting for 65.1 per cent of the total investment. The investment in the primary industry was up by 24.1 per cent; in the secondary industry by 14.3 per cent; and the tertiary industry saw a growth in invest-ment of 19.5 per cent.

While the economic situation in China has sent out encouraging signals, complicated external and inter-nal conditions have made stabilization of economic growth, reforms and restructuring major concerns for the Chinese government lately.

The gross domestic product of China witnessed a mar-ginally improved year-on-year growth of 7.5 per cent in the second quarter of the current year, compared with 7.4 per cent in the first quarter. While agricultural pro-duction showed good momentum, industrial produc-tion grew steadily.

China on Crossroads between Growth and Reforms

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GLOBAL TRENDS

JULY - AUGUST 2014

In July 2014, China’s manufacturing purchasing man-agers index (PMI) stood at 51.7 per cent, 0.7 per cent higher over last month, increasing for 5 consecutive months, indicating continued momentum of growth in China’s manufacturing sector. The PMI of large-sized enterprises was 52.6 per cent, an increase of 1.1 per cent month-on-month; that of medium-sized enterprises was 50.1 per cent, a slight moderation by 1.0 per cent month-on-month; that of small-sized enterprises was 50.1 per cent, up by 1.7 per cent month-on-month. Production index stood at 54.2 per cent rising to a high point of this year, with an increase of 1.2 per cent month-on-month. New orders index was 53.6 per cent, which increased 0.8 per cent month-on-month. New export orders in-dex was 50.8 per cent, which went up by 0.5 per cent month-on-month. Production and business activities expectation index was 55.3 per cent, witnessing an in-crease of 0.5 per cent month-on-month.

Sales in domestic markets enjoyed a steady growth. In the first half year, the total retail sales of consumer goods saw a growth of 10.8 per cent, 0.1 per cent faster than that in the first quarter.

Imports and exports reversed to positive growth. Ex-ports in July 2014 jumped 14.5 per cent from a year earli-

er - the fastest pace in 15 months, doubling from 7.2 per cent in June and roundly beating market expectations. However, imports contracted 1.6 per cent year-on-year, indicating soft domestic demand and a downward pres-sure on growth. In the first half year, the total value of exports was up by 0.9 per cent; the total value of im-ports saw an increase of 1.5 per cent. The trade balance was 630.6 billion yuan or 102.9 billion dollars.

The growth of consumer price remained stable. In July 2014, the consumer price index went up by 2.3 per cent year-on-year. The prices grew by 2.3 per cent in cities and 2.1 per cent in rural areas. The food prices went up by 3.6 per cent, while the non-food prices increased 1.6 per cent. The prices of consumer goods went up by 2.2 per cent and the prices of services grew by 2.5 per cent. On average from January to July, the overall consumer prices were up by 2.3 per cent over the same period of the previous year. The month-on-month change of con-sumer prices was up by 0.1 per cent, of which, prices increased 0.1 per cent in cities and remained at the same level in rural areas. The food prices went down by 0.1 per cent, while the non-food prices went up by 0.1 per cent. The prices of consumer goods decreased 0.1 per cent, and the prices of services went up by 0.5 per cent.

ECONOMY MATTERS 12

GLOBAL TRENDS

Residents’ income continued to increase. In the first half year, the per capita cash income of rural and urban residents went up by 9.8 and 7.1 per cent respectively. The national per capita disposable income stood at 10,025 yuan, rising by 8.3 per cent.

Structural adjustment has achieved stable progress. The industrial structure continued to be optimized. In the first half year, the value of the tertiary industry ac-counted for 46.6 per cent of GDP, 1.3 per cent higher than the same period last year, 0.6 per cent higher than that of the secondary industry. The structure of domes-tic demand was further improved. In ¬the first half year, the final consumption expenditure accounted for 52.4 per cent of GDP, 0.2 per cent point higher than the same period last year. The income gap between urban and ru-ral households was further narrowed. In the first half year, the real growth of the per capita cash income of rural households was 2.7 per cent higher than the per capita disposable income of urban households. The per capita income of urban households was 2.77 times of the rural households, 0.06 less than that of the same period last year. Energy conservation and consumption reduction continued to make new achievements. In the first half year, the energy consumption per 10,000 yuan of GDP decreased by 4.2 per cent.

Money supply maintained a steady growth. By the end of June, the balance of broad money saw a year-on-year growth of 14.7 per cent; the balance of narrow money was up by 8.9 per cent; and the balance of cash in cir-culation saw a rise of 5.3 per cent. To revitalize a slow-ing economy, Beijing in recent months has adopted “mini-stimulus” measures such as loosening credit for rural banks, expanding loans to smaller borrowers and reducing fees and taxes for businesses.

China’s rapid growth has been sustained by heavy reli-ance on capital spending and credit and, while this has provided a welcome lift to the global economy, growth

prospects are now threatened by declining efficiency of investment, a significant build-up of debt, income inequality and environmental costs. The challenge is to shift gears, reduce the vulnerabilities that have built up, and transition to a more sustainable growth path. Key reforms include further strengthening regulation and supervision, freeing up bank deposit interest rates, in-creasing reliance on interest rates as an instrument of monetary policy, and eliminating implicit guarantees across the financial and corporate landscape

China’s economic stature, its newly accumulated eco-nomic assets and its transition to middle-income eco-nomic status are real. The achievement is also now a reality that Chinese policymakers have to face as they struggle to stay on course in guiding the economy through middle-income to OECD advanced country liv-ing standards over the next two decades or so. With a GDP growth rate that has slipped below the average 10 per cent at which the economy barrelled along for more than three decades, China faces more and more questions about how its leadership and policymaking authorities should manage the next phase of the coun-try’s economic development.

Three problems currently plague the Chinese economy. The first is the slow global recovery and negative ef-fects of previous stimulus policies that generated over-investment and capacity. The second is a growth model that no longer attacks the burning problems of the time, such as over-investment and income inequality. The third is steering a way through the middle-income trap challenge. Only the first of these is cyclical in character. The second two are structural and underline the chal-lenge of maintaining higher growth potential through lifting productivity as the supply of cheap labour dries up. Long-term growth cannot occur via fiscal stimulus, which will create more zombie firms, inhibit productiv-ity, profitability and job creation in viable firms and de-liver white elephant public investment projects.

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DOMESTIC TRENDS

India’s Oil Economy

JULY - AUGUST 2014

India’s significant dependence on oil makes it the fourth largest oil consumer in the world. However,

India is not self sufficient in oil production and relies heavily on imports. At present India imports about 80 percent of its oil needs. In the first quarter of the cur-

rent fiscal year, India has already imported 48 million tons of crude oil worth US$36.4 billion as compared to total oil imports of 189 million tons in fiscal year 2013-14. From the chart below, we can see that over the last few years, the quantity of crude oil imports as well as the oil import bill has stabilized a bit because of some stability in the international crude oil prices. However, any supply disruption in any country or any global risk that tends to raise international crude prices creates ex-treme repercussions for India.

ECONOMY MATTERS 14

DOMESTIC TRENDS

Recent Geo-Political Tensions have Raised Concerns

India’s dependence on oil imports is markedly skewed towards the Middle East, as India imports more than 60 per cent of total oil import from this region.

The recent geo-political tensions in Iraq raised concerns regarding the continuity of economic recovery in India as Iraq accounts for about 12 per cent of India’s total oil imports and historically the Indian economy has been

Impact of Oil Prices on the Economy

The Indian economy is so heavily dependent on oil that any change in global oil prices creates significant policy implications for the economy. It is evident from the ta-ble below that the slowdown in India’s growth in the last three years has also coincided with an increase in in-ternational crude oil prices. This has also been associat-

highly sensitive to any changes in oil prices. As of mid-June, militants had seized an important oil field in the northern region of Iraq, and were slowly progressing towards the major oil fields in the southern region- caus-ing oil prices to shoot up to US$115 per barrel. However over time, with no apparent risks to the southern Iraq oil fields and resumption of oil supplies from Libyan oil fields, oil prices steadily declined to US$104 per barrel, before witnessing renewed volatility on recent news re-garding US airstrike on Iraq.

ed with higher inflation, higher fiscal deficit (on account of higher subsidies) and higher current account deficit.

In the event of a rise in fuel prices, the government can choose to either pass on the burden to the consumer or bear the burden itself through an increase in subsidy expenses. However, no matter who shoulders the bur-den, when global oil prices increase, there is definitely a negative impact on the economy.

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DOMESTIC TRENDS

JULY - AUGUST 2014

Any change in price of oil impacts domestic economy through multiple channels as highlighted below:

• Impact on Current Account Deficit (CAD)

Any change in oil prices leads to a subsequent change in our import bill as oil imports account for about 30 per cent of our total imports. As per our calculations, for every US$5 per barrel increase in international crude oil price, there is a subsequent US$7.3 billion increase in our import bill for that par-ticular year. If we assume a constant exchange rate, this would imply that our oil import bill would in-crease from US$144.7 billion in 2013-14 to US$159.6 billion in 2014-15.

Typically, when there is upward pressure on the trade and current account deficits, the domestic currency tends to weaken and foreign investment inflows recede, leading to further pressure on the balance of payments. Currency depreciation could pose further problems for the fiscal deficit and for the under-recoveries borne by the public sector Oil Marketing Companies (OMCs).

On similar lines, any decline in international crude oil prices would be beneficial for our import bill hence will mean lower stress on our current ac-count deficit, domestic currency and fiscal deficit.

• Impact on Fiscal Deficit (FD)

Higher oil prices also impact the government fi-nances as fuels such as diesel, LPG and kerosene are sold at fixed rates by public sector OMCs.

If oil prices increase internationally, the govern-ment can either raise retail prices and pass the entire burden onto the consumer or keeps the retail prices fixed and share the losses from OMC under-recoveries. If the government decides to keep the retail prices of diesel, LPG and Kerosene unchanged, then public sector OMC’s will suffer losses from selling these fuels at a subsidized rate. To make up for the losses of the OMC’s, the under-recoveries are shared among the OMC’s, upstream oil companies – ONGC, Oil India Limited (OIL) and

GAIL – and the government in such a way that the government and upstream oil marketing compa-nies bear a significant proportion of these losses (under-recoveries). Usually each year, the govern-ment contributes more than 40 per cent and the upstream companies share more than 30 per cent, with the rest being borne by the OMC’s.

According to PPAC estimates, for every US$1 per barrel increase in crude oil prices, the government has to shell out an extra US$733 million in the form of under-recoveries. This burden of under-recov-eries puts an upward pressure on the fiscal deficit as oil subsidies constitute ~32 per cent of the total subsidy bill.

The Petroleum Planning and Analysis Cell (PPAC) has also estimated that for every INR 1 per USD de-preciation in the rupee, there is an INR 8,000 crore (US$1.3 billion) increase in our under-recoveries.

To counter this huge build-up in under-recoveries the government is steadily moving towards de-regulating diesel prices as well, after deregulating petrol prices in 2002. From the table below we can see that diesel forms a big chunk in the total under-recoveries and to counter this, the government has progressively raised diesel prices each month by about 60 paise, based on the recommendations of Kirit Parekh committee. It is expected that by the end of this year diesel prices will be at their interna-tional level, thus generating no under recoveries, if crude prices remain stable.

Additionally, from the below table, we can expect that OMC under-recoveries in FY 2014-15 will be lower than the previous year levels, even if crude oil prices average at US$110 per barrel through the year. The table shows that till Q1: 2014-15, the total under-recovery bill was INR 286 billion and diesel under-recoveries had declined considerably com-pared to last year. Hence, the continuous decline in diesel under-recoveries due to an increase in retail prices would help us achieve a lower fuel subsidy bill this year, even if global oil prices average at US$110 per barrel in FY 2014-15.

ECONOMY MATTERS 16

DOMESTIC TRENDS

• Impact on Inflation

In the event of an increase in international crude prices, if the government decides to pass on the burden onto the consumers then higher oil prices feed into inflation through both, a direct increase in fuel prices and an indirect increase in prices of vari-ous other commodities, via an increase in transpor-tation cost. Even if it decides to bear the burden it-self, persistently higher subsidies and fiscal deficits can be inflationary. As per RBI’s estimates, a US$10 per barrel increase in crude oil price, if sustained, can push up inflation by 1 per cent directly, and by up to 2 per cent if indirect effects are taken into ac-count.

On the contrary, if international crude oil prices fall, then government transmits this to the consumers

in the form of a cut in fuel prices, thus reducing in-flationary pressures directly. Also, the fuel subsidy bill shrinks, which translates into lower fiscal deficit and aides indirectly in inflation management.

• Impact on Growth

Inflationary pressures play a major role in direct-ing an economy’s growth trajectory. High inflation can force the country’s Central Bank to tighten its monetary policy thus squeezing both consumer demand and investment demand, hence impact-ing economic growth. While on the other hand low inflation, gives the Central Bank the freedom to pursue pro-growth policies thus generating invest-ment demand.

Outlook is MixedWith the domestic economy on the path of recovery and oil prices receding in recent weeks (owing to uninter-rupted oil supplies from southern Iraq and restoration of oil production in Libya’s largest oil field, El Shahara) there are no immediate concerns to the domestic growth. However, given the volatile nature of the global oil prices and the historical performance of the domestic economy in times of sudden increases in international crude prices, it is very difficult to define the outlook for the country. It is important to shield the economy from any such crisis in the future and this would require reducing our dependence on oil imports. In the short term, oil importing companies would have to diversify the source of crude away from the Middle East while in the medium term it is imperative that we expedite the exploration of newer oil fields to support domestic production of crude oil and natural gas.

(Contributed by: Ms. Bidisha Ganguly, Principal Economist, CII)

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DOMESTIC TRENDS

JULY - AUGUST 2014

The fiscal deficit in the first quarter of 2014-15 (1QFY15 henceforth) stood at Rs 2.97 lakh crore which translates into 56.1 per cent of the budgeted figure for the entire financial year. The jump in fiscal deficit in the 1QFY15 was underpinned by rise in expenditure growth and contrac-tion in revenue growth during the said quarter. In y-o-y terms, fiscal deficit recorded a growth of 13.3 per cent in the 1QFY15 as compared to 38 per cent growth in the same quarter last year. To be sure, while presenting the

It is interesting to see how the monthly fiscal numbers in the current year stack up as compared to the situation in the last year. In the below graph, it becomes amply clear that fiscal deficit in the first three months of 2014-15 has been on the higher side as compared to the last year. And if the trend observed last year, wherein the fiscal deficit was progressively increased in the subse-quent months of the year, is repeated this year, the 4.1

first budget of the newly elected NDA government in July 2014, Finance Minster (FM), Mr Arun Jaitley had laid stress on fiscal prudence, lowering the fiscal deficit tar-get of 4.1 per cent of GDP for 2014-15 as compared to 4.6 per cent in 2013-14. However, given the situation of the government finances in the 1QFY15, it would be an uphill task for the FM to meet these ambitious targets of the current fiscal.

per cent of GDP target for fiscal deficit is clearly under threat. The only silver lining appears to be the proposed disinvestment programme of the government, which is slated to begin in October 2014. To start the ball rolling, government stake in SAIL and Coal India is expected to be disinvested first, followed by a dozen other PSUs identified by the Finance Ministry (see below table).

High Fiscal Deficit in 1QFY15 Raises Worries

ECONOMY MATTERS 18

DOMESTIC TRENDS

The deficit crossed more than 50 per cent of its annual target in the first quarter of the year itself mainly be-cause of weakness in revenues. Total receipts declined by 3.1 per cent to Rs 1.15 lakh crore during April-June 2014, which translates into only 6.4 per cent of the budgeted estimates for the full year. This was due to the fact that revenue receipts collection remained weak during the first two months of the current year due to

huge refunds. Mirroring the sluggish economic scenar-io, gross tax revenues growth too remained anemic at 3.4 per cent as compared to a healthy 11.2 per cent in the last quarter and 4.2 per cent in the same quarter last year. Income and service tax were the star performers in boosting the government coffers in the first quarter. Non-tax revenue growth remained dismal in the report-ing quarter as well.

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DOMESTIC TRENDS

JULY - AUGUST 2014

Expenditure rose by 8.2 per cent to Rs 4.14 lakh crore during April-June 2014. This translates into 23 per cent of the budgeted targets for the current year. The non-plan spend rose by 12.9 per cent in the 1QFY15, as the

The government reduced its reliance on market bor-rowings to finance fiscal deficit in the 1QFY15. Net mar-ket borrowings declined by 3.2 per cent to Rs 1.71 trillion

The performance of the government finances was not up to the mark in 1QFY15. It would need to tighten its purse strings and boost revenue growth in order to meet the fiscal deficit target for 2014-15. To be sure, in order to lower the fiscal deficit to 4.1 per cent of GDP in 2014-15, the government is betting on both revenue and expenditure growth of 12.9 per cent as compared

former UPA government tried to clear its subsidy ar-rears in the first two months of the year. However, plan expenditure was kept on a tight leash as it declined by 2.6 per cent to Rs 1.12 trillion in 1QFY15.

during April-June 2014. These financed 57.3 per cent of the fiscal deficit as compared to 67.1 per cent a year ago.

to the revised estimates for 2013-14. In order to achieve the revenue growth target, tax revenues, which form around 80 per cent of total revenues, need to prop up. Moreover the nature of expenditure compression needs to be kept in mind as trimming of capital expendi-ture will further slow down the economic recovery pro-cess

ECONOMY MATTERS 20

DOMESTIC TRENDS

After growing at a modest pace in the last two months, industrial production growth eased to 3.4 per cent in June 2014, raising doubts about the depth of recovery in the sector. Notably, the deceleration came on the back of a low base of last year. Moreover, reading was below expectations with a negative surprise provided by the consumer goods segments that contracted by 10 per cent, its worst performance since February 2009. To be sure, growth in consumer goods sector had moved into the positive territory after seven consecutive months of contraction in May 2014. The sequential momentum as indicated by the movement in the seasonally-adjusted month-on-month series also showed that industrial out-put growth declined in June 2014 (from -0.4 per cent in

Notwithstanding the moderation in IIP growth in June 2014, the output of eight core industries, having a com-bined weight of 37.90 per cent in the IIP, recorded an increase of 7.3 per cent in June 2014, highest since Sep-tember 2013 when it recorded a growth of 8 per cent. The output has shown an increase of 4.6 per cent for

May 2014 to -1.7 per cent in June 2014). However, the fact that the April-June 2014 average IIP growth still stands at a respectable 3.9 per cent is encouraging. This clearly shows that the nascent signs of a revival in manufacturing growth are very much evident on the horizon. As per CII ASCON Survey, as high as 24 industry segments registered a growth rate of more than 10 per cent in the 1st quarter (April-June 2014) and 58 indus-try segments continued to be in the growth trajectory of 0-10 per cent. We expect the pace of recovery to in-crease going forward, on the back of significant deci-sions announced in the budget to boost manufacturing sector.

April-June 2014. Coal production increased by 8.1 per cent, while the electricity generation increased sharply to 15.7 per cent in June 2014. However, the production of natural gas and fertilizer declined by 1.7 and 1.0 per cent respectively in June 2014.

Industrial Output Decelerates in June 2014

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JULY - AUGUST 2014

On the sectoral front, output of the manufacturing sec-tor, which constitutes over 75 per cent of the index, moderated sharply to 1.8 per cent in June 2014 as com-pared to a healthy 5.1 per cent in the previous month, inspite of a supportive base of last year. In terms of in-dustries, fifteen (15) out of the twenty two (22) industry groups (as per 2-digit NIC-2004) in the manufacturing sector showed positive growth during the month of June 2014 as compared to the corresponding month of the previous year. The industry group ‘Electrical ma-chinery & apparatus n.e.c.’ showed the highest positive growth of 69.2 per cent, followed by 10.3 per cent in ‘Luggage, handbags, saddlery, harness & footwear; tan-ning and dressing of leather products’ and 9.8 per cent in ‘Other non-metallic mineral products’. On the other hand, the industry group ‘Radio, TV and communication equipment & apparatus’ showed the highest negative growth of (-) 62.9 per cent, followed by (-) 60.5 per cent in ‘Office, accounting & computing machinery’ and (-) 13.4 per cent in ‘Furniture; manufacturing n.e.c. Min-ing sector, which had turned the corner in the last cou-ple of months, continued to post healthy growth rate, growing by 4.3 per cent in June 2014 as compared to 2.9 per cent growth in the previous month. In line with the core sector data, electricity sector output growth grew

at a brisk pace of 15.7 per cent in the reporting month as compared to a healthy 6.7 per cent in the previous month.

Amongst the use-based sectors, capital goods grew at a robust pace of 23 per cent in June 2014 as compared to 4.3 per cent in the previous month. The performance of the volatile sector this year has been good as it has grown at an average rate of 13.9 per cent as compared to contraction to the tune of 3.7 per cent in the same period last year. Intermediate goods, which registered steady growth for most part of last fiscal, continued its good performance in June 2014 too, growing by 2.7 per cent, albeit a moderation from the previous month. In contrast, basic goods growth galloped to 9.0 per cent in June 2014 from 6.4 per cent in the previous month. Consumer goods sector growth collapsed to -10.0 per cent, pulled down by both poor showing in both its sub-components of durables and non-durables. Consumer durable growth declined by a sharp 23.4 per cent, while non-durables growth stood at an anaemic 0.1 per cent during the month. With the improvement in the cover-age of monsoons, consumer non-durables sector is ex-pected to do well, going forward.

ECONOMY MATTERS 22

DOMESTIC TRENDS

WPI based inflation slowed down to a five-month low of 5.2 per cent in July 2014 from 5.4 per cent in the previ-ous month, at a time when retail inflation (as measured by CPI) accelerated. The fall in WPI inflation was mainly due to a moderation in fuel prices, which slowed to 7.4 per cent in July 2014 from 9.0 per cent a month ago. However, total food inflation (primary and manufactur-ing) accelerated to 7.0 per cent from 6.2 per cent. In con-trast to slowing WPI inflation, retail inflation quickened to 7.96 per cent in July 2014 from 7.46 per cent in June 2014. The spike was primarily attributable to an increase in vegetables prices, which rose 17 per cent on month-

on-month (m-o-m) basis in July-2014. In some positive news, core CPI decelerated to 7.4 per cent in July 2014 from 7.5 per cent a month ago. However, the rise in mo-mentum to 0.8 per cent on m-o-m basis as compared to last six-month average of 0.5 per cent m-o-m is worry-ing. So far, CPI inflation has remained firm and showed little signs of treading down. However, given that the rise is primarily attributable to a spike in vegetables prices, it is expected to be temporary and wane out as supply hits markets post Diwali. This will help the RBI to reach its inflation glide path of 8 per cent by January 2015 fairly comfortably.

WPI Inflation Moderates, while CPI Inflation Rises in July 2014

OutlookGrowth in industrial production, which has been on the ascendant for the last two months, has shown a modera-tion in June 2014 on the back of sluggish performance of the manufacturing sector. However, we would like to see this as an aberration, as CII’s own Business Outlook Survey and the ASCON survey are showing early signs of an in-dustrial turnaround. With proper interventions in the areas of land, labour and environment norms, manufacturing can post a quick revival. We are already seeing a lot of pro active reforms being brought about by the government in the labour space. Industry also looks forward to change in the areas of land acquisition and other factors that could promote ease of doing business.

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Primary inflation remained stable at 6.8 per cent in July 2014 from the previous month. Primary food though ac-celerated to 8.4 per cent from 8.1 per cent in the pre-vious month. Amongst primary food prices, the data showed that vegetable prices fell 1.3 per cent from a year ago. However, what’s interesting to note is that to-mato prices were not considered while computing the wholesale price index from April 2014 onwards, which is rather convenient, because everybody knows that to-mato prices have increased sharply recently. That’s not all. Prices of green peas and cauliflower, too, have not been considered. Hence, it’s quite possible, that veg-etable inflation has been underestimated for the month of July 2014. Primary non-food inflation moderated to 3.3 per cent in July 2014 from 3.5 per cent a month ago, led by raw rubber (to -27.1 per cent from -16.9 per cent) and fibres (to -3.2 per cent from 2.8 per cent), and partly offset by oilseeds (to 6.4 per cent from 4.8 per cent). Inflation in minerals continued to decelerate, standing at 2.4 per cent from 4.4 per cent in the previous month.

Fuel inflation decelerated sharply to 7.4 per cent in July 2014 as compared to 9.0 per cent in the previous month, benefitting from a favourable base effect, despite a 1.1 per cent increase in the index level in m-o-m terms. The

mineral oil sub-index rose to 237.7 in July 2014 from 233.8 in June 2014, reflecting a relatively broad-based increase in rise in the subcomponents, including the in-crease in the price of diesel by Rs. 0.5/litre and petrol by Rs. 1.69/litre in July 2014. Under-recoveries on the retail sale of diesel eased to Rs. 1.33/litre for the fortnight be-ginning August 1, 2014 from Rs. 3.4/litre for the fortnight beginning July 1, 2014, indicating a decline in the sup-pressed inflationary pressures in the Indian economy.

Manufacturing inflation increased marginally to 3.7 per cent in July 2014 as compared to 3.6 per cent in the pre-vious month. Encouragingly, non-food manufacturing or core inflation, which is widely regarded as the proxy for demand-side pressures in the economy, eased to 3.6 per cent during the month as compared to 3.9 per cent in June 2014. In the coming months, we expect core WPI to hover around 3.0-3.5 per cent, RBI’s comfort level for this inflation measure. Manufacturing food in-flation showed a sharp uptick during the month, led by tea & coffee (to 10.1 per cent from 1.3 per cent), salt (to 6.4 per cent from 3.7 per cent) and dairy products (to 8.2 per cent from 6.6 per cent).

ECONOMY MATTERS 24

DOMESTIC TRENDS

Reserve Bank of India (RBI) kept the key policy rates un-changed in its third bi-monthly monetary policy review held on August 5, 2014, citing the upward risks still hov-ering over inflation in the wake of sub-par monsoons. With this, the repo rate stands at 8 per cent, reverse repo at 7 per cent and marginal standing facility rate at 9 per cent. However, RBI did reduce the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 22.5 per cent to 22.0 per cent of their NDTL with effect from the fortnight beginning Au-gust 9, 2014 and the HTM (Held to Maturity) ceiling to 24 per cent. This reduction in SLR is expected to release liquidity to the tune of approx Rs 40,000 crore into the financial system. This infusion of liquidity is expected to cater to the credit demand of the productive sectors of

the economy as when they recover. But, we at CII have been continuously pointing out that this reduction in SLR won’t be able to help the markets in the near-term, given that the commercial banks are already investing in government securities in excess of the mandated SLR requirement (as of May 2014, the actual stood at around 27 per cent). See our note on ‘RBI Reduces SLR- Will it Help the Market Now? in Economy Matters, May 2014 is-sue. Additionally, the Central Bank also announced that it will continue to provide liquidity under overnight re-pos at 0.25 per cent of bank-wise NDTL and liquidity un-der 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system.

OutlookBulk of the upside pressure on CPI inflation was due to high food prices. However, going ahead, we do not expect food inflation (with close to 50 per cent weight in CPI) to soar further. Recent monsoon update by the Indian Meteorological Department (IMD) signals 17 per cent below normal rainfall as of August 11, 2014. Moreover, the government has taken proactive measures to cap the rise in food prices due to monsoons. These include keeping a strict check on hoarding activities, urging states to abolish the APMC act, raising the minimum export price of onions, and its willingness to offload excess food grain stocks to meet supply shortages. With core CPI inflation also continuing to decelerate, we expect RBI to reach its goal-post of 8 per cent CPI inflation by January 2015 fairly comfortably.

RBI Maintains ‘Status-Quo’ on Interest Rates

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On inflation, the RBI mentioned that it remains commit-ted to the disinflationary path of sustaining CPI inflation below 8 per cent by January 2015. The Central Bank also reiterated its firm commitment to achieve the target of 6 per cent CPI inflation by January 2016. Achieving this target will be a tough challenge as disinflation will have to be sustained over the medium-term, especially when GDP growth and demand is picking up. RBI indi-cated that the risks to the latter are still on the upside and “warrants heightened state of policy prepared-ness if these risks materialise”. On growth front, RBI was reasonably happy with the improving growth pros-pects. As per the RBI, “if the recent pick-up in industrial activity is sustained in an environment conducive to the revival of investment and unlocking of stalled projects, with ongoing fiscal consolidation releasing resources for private enterprise, external demand picking up and international crude prices stabilising, the central esti-mate of real GDP growth of 5.5 per cent within a likely range of 5 to 6 per cent that was set out in the April projection for 2014-15 can be sustained”.

As per RBI, liquidity conditions remained broadly sta-ble during the months of June and July 2014, barring

episodic tightness on account of movements in the cash balances of the government maintained with the Reserve Bank. While the system’s recourse to liquidity from the LAF, and regular and additional term repos was around 1.0 per cent of the NDTL of banks, access to the MSF has been minimal and temporary. In order to manage transient liquidity pressures associated with tax outflows and sluggish spending by the government, the Reserve Bank injected additional liquidity aggregat-ing over Rs 940 billion through nine special term repos of varying maturities during the months of June and July 2014.

Aggregate bank credit growth slowed down to 13.4 per cent y-o-y as on July 11, 2014 from 14.3 per cent as on July 12, 2013, owing to sluggish investment demand and increased risk aversion given the deterioration in the asset quality of public-sector banks (PSBs). To be sure, gross non performing asset (GNPA) stood at 4.0 per cent levels in March 2014 as compared to 3.3 per cent in March 2013. Growth in bank deposits too slowed down to 12.9 per cent as on July 11, 2014, from 13.8 per cent during same period last year as financial savings slowed down. Consequently, the credit deposit (CD) ratio stood at 76.6 per cent as on July 11, 2014.

CII Reaction

The RBI, in a bid to safeguard against upside risks accruing from inflationary expectations, kept its rate easing cycle on hold, which was as per market expectations.

At a time when industrial growth continues to be sluggish, CPI based inflation is moderating and above all, infla-tion risks are gradually abating due to improvement in monsoon conditions, the RBI could have taken this oppor-tunity to effect a cut in interest rates.

ECONOMY MATTERS 26

DOMESTIC TRENDS

The high cost of capital has been dissuading industry from undertaking capacity expansion and is causing finan-cial stress among firms where demand is credit driven. What is more, the government’s commitment to adhere to the path of fiscal consolidation and recent steps to ease bottlenecks in the food supply chain would help to alleviate inflationary pressures in the economy while stimulating growth, going forward. All this could have mo-tivated the RBI to give the primacy to growth by effecting a cut in interest rates. A rate cut at this juncture would have positively surprised the market and sent a strong signal that both the fiscal and monetary policies are work-ing in tandem to bring growth back to the economy. Considering the transmission time taken for the impact of monetary policy to be visible, an impetus to growth could have assumed special importance.

Trade Deficit Widens on Slowing Exports

Pace of exports growth slowed down to 7.3 per cent (US$27.7 billion) in July 2014 as compared to 10.2 per cent in the previous month. Imports growth too slowed down to 4.3 per cent from 8.3 per cent a month ago. However, the trade deficit widened to a year’s high of US$12.2 billion as level of exports moderated at a faster pace than imports. Among the items in exports, sec-tors such as drugs & pharmaceuticals grew at 10.78 per cent, while engineering goods rose 23.89 per cent in July 2014. However, among the major sectors, gems & jewellery exports contracted by 17.2 per cent during the month. Cumulative value of exports for the first four months of the current fiscal (Apr-July) were valued at US$107.8 billion as against US$99.2 billion a year ago,

thus registering a year-on-year growth of 8.62 per cent. Going forward, we expect exports growth to improve in consonance with improvement in the global trade conditions. The World Trade Organisation (WTO) ex-pects global trade to grow by 4.7 per cent in 2014 and at a slightly faster rate of 5.3 per cent in 2015.

Imports during July 2014 were valued at US$39.9 billion as compared to US$38.3 in same month last month. The rise in level of imports was mostly due to purchase of oil and electronics goods during the month. Oil imports during July, 2014 were valued at US$14.3 billion which was 12.75 per cent higher than oil imports valued at US$12.7 billion in the corresponding period last year. Non-oil imports, which are an indication of the health of the domestic demand, grew only by 0.03 per cent to US$25.6 billion in July 2014.

OutlookWith the global trade scenario improving with some positive developments in the EU, US and emerging econo-mies, exports should drift upwards in the coming months. However, imports growth would also accelerate as domestic demand recovers, thus posing upside risks for the trade deficit.

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Ministry of Statistics and Programme Implementation (MoSPI) on July 30, 2014 released the provisional results of the Sixth Economic Census. The Central Statistics Of-fice (CSO) in the MoSPI conducted the Sixth Economic Census during January, 2013 to April, 2014 in collabora-tion with Directorates of Economics and Statistics in all the States and Union Territories. Economic Census provides detailed information on operational and eco-nomic variables, activity wise, of the establishments of the country including their distribution at all-India, State, district and village/ward levels for comprehensive analysis of the structure of the economy (micro, macro, regional levels) and for benchmark purposes. The data-base also serves as a sampling frame for drawing sam-ples for socio economic surveys by Governments and research organizations.

The first Economic Census was conducted in 1977 cov-ering only non-agricultural establishments employing

at least one hired worker on a fairly regular basis. The second and third Economic Censuses were conducted in 1980 and 1990 along with house listing operations of 1981 and 1991 Population Censuses respectively. These two Economic Censuses covered all agricultural and non-agricultural establishments excepting those en-gaged in crop production and plantation. The fourth and Fifth Economic Censuses were carried out in 1998 and 2005 respectively with the same coverage. The Sixth Economic Census had also the same coverage as that of Fifth Economic Census. However, establishments engaged in public administration, defence and com-pulsory social security activities have been excluded as data pertaining to them are available with the Govern-ment through administrative records and also due to the difficulties faced in collecting information from such establishments during the Fifth Economic Census. The key provisional results of the Sixth Economic Census are as follows:

Provisional Results of the Sixth Economic Census Released

ECONOMY MATTERS 28

DOMESTIC TRENDS

Highlights of Prime Minister Shri Narendra Modi’s Maiden Independence Day Speech

Prime Minister Shri Narendra Modi addressing the nation from the ramparts of Red Fort on the occa-sion of 68th Independence Day

1. BANKING FOR THE POOREST: Taking banking to the poorest, the Pradhanmantri Jan-Dhan Yojana will give each family a bank account with a debit card and an insurance cover of 1 lakh. “Today, there are crores of families that have mobile phones but no bank accounts. We have to change this. Economic development must benefit the poor and it should start from here,” the PM said. Official data puts the number of poor households in India at 6.5 crore.

2. ADOPT A VILLAGE : Using their development funds, MPs will adopt a village in their constituencies and turn it into a model village by 2016. The Sansad Aadharsh Gran Yojana strives to usher improvements in health, sanita-tion, greenery and cordiality

3. ‘MADE IN INDIA’ : Modi invites global manufactures to ‘come, make in India’ and sell it to the world, with an aim to strike a balance between imports and exports and create jobs. “We have the skill, talent, discipline and determination to do something,” he said in his speech.

4. A SKILLED WORKFORCE : The govt’s mission is two-pronged – create a skilled workforce that can be employed anywhere in the world and encourage entrepreneurship to create more jobs at home. And the aim is to do this at a rapid pace.

5. ZERO DEFECT , ZERO EFFECT : ‘Made in India’ must stand for quality products. PM encourages domestic manu-factures to adopt a policy of ‘zero defect, zero effect’ – make top-of-the-line products with no ill effect on the environment.

6. ENTER THE DIGITAL AGE : PM aims to connect every Indian through technology, provide governance via mo-bile phones, have every village on a broadband platform. “E-governance is easy governance, effective govern-ance and economic governance,” he said.

7. CLEAN INDIA CAMPAIGN : No city or village should remain dirty by 2019, when the country observes the 150th birth anniversary of Mahatma Gandhi. The government plans to achieve this with public and private participa-tions.

8. TOILETS IN SCHOOL : Target before next I-Day: a toilet in every school, and a separate one for girls. MPs to take the mission forward. Corporate participation also sought under Corporate Social Responsibility

9. NEW WAY : Planning Commission set up by Nehru on its way out. It will make way for an institution that gives the new direction to the country through creative thinking , public-private partnership and optimum utilization of resources.

10. POVERTY : Taking the war to end poverty to another level, PM calls for all south Asian countries to join India. “Why not get together with all Saarc nations to plan the fight against poverty? Let’s fight together and defeat poverty,” he said.

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Other Economic Developments of the Month- Government approved the constitution of an Expenditure Management Commission (EMC) that Finance Min-

ister Arun Jaitley had announced in his Budget Speech in July 2014. CII had been recommending the formation of this commission since long. The Commission is expected to recommend major expenditure reforms that will enable the government to lower its fiscal deficit. The Commission will be mandated with the task of suggesting an overhaul for reducing the food, fertiliser and oil subsidies and other ways of controlling India’s fiscal deficit. It is expected to submit its interim report before the presentation of the 2015-16 Budget next February. The final report is expected before the Budget of 2016-17. The Government will shortly issue the terms of reference for the Commission. Former Reserve Bank Governor Bimal Jalan will head the Commission. Members will in-clude former Finance Secretary Sumit Bose and former Reserve Bank Deputy Governor Subir Gokarn.

- India refused to sign the Trade Facilitation Agreement (TFA) until the issue of public stockholding for food security is resolved. The trade facilitation pact reached in Bali, Indonesia, last year is meant to simplify customs procedures, facilitate the speedy release of goods from ports and cut transaction costs—measures that could benefit rich nations more than developing countries such as India. At the heart of the problem is a WTO rule that caps subsidies to farmers in developing countries at 10 per cent of the total value of agricultural produc-tion, based on 1986-88 prices. Developing countries are complaining that the base year is now outdated and they need to be given leeway to stock enough foodgrains for food security of millions of their poor. CII is of the view that a great amount of effort have gone into clinching a balanced Bali deal. Hence, it must not be wasted and all efforts must be made to use Bali Ministerial outcomes as springboard to conclude the Doha round, which is into its 13th year of negotiations.

- Government approved 49 per cent foreign investment in insurance companies through the FIPB route ensur-ing management control in the hands of Indian promoters. The move would help insurance firms to get much needed capital from overseas partners. The proposal to raise FDI cap has been pending since 2008 when the previous UPA government introduced the Insurance Laws (Amendment) Bill to hike foreign holding in insur-ance joint ventures to 49 per cent from the existing 26 per cent.

- In a similar move, Union Cabinet on August 6, 2014 also cleared the proposal to set the composite cap for foreign investment in the defence sector at 49 per cent, compared with the current 26 per cent foreign direct investment (FDI) ceiling. But the management control of companies receiving these investments must remain in the hands of Indians. The Cabinet also permitted foreign investment in rail operations like dedicated freight lines, high-speed trains and mining & port connectivity, besides allowing FDI in some projects like construction of new lines, gauge conversion, doubling of lines and maintenance projects under the public-private partner-ship model. For joint venture in the area of projects, up to 74 per cent FDI will be allowed. These FDI proposals will be allowed under the automatic route, so these will not require FIPB approval. This decision, too, is an executive one and need not go to Parliament.

- The Central Board of Directors of the Reserve Bank of India, approved the transfer of surplus amounting to Rs 526.79 billion for the year ended June 30, 2014 to the Government of India. The amount was Rs 330.10 billion for the year ended June 30, 2013.

- The latest round of RBI inflation expectations survey (Q1FY15) indicates that the number of respondents ex-pecting an increase in inflation over the coming three months as well as one –year ahead have declined. This is true both for expectations of food and overall inflation. However, the expected three-month ahead inflation rose while that for a year ahead remained high (unchanged as compared to the Q4FY14). This is in line with the progress of monsoons over this season with rainfall deficiency remaining high for most of the first quarter.

- Data Released by RBI showed that during the first quarter of 2014-15 (April-June), net services exports were valued at US$17.2 billion, growing at 1.8 per cent over the same period a year ago.

- The Indian Meteorological Department (IMD) in its long range forecast (LRF) for second-half (August-Septem-ber 2014) estimates that the rainfall over the country as a whole during the second half of the 2014 southwest monsoon season is likely to be 95 per cent of LPA with a model error of ±8 per cent. For the season as a whole, rainfall over the country as a whole is likely to be 87 per cent of LPA with a model error of ±4 per cent. IMD has also decreased the probability of weak El Nino conditions to 50 per cent during the remaining part of the season.

ECONOMY MATTERS 30

CORPORATE PERFORMANCE

Net Sales Foretell a Recovery

Indian firms posted an impressive performance in the first quarter of the current fiscal (1QFY15), as net sales

and profit rose at the fastest pace in seven quarters, spurring investor optimism that the worst is over for corporate earnings. The net sales of companies (manu-facturing plus services) in the first quarter expanded by 10.0 per cent on a y-o-y basis, up from 5.7 per cent in the comparable period last year. Our analysis is based on the financial performance of 1613 companies (840-

Manufacturing and 773 Services and excludes oil & gas companies), using a balanced panel, extracted from the Ace Equity database.

It is encouraging to note that the beleaguered manu-facturing sector witnessed sharp acceleration in sales growth in the first quarter. Manufacturing sector in the first quarter grew at its highest pace in the last seven quarters at 9.8 per cent as compared to paltry 0.7 per cent in the same period last year, indicating that the downtrend is over. We expect further improvement in growth performance during the current fiscal on the back of the slew of policy measures which the new gov-ernment has introduced in the recent months to spur investment and revive growth.

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The net sales of services sector in the first quarter though moderated to 10.3 per cent as compared to 13.8 per cent in the same quarter previous year, it continued to remain in double-digits. Sustaining this momentum is important even as the rupee continued to remain vola-tile against the US dollar and economic growth contin-ues to remain restrained. Even though the growth of net sales of services has been relatively impressive, the sector has shown a sharp deterioration in expansion rate in last few years and its revival is critical for facilitat-ing the overall acceleration in economic growth.

The expenditure costs of the firms, on an aggregate ba-sis, accelerated by 11.4 per cent in the reporting quarter, as compared to 6.2 per cent in the comparable time pe-riod last year. Under its various heads, growth of raw materials cost increased to 10.4 per cent over decline to the tune of 2.3 per cent in the same period last year. In contrast, growth in wages & salaries showed mod-eration. Total expenditure costs for manufacturing sec-tor also increased to 10.0 per cent in the first quarter of 2014-15 as compared to decline of 0.3 per cent in the

In sum, both the ‘top-line’ and ‘bottom-line’ of compa-nies improved in the first quarter of the current fiscal. However, it would remain to be seen, how far this re-

same quarter last year. All the heads of expenditure for manufacturing except wages & salaries accelerated during the quarter. Total aggregate expenditure costs for services sector too increased to 13.1 per cent in the reporting quarter, albeit at a marginal pace, as com-pared to 12.8 per cent in the same quarter a year ago.

The performance analyzed in terms of Profit after Tax (PAT) exhibits a sharp improvement in financial results of companies at aggregate level in the first quarter of the current financial year. On an aggregate basis, growth in PAT improved significantly to 25.4 per cent in the first quarter as compared to contraction to the tune of 4.5 per cent in the same quarter of last year. This has been driven by sharp improvement in PAT growth of both manufacturing and services sector. PAT growth across the manufacturing sector firms, improved sharp-ly to 36.4 per cent in the first quarter as compared to decline of 12.0 in the same quarter of previous year. For services sector, PAT growth accelerated to 16.5 per cent as compared to an anemic 2.6 per cent in the same quar-ter a year ago.

covery is sustained. The emerging signs are propitious though, with the election of a new government which enjoys absolute majority and hence would face little dif-ficulty in implementing strong policy measures.

ECONOMY MATTERS 32

SECTOR IN FOCUS

Jobless Growth and its Implications

As India progresses on its demographic ‘sweet spot’, the imperative of translating demographic

advantages into tangible gains has emerged as a top priority. Although the country is expected to have the world’s fastest growing workforce over the next two decades, it cannot be taken for granted that economic growth would follow a declining age-dependency ratio.

Since economic reforms commenced in 1991, the Indian population and workforce structure is marked by sig-nificant trends.

To begin with, the age pyramid is in the process of shift-ing from a large base to a wide bulge in the working age sections. This means that the number of dependents per worker is declining. In 1991, this ratio stood at 70 per 100 working-age population; by 2013, age dependency ratio had fallen to 531. It is further expected to fall up to 2030 when India will have the largest workforce in the world. The declining age dependency ratio is expected to convert into rising savings, thus driving investments and growth as workers produce more than they con-sume. The impact of the demographic window however depends additionally on numerous factors, such as edu-cation levels, participation of women in the workforce, policy environment, and socio-cultural context, among others.

A second trend in India’s workforce structure is the de-clining Labour Force Participation Rate (LFPR). As a pro-portion of the total working age population, the number of people actually entering the workforce or looking for employment is falling. Much of this has to do with the withdrawal of women from the workforce, especially in rural areas. This is attributable to rising participation in

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education, rise in incomes, and other factors.

Three, the country is seeing a shift in sectoral employ-ment as workers move from agriculture to non-agricul-tural sectors for livelihood. In rural India, off-farm liveli-hoods account for a greater proportion of workers than those finding livelihood in the field.

Four, the percentage of workers in the organised sec-tors has declined while informal employment has risen. Studies show that a vast proportion of new employ-ment opportunities relates to the informal sector while the number of workers in the formal sector has stag-nated. Even within this, the share of the public sector has fallen while that of the private sector is going up.

i. The Demographic Dividend

India’s demographic dividend refers to the fact India currently has and will continue to have the largest num-ber of people in the working age group of 15-59 years. As of 2010, India’s working age population constituted 62.1 per cent of the total population, of which a little less than half were in the ‘young’ age group of 15-29.

However, this can be turned into an advantage only if jobs can be created for the large number of people joining the working age population every year. Accord-ing to our calculations, the working age population is expected to swell by about 200 million between 2010 and 2030. This implies about 10 million people attaining working age every year. Not all these people join the

Five, the number of jobs created in the economy over the last fifteen years is not enough to absorb the rising number of workers. Thus, there has been an increase in self-employment. The quality of such self-employment is poor, characterised by low productivity and incomes.

The impact of these trends is far-reaching with implica-tions for economic growth, poverty alleviation, produc-tivity, social security and socio-cultural developments over the long-term future of the country. The discus-sion paper studies the above trends in the employ-ment scenario based on recent data and analyses the implications of a changing workforce structure. It ends with possible policy responses to leverage India’s best resource – its people.

This trend will continue well into the next few decades even as large parts of the world are experiencing an ageing population. What this means is that the depend-ency ratio, i.e. the ratio of the population aged 0-14 and 65+ per 100 people in the working age group will keep declining. With a median age of 26.4, India has one of the youngest populations among the major countries in the world.

labour force, as some may opt for further education or training. India, in particular, has a low rate of labour force participation probably because the expectation of finding a suitable job is limited. A complete overhaul of labour force regulations as well as the business environ-ment is required in order to change the employment scenario in the coming years.

1 http://data.worldbank.org/indicator/SP.POP.DPND?page=4

I. Employment Structure and Trends – the Data

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ii. The Employment Imperative

In order to take advantage of India’s demographic divi-dend, job opportunities have to be created on a large scale. Further, as the share of agriculture in GDP shrinks, so should its share in employment. Labour being ren-dered surplus from agriculture needs to be absorbed in either industry or services. However, the experience so far has not been encouraging in that employment has not increased to the extent it should have, given the additions to the labour force and the high rate of eco-nomic growth till 2007-08. As the growth rate slowed down in the recent period, the data does not show an increase in unemployment. Instead, it shows a decline in the labour force participation rate (LFPR). This could indicate that instead of reporting as unemployed and available for work, respondents prefer to remain out-side the labour force.

iii. Sectoral Shares in Employment

Comparing the shares of the three broad sectors in em-ployment, it is apparent that agriculture remains by far the largest employer. However, the share of agriculture in employment fell below 50 per cent for the first time in 2011-12 from 56.6 per cent in 2004-05. Agricultural em-ployment fell as the labour force migrated from agricul-ture to industry and services. As for industry, it has wit-nessed a rise in its share of employment from 18.7 per cent to 24.6 per cent in the comparable period. How-ever, this is mostly attributable to the rise in workers

The NSS conducts Employment-Unemployment Sur-veys (EUS) every five years, but the latest survey for 2011-12 was carried out two years after the EUS 2009-10, as the latter had shown some contentious results in terms of low employment growth. The table below, reporting the results from the last few surveys, shows the number of people in the labour force (persons who are either working or available for work) and the work force (persons working).

It is apparent that additions to the labour force out-stripped the additions to the work force till 2004-05 when the growth rates were high, while additions to the labour force itself declined in the period after 2004-05. In terms of employment creation, there has been a slowdown in the latter period – while 60 million jobs were created in the five-year period between 1999-00 and 2004-05, only 15 million were created in the seven-year period between 2004-05 and 2011-12.

engaged in construction. The services sector has seen a smaller increase in its share in employment, from 24.7 per cent in 2004-05 to 27.9 per cent in 2011-12. Since its share in GDP has increased sharply in the same period, one possible implication of this trend could be that the sector’s productivity is on the rise.

It needs to be noted that industry continues to have the lowest share in total employment and within industry, the share of employment in manufacturing is merely 13.0 per cent. Employment in manufacturing increased by merely 5.4 million between 2004-05 and 2011-12 while employment in construction increased by a much larger

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23.9 million. The Planning Commission is projecting that by the end of the 12th Plan period (2016-17), the share of agriculture would decline to 45.0 per cent with a com-mensurate rise in industrial and services sector employ-ment. The share of manufacturing is expected to rise to 18.0 per cent by 2016-17.

This pattern of employment clearly sets India apart from other countries that have entered a high-growth period which have all typically experienced an increase

iv. Low Share of Organised Sector in Employment

Another unique characteristic of the employment scenario in India is the very low level of employment in the organised sector. Enterprises with more than 10 workers are supposed to register with the govern-ment, and are regarded as the ‘organized sector’ of the economy. The ‘organized sector’ is subject to govern-ment regulations regarding many aspects of economic activity including more stringent labour regulation and procedural requirements. It is well known that regula-

in the share of output and employment in manufactur-ing and other industrial activities. In India, this is yet to happen due to the lack of large scale job opportunities outside agriculture. In fact, the NSS data shows that there has been a decline in manufacturing employment between 2004-05 and 2009-10. While this could be relat-ed to the onset of the global economic crisis in 2009-10, it is indeed worrying that manufacturing employment declined during a period of relatively high growth.

tory requirements for businesses are quite stringent in India, as a result of which India gets a low rank of 134 out of 185 countries in the World Bank’s Ease of Doing Business rankings. These regulations have acted as a disincentive for firms to increase employment and be categorised as part of the ‘organised sector’.

The Planning Commission considers an increase in or-ganised sector employment as one of its objectives since this is associated with some security of tenure and higher wage rates. Also, the productivity of labour is higher in the organised sector. However, it is pertinent

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to note that only 29 million out of a workforce of 472 million are employed in the organised sector, as regula-tions imposed on it are certainly a deterrent to increas-

v. Large Share of Self-Employed

The workforce is dominated by the self-employed, who account for more than 50 per cent of workers. The share of those in regular salaried or wage employment is the lowest but a good sign is that it has been rising since 2004-05. Some concern has also been expressed about the increasing casualization of the workforce, even within the organised sector. This has happened

vi. Women workers

According to NSSO, the Labour Force Participation Rate (LFPR) for women came down from 29 per cent in 2004-05 to 22.5 per cent in 2011-12. This accounts for the major proportion of the declining LFPR in the country. There has been speculation about the factors causing

ing employment. A concerted effort is required to ease the regulatory burden on the organised sector so that better quality employment can be generated in much larger numbers.

largely to get around the stringent labour laws that are applicable to regular or salaried employees. The data, shown below, does indicate some increase in the share of casual labour in 2009-10 over 2004-05 but this has moderated in 2011-12. However, it should be noted that this data is for the entire workforce that includes those employed in agriculture and not just those employed in organised industry or services.

this at a time when women are increasingly entering the workforce in other countries. Possibly, as household in-comes rise, women prefer not to work, especially when work opportunities relate to physical labour. Other fac-tors could be the rise in women in higher education, preference to raising children, etc. Whatever the cause, the decline in proportion of women participating in the economy is of deep concern.

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In the ultimate analysis, job creation is a matter of hu-man rights as has been recognised by the Indian Consti-tution. Article 41 of the Constitution provides that “the State shall within the limits of its economic capacity and development, make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disable-ment, and in other cases of undeserved want.” Article 43 states that it shall endeavour to secure a living wage and a decent standard of life to all workers.

The question therefore is how the state would ensure that all workers can secure a living wage and a decent standard of life. Given the ‘limits of its economic capac-ity and development’, the government can make ‘effec-tive provision’ by facilitating job creation through the private sector.

The challenges of job creation are inextricably linked to multiple economic dimensions:

1. Education system: Our education system should be responsive to market needs to enhance the em-ployability of the workforce and make them con-tribute to the production process. This would obvi-ate the situation wherein an array of unemployed graduates co-exists with huge skill shortages within industry. The application of ICT has vast potential to energize education and skill development as it provides more opportunities for extended learning.

2. Skill development: While employment is one side of the challenge, employability is the obverse. The skill development endeavor has to be accelerated and greatly scaled up in a joint effort of government, in-dustry, and civil society. While the 12th Plan targets skilling of 50 million people in five years the actual number of beneficiaries has been much lower. Ar-eas to be examined could include raising resources, scaling up infrastructure and institutions, voucher system, teacher training institutes, building capac-ity of state governments, ensuring quality teaching, convergence with MNREGA, etc.

3. Growth: To raise the quality of jobs available to new entrants to the workforce, it is essential to rejuve-nate growth to at least 7 per cent by the end of 2014. Some issues of top priority at the policy level would be governance, project implementation, taxation, interest rates and inflation, public private partnerships, long-term financing, and FDI, among others.

4. Industrial performance: Given that large sections of the workforce are moving off the land and that the demand is for less-skilled jobs, it is the industry sector that would have to be promoted to provide such jobs. Employment-intensive mass manufactur-ing sectors would be central to the endeavor.

II. Recommendations

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5. Investments: Rejuvenating investments and mak-ing them more efficient is a top priority. New in-vestments and projects including in infrastructure, power and manufacturing can strengthen the envi-ronment for job creation.

6. Ease of doing business: A business climate that fosters entrepreneurship and promotes new busi-ness ventures and the expansion of existing ven-tures with stability and clarity is the best way to create employment opportunities. It is important to examine each of the regulations covered under the World Bank Ease of Doing Business Indicators and set a target of reaching rank 50 within 5 years. Administrative, environmental and bureaucratic procedures must be examined in detail to minimize them.

7. Export competitiveness: Strategic security derives much from a nation’s footprint on the global eco-nomic stage. India needs to increase its presence in top globally traded goods and services, which is also a key avenue for job creation domestically. Overseas investors have a significant role to play in plugging India into global supply chains. A National Export Competitiveness and Market Promotion Council could be considered to assist domestic sup-pliers and build overseas markets. Reducing trans-action costs would be required.

8. Legal and regulatory architecture: India’s legal and regulatory framework should be geared towards

Mass Manufacturing Enterprises: In most countries, enterprise size is defined by the number of workers on the payroll. In India, just as there is a separate category of MSME based on investments, there could be a sepa-rate category of enterprises that employ large numbers of people. Enterprises employing more than a certain minimum – say, 4000 workers – would be eligible for tax relief, deductions for skill development or worker housing, benefits in terms of land, special provisions re-garding labour regulation applicability, etc.

employment-creation and in line with global best practices. Social security and worker protection have to be addressed simultaneously at, with the imperative of mass scale employment creation. The regulatory architecture should be relooked with the idea of light-handed, fair, and independent regulation that encourages competition. A number of bills would need to be reintroduced and a new Parliament offers a chance to redraft some of them. Mining, insurance, pension, etc. are some impor-tant pending bills.

9. Labour Law Reforms: The provision of more flex-ible labour laws, which confer to employers the right to take management decisions, is crucial to provide a fillip to labour intensive manufacturing. There is need to create a ‘social safety net’ to com-pensate workers rationalized during the produc-tion process. Outdated laws need to be weeded out and existing laws would need to be adapted in tune with current realities.

10. Entrepreneurship: Promoting entrepreneurship is vital to expanding opportunities for livelihood and employment. In particular, start-ups must be encouraged. There is need for a national policy on facilitating entrepreneurship which would bring together elements of capacity building, access to finance, boosting venture capital and angel invest-ing, and the creation of necessary infrastructure such as industrial parks.

Taxation benefits: A graded system of corporate taxes could be considered for manufacturing enterprises de-pending on employment. For example, enterprises em-ploying more than 1000 workers could get 2 per cent discount on tax, enterprises employing more than 3000 workers could get 4 per cent discount, etc.

Services: The manufacturing sector may not be able to take up the entire responsibility for employment and many services sectors too could provide large scale employment opportunities. This can be scaled up with

III. Some Innovative Ideas to Push Employment

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appropriate training. Some top services sectors with huge employment potential are tourism and hospital-ity, healthcare, education and skill development, retail trade especially multi-brand retail, logistics services, etc. It is necessary to devise policy frameworks that would expand services with high employment potential. These also benefit from short lead times.

Non-farm employment in rural areas: Since the share of agriculture in employment in rural areas is declining and more and more workers need to find work off the farm, rural non-farm sectors can be identified and pro-moted. Some of these sectors could be food process-ing, construction, large-scale poultry and fish farms, horticulture, floriculture, sericulture, packaging, etc. Ex-port processing from rural areas can also be promoted in an employment-enhancing manner in products such as bovine meat, poultry, fisheries and marine products, flowers, vegetables, etc.

National Entrepreneurship Policy: It is necessary to de-vise a policy which clearly lays out the benefits that a new enterprise would be accorded and the administra-tive and facilitative architecture for its operation. This would include elements of training and skill develop-ment, finance, technology, marketing, cluster format, etc. Entrepreneurship could also be considered as part of the regular secondary school curriculum to inculcate awareness on its dimensions, as a large proportion of school-leavers would go into self-employment/small en-trepreneurship.

Resources for skill development: A National Skill De-velopment Bank could be set up to finance skill devel-opment training, fund skill development institutes and provide seed capital for new entrepreneurs. MNREGA should include a component of skill development to ef-fectively deploy employment funds for building employ-ability capacity. Weighted deduction could be offered to companies for providing certifiable skill development for employees.

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Rejuvenating the Textiles Sector

Textiles is one of the most important sectors of In-dian economy, in terms of, its contribution to indus-

trial output, employment generation, and the export earnings of the country. India’s dominance in global textiles can be gauged from the fact that the country is second largest producer of fibre in the world. It is also counted among the leading textile industries in the world. Abundant availability of raw materials such as cotton, wool, silk and jute and skilled workforce has

made India a major sourcing hub. The textile industry in India traditionally, after agriculture, is the only industry that has generated huge employment for both skilled and unskilled labor in textiles. The textile industry con-tinues to be the second largest employment generating sector in India.

Going forward, the Indian textile industry is poised for strong growth, given the strong domestic consump-tion as well as export demand. However, this age-old Industry in the country is facing many challenges for its survival and sustainability too. In this context, we cover this crucial sector in this month’s ‘Focus of the Month’, providing an in-depth analysis of the sector by sectoral experts.

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Q1: What is the vision of the Confederation of Indian

Industry for the Indian Textiles Industry?

CII envisions creation of a strong and competitive textile and apparel manufacturing value chain with creation of employment and value addition in focus. It aims to cre-ate a platform for sharing, nurturing and disseminating information on industry best practices and assisting in-dustry and government in making India a preferred des-tination for Textile manufacturing.

Q2: What is current status of Textile Industry in India

and how does it stack up in comparison?

Today, the Indian textiles industry is one of the largest in the world. It is a US$100 billion industry. The domes-tic consumption is estimated at US$67 billion whereas the exports are about US$33 billion. The domestic tex-tile and apparel industry in India is estimated to reach US$141 billion by 2021. In addition to providing one of the basic necessities of life, the textiles industry in India plays a vital role through its contribution to industrial output, employment generation, and the export earn-ings of the country.

It is the second largest sector after agriculture in terms of employment and provides direct employment to over 45 million. Besides, another 60 million people are engaged in its allied activities. During April-September 2013, textile exports from India reached US$16 billion, which is 8 per cent higher than the exports during the same period last year.

The industry also accounts for about 14 per cent of in-dustrial production, 5 per cent of the country’s gross domestic product (GDP), 11 per cent of export earnings, 23 per cent of the world’s spindle capacity, 4 per cent of the global textile and apparel trade and 12 per cent of the world’s production of textile fibres. The global demand of textile and apparel products is on rise and within India the demand growth is still faster.

Over last 10 years, some interesting progress has hap-pened in Indian Textile industry. New investment in spinning and shuttle less weaving machines have re-sulted in ~ 40 per cent of India’s spinning capacity and almost entire shuttle –less weaving capacity being less than 10 years old leading to higher efficiency.

Also, India is faster becoming competitive in factor cost, particularly in power and wage cost, though there ex-ists a huge potential to improve productivity per unit of factor cost.

Q3: What according to you are the key opportunities

and challenges being faced by this industry today?

While India is the country with second largest produc-tion infrastructure, it lags far behind China in terms of scale and technology level. It also faces competition from several other countries which have carved a niche for them e.g. Bangladesh, Vietnam, Turkey, etc. Indian textile industry faces several challenges like low value addition, higher power and financial cost, gaps in skill

The Indian Textiles Industry: Pivotal in Increasing the Share of Manufacturing in GDP

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level at all levels, fragmentation, smaller capacities, etc. Since the industry’s growth is directly linked with its huge employment generation capability and export potential, focused initiatives to uplift the industry will result in significant growth for the overall economy as well.

Some of the key challenges are

• Lack of infrastructural support especially in power, road and ports, enabling faster lead time to con-sumption centers

• Lack of long term policy regime which otherwise would have attracted investors to put long term in-vestment without fear of policy changes

• To maintain raw material security at competitive price

If we are able to tackle these challenges India can be-come a formidable force in the global textile value chain.

Q4: What are your recommendations for leveraging

the opportunities and combating the challenges de-

tailed above?

To achieve competitive edge within the domestic indus-try as well as in the global arena, a few policy reforms and amendments are required. In order to tap the op-portunity for growth and role in global textiles at this important juncture of time, CII recommends efforts re-quired in 4 broad areas for the overall growth and im-provement in competitiveness of the industry.

1. Attracting Investments – establishing Textile Mega Parks, Special Incentives for Value Added Textile and Apparel Manufacturing, Attracting Foreign Di-

rect Investments (FDIs), Attracting investment in Machinery Manufacturing Segment;

2. Enhancing Manufacturing Competitiveness - Amendment in Labour Laws, promoting Skill Devel-opment, Rationalization of Taxation, Revising Pow-er Tariffs and Improving Availability and Supporting Technical Textile Manufacturing;

3. Market Development - expediting negotiations with regard to Free Trade Agreements, particularly India-EU FTA and creating “Brand India” through Exhibitions and Region Specific Textile Parks;

4. Support services - Custom Clearance Process and setting up of Centers of Excellence.

Apart from this focus on higher value addition and de-veloping niche sectors should be a priority. One of the areas to focus can be supporting of technical textiles manufacturing.

Technical textiles are among the most promising and fastest growing areas of Indian textiles industry. The technical textile sector has demonstrated encouraging growth trends in India with a CAGR of 8 per cent for the last few years it has reached a size of US$13 billion. The sector is expected to show a CAGR of 16 per cent to reach US$31 billion by 2016-17.Globally, these textiles account for more than one third of all textile consump-tion. Currently, India accounts for only 8.6 per cent of global technical textiles consumption.

Technical textiles are bound to play an important role as our economy grows. Increasing disposable income and the growth of various end user segments like health-care, roads and highways, agriculture, automobiles etc. are expected to drive the demand for these products at a much higher rate in India.

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Tiruppur is a major textile export hub with special-ized expertise in cotton knitted garments with over

18000 Crores of apparel exports and significant turno-ver on account of domestic sale of garments in India to the tune of 8000 Crores, thereby providing direct em-ployment to over 5 Lakh people.

It is called the knit capital of India as it caters to famous retail brands from all over the world. Almost every inter-national knitwear brand in the world has a strong pro-duction share from Tiruppur. It has a wide range of fac-tories which export all types of knits fabrics and supply garments for kids, ladies, men’s garments - both under garments and tops. Some of the world’s largest retail-ers including C&A, Switcher, Wal-Mart, Primark, Die-sel, ARMY, Tommy Hilfiger, M&S, FILA, Respect, H&M, HTHP, Whale, NIKE and Reebok import many textile items and clothing from Tiruppur city.

Tiruppur was a small village about a couple of decades ago. Despite several disadvantages including lack of proper infrastructure facilities, difficult access to ports and airports, etc., Tiruppur has emerged as a major play-er in world apparel market because of unstinted hard work and enterprise of the entrepreneurs in and around the region.

Most of the entrepreneurs hail from agrarian back-ground with very few qualified and educated. It is due to their dedicated hard work that these entrepreneurs have carved a niche for themselves in the Global textile map thereby contributing to the economic growth of the Country. The unique factors which has helped to en-trench Knitwear Industry in Tiruppur Cluster are

• Micro, Small and Medium industries have got syn-ergized in the manufacturing process which is very unique for this cluster. Since this cluster caters mainly to the western markets which is so dynamic in nature where in change is the constant factor, to accommodate this companies should be flexible and be ready to swift adaptability to incorporate the required changes in the manufacturing process and in the embellishments area. Without this flex-ible nature it would be very difficult to cater to the markets on time.

• Unity in diversity, that means competitors would mutually exchange the expertise without any sec-ond thought; the standing testimony for this unity is NIFT-TEA which is an institution promoted by 185 entrepreneurs together. The main objective of this Institute is to support the growth of this Industry. Moreover this is the only Institute across the coun-try which provides courses exclusively relevant to knitwear and is evolving itself as the repository of knitwear knowledge source.

With all these efforts yet the knitwear / apparel industry in India caters to less than 3 per cent of the global de-mand for textile products. Off late the apparel exports from China and other competing countries are getting less competitive because of several internal factors. This presents a unique opportunity for Indian apparel indus-try, specifically clusters like Tiruppur, to effect manifold growth in volume of exports from the country.

Tiruppur – An Industry with Great Growth Potential

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In the globalised era there is enormous opportunities to tap, for example next to China, India has cotton pro-duce, manpower and Technical knowhow inspite of all these precious possessions, the Indian apparel industry have a dismal share as stated above in the global mar-ket’s requirement. With all these factors we need to have an holistic policy to bridge the prevailing gaps to enhance our share in the international market to a con-siderable level say to the extent of 20 per cent (from the existing 3 per cent), which is very much possible.

The gaps to be addressed in the following ways:

1) First and foremost step to be taken is towards establishing a Research Institute for the Apparel Industry in the line of “Central Leather Research Institute (CLRI) or South India Textile Research As-sociation (SITRA)” to help the industry to stream-line the processes involved; furthermore this Indus-try which is dynamic in nature requires a dedicated platform to carryout research, the reason being, it is highly impossible to run R&D facility in the indi-vidual entity because by the time the results come it would become irrelevant, by then a different style would be in the production line. Hence, a common platform like NIFT-TEA should be promoted as the research base which would facilitate the informa-tion disseminating process to the Industrial Cluster.

2) By establishing the above said R&D facility with the objectives of doing research and documenting the accumulated expertise by the way of case studies would help institutionalizing the above said accu-mulated expertise. This would help this cluster’s successful formula to be replicated in other parts of the country successfully.

3) Opening up of more ITI training centers to impart the required skills would help the growth of this in-dustry to a considerable extent. Moreover, it would generate enormous employment opportunity and assist in blossoming of new entrepreneurs. The Tiruppur cluster formula is based on the coopera-tion of Micro Small and Medium scale Industries

which would very much suit an economy like India where disparity of wealth is prevailing.

4) In India not only textile industry but all the other industries are also facing acute skilled labor short-ages to overcome this we need to revisit our educa-tion system. Almost every year, lakhs of student’s dropout at 10th and +2 levels, but these fresh hands that are in search of job opportunities do not have details about the prospective opportunities in in-dustries from their respective regions. The sug-gestion here is respective state Governments and the Central Government along with the industries should conduct district wise awareness programs by portraying the prospective opportunities in vari-ous industrial sectors and its future to help them to choose the interested areas and once they have chosen the area they can be subjected to skill train-ing exercise for a specified period, which would en-able them to settle economically stronger and they could be guided to undertake their knowledge pur-suit by enrolling themselves in any of the postal de-gree programs of their choice. This exercise would create a win-win situation for the Individual, for the family’s economy, for the State’s economy and fi-nally for the Country’s economy.

With a sound policy direction as stated above would help the country’s economy to grow leaps and bounds in all direction and particularly the knitwear segment alone would effectively mitigate our country’s BOT is-sue to a major extent.

With all this the CII formed a district council in Tiruppur with over 100 industries as members in 2014. The mem-bers from Tiruppur have undertaken an herculean task of increasing Tiruppur cluster’s turnover from present 25000 crores to 100000 lakh crores turnover by 2020 for which a “Tiruppur Vision 2020 Document” has been pre-pared. This was submitted to the State and Central Gov-ernments. Furthermore to bring the envisaged growth potentiality into reality, CII is making all efforts to pre-pare a DPR (detailed project report) by involving some of the reputed consultant agencies of our country.

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Man-made fibre textiles have been redefining fash-ion trends across the globe. Its vibrancy, dura-

bility and opulence lend a uniqueness that’s virtually unmatched and unparalleled. India is one of the few countries that has the complete supply chain, right from diverse fibres to a range of fabrics and made-ups. It is capable of delivering customized packages to cus-tomers. Today, India supplies a wide variety of fibres, yarns in different counts, fabrics in an amazing range of textures and finishes and exquisite made-ups. India of-fers the entire range of polyester, viscose, nylon, acrylic and blended textile items to the discerning internation-al buyers.

Export Opportunity in MMF T&A Exports of US$80 bil-lion by 2025

Indian synthetic textile sector is contemporary and has good growth potential to emerge as a major outsourc-ing hub. Share of synthetic textiles in total textile in In-dia is abysmally low at 35 per cent as against 65 per cent globally. Global MMF T&A market is likely to increase to US$1020 billion by 2025 from the US$425 billion in 2012. Even after assuming India’s share in global MMF mar-ket to remain at the current levels of 2 per cent, India stands to get MMF exports opportunity of US$19 billion by 2025. In addition to this, China’s share in the global T&A exports is likely to come down to 30 per cent in 2025 from the current 36 per cent as its domestic de-mand is likely to outpace its production. This will give an additional opportunity of US$61 billion in the MMF space for other countries.

It is expected that China’s lower contribution in the MMF exports market will create a great opportunity es-

pecially for India as it is the largest MMF producer after China. Thus by 2025, India will have an exports opportu-nity of US$80 billion in MMF segment, from exports of US$7.9 billion in 2012.

Domestic Population to Double MMF Consumption in India by 2020.

Given the population expectation of 1.3 billion by 2020, we expect the total fibre consumption to increase to 13 billion kg from 8.2 billion kg in 2011. Assuming similar cotton yields of 514 kg/hectare as in 2011 level, cotton production to support fibre consumption will only be up to 5.2 billion kg in 2020. Hence the balance fibre con-sumption of 7.8 billion kg has to come from MMF seg-ment only. Hence MMF consumption is expected to in-crease to 7.8 billion kg in 2020 from 3.3 billion kg in 2011.

Total per capita fibre consumption is expected to in-crease by 48 per cent to 10 kg by 2020 from 6.8 kg in 2011 and the incremental per capita fibre consumption of 3.2 kg will come from MMF space only, thus taking the MMF share in the total fibre consumption to 60 per cent in 2020 from 40 per cent in 2011.

Domestic Technical Textile Industry to Grow to US$36 billion by 2017.

India’s per capita technical textile consumption is only 20 per cent of the global average because 64 per cent of technical textile application in the country comes from low fibre consuming segments like Home Textiles, Clothing and Packing. Globally segments like Automo-biles, Industry, Infrastructure and Sports are the main end using segment of technical textile where the fibre requirement is higher.

Growth Opportunities, Impediments and Way out for India’s MMF Textile Industry

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With increase in domestic investments in automobiles, personal care, industry and infrastructure space, techni-cal textile industry in India is poised for a considerable growth. Indian domestic technical textile consumption which is at US$14 billion in FY12, is expected to grow to at a CAGR of 37 per cent to US$36 billion over FY12-17.

MMF Industry to Attract Investment of US$5.9 billion.

India’s MMF capacity will increase to 12.1 billion kg by 2020 from 5.1 billion kg in 2012 to meet the increased domestic consumption of 7.8 billion kg and to cater the growing global exports market, which is expected to grow at a 3.9 per cent CAGR over 2011-20. The current replacement cost of 1 billion kg of MMF Plant is US$0.83 billion. Hence, with capacity addition of 7.1 billion kg by 2020, the estimated additional investments require-ment will be of US$5.9 billion.

Impediments

The paramount reason for the lopsided growth of Indi-an MMF Textile industry is the historical discrimination of Man Made Fibres and Textiles against cotton and cotton textiles in the form of higher Excise, Custom and other duties. Man made fibres are subjected to 5 per cent Custom Duty, 4 per cent Special Additional Duty (SAD) and 12.36 per cent Excise Duty or Countervail-ing Duty besides anti-dumping duties on various fibre / yarn. Thus Indian consumers have to pay minimum 22 per cent higher amount for MMF as compared to inter-national prices and as against “nil” in case of cotton. This has been strangulating the growth of this industry

Way-Out

There should be a fibre neutral Excise Duty as envisaged in the draft National Fibre Policy i.e., all textiles and fi-bres should attract same Excise Duty. There is no differ-ence in Excise Duty between cotton and Man Made Fi-bre / Filament yarns in other countries and India should be no exception to it. 5 per cent Custom Duty and 4 per cent Special Additional Duty on import of MMF should be abolished.

There is need to encourage exports of MMF products in all their value added forms. Therefore export oriented incentives should be provided to the manufacturers of MMF textiles and garments for a limited period to neu-tralize the impact of cost disadvantage vis-à-vis export-ers in competing countries. A graduation scheme for three years can be introduced in Focus Product Scheme with benefits of 10 per cent in first year, 7 per cent in second year and 3 per cent in 3rd year as recommended by the working group on India’s manufacturing experts for 12th Five Year Plan.

Users of MMF generally constitute small / medium busi-nesses who are not able to initiate / defend anti-dump-ing proceedings for their products as it involves huge cost. Thus there is a need for introduction of an insti-tutional mechanism to provide support (financial and other) to industry associations to initiate and defend anti-dumping proceedings / safeguard duties. Often, anti-dumping duties are levied on MMFs without ad-equate consultation with the concerned user industry. Therefore it is suggested that anti-dumping duty on any fibre / yarn should not be levied without prior consulta-tion with user industry and approval of the Textile Min-ister.

(Views are Personal)

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Today’s Textile Industry is passing through a very dif-ficult phase due to multiple challenges. We all know

that Textile is one of the oldest Industry of India, con-tributing 4 per cent to country’s GDP, 14 per cent to total industrial production, 11 per cent to total export earnings and provides direct employment to some 35 million people. But today, this age-old Industry in the country is facing many challenges for its survival and sustainability.

1. Lack of Product Innovation: Most of our textile manufacturing companies pay cursory attention to this area, be it in terms of putting right resources or technology. As a result, most of the companies turn out same or similar products with intense com-petition cutting into each other`s margin and settle with a very thin bottom line, leading to a “vicious cycle”. Personal zeal and efforts for real product development and to be different from others in terms of actual differentiation of product attributes or performance take a back seat. Although one will come across departments like “Design & Develop-ment” in almost all companies, they are either mere copying /duplicating customers` designs or trying to create different versions of the same concept or product. As a result, we have not been able to act as a “leader/innovator”, but have become a follower.

2. Training and Development: It is a fact that in last 20 years or so, bright and intelligent students are not coming to take up “Textile Engineering and Allied courses”. Instead, more and more students are opt-ing for better opportunity lines elsewhere (like IT, Computer Science etc). Many of those who do pur-sue this line finally change the stream after gradua-tion, resulting in perpetual shortage of good talent in the industry. For instance, in the machine opera-

tor’s area, workers are opting for those Industries, which are able to afford a much higher wage than the highly labour- intensive and lower paying Tex-tile industry, resulting in acute shortage of good manpower both at white collar and blue collar lev-els. Thus, in these circumstances, if the Industry desires to sustain, there is no option but to go in for structured and organised training programmes right from machine operator to all levels of staff. It has to be woven in the daily work profile and some mandatory training hours must be fixed. This will help the industry in several ways, like better yield, higher productivity, lesser absenteeism and lesser downtime of the machines. An amalgamation of all above actions will give at least 2 to 3 per cent boost in the bottom line, which is significant

3. High Utility Cost: All Textile processes, right from Spinning to Weaving to Processing, consume huge power. Power tariff and availability, both have be-come a major issue - in last 10 years or so. Apart from power, coal and gas have seen escalating prices in last few years, pushing the cost of pro-duction up and thereby rendering us increasingly uncompetitive in global market. Industry needs to work very seriously about reduction of power cost by plugging all weak areas as there may not be res-pite from its inflation in short to medium term.

4. Fragmented eco system: Textile industry has been working in isolated pockets and it is too much frag-mented. In last 20 years or so, most of the compos-ite units have closed down and thereby depend-ency on each other has increased multi-fold. While end- customer is looking for a complete package, the manufacturers struggle within themselves to arrange all elements with right quality, consistency

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and on-time delivery. Moreover, the lack of profes-sionalism is one of the major setbacks here. The suppliers always depend upon their back-end ven-dor and any deviation at the back-end supply push-es the shipment beyond a manageable limit and creates customer dissatisfaction. While many peo-ple believe that fragmentation is better in terms of cost competitiveness, however, in real world it has more pitfalls than advantages.

5. Very High Interest Cost: India is one of the top most high finance cost country in the world and the borrowing cost here ranges between 12 and 15 per cent. As the profit margin in the textile industry is already thin due to its very nature and also due to

6. Ability to tackle environmental issues: This is one of the most burning issues, especially in relation to Textile processing area, which consumes huge supply of water and thermal power. Due to grow-ing awareness, of the environmental concerns, and to perform our duty as a responsible citizen, it is important for manufacturing units to have 100 per cent control and compliance in this respect. How-ever, this has huge cost repercussions on a firm, thereby putting further pressure on the margin. Moreover, in many cases, authorities unnecessar-ily harass many genuine factories and the cost of malpractices adopted by a handful of firms in the industry is borne by all.

7. Threat of Import: Due to WTO agreement and lib-eralisation of trade, Textile is no longer a protect-ed industry. Today, huge imports are coming into India in virtually all categories of Textile products. Many importers indulge in the malpractice in terms of import duty component, resulting in our own

lack of product innovation and differentiation, it presents all entrepreneurs with a major challenge. The problem is even more acute, when a new pro-ject is set up. Although most of the companies are able to manage profit at the operating level, the problems start with repayment to bank in terms of working capital interest and interest on long-term capital asset. Although this is a common problem cutting across all spectrum of industry in the coun-try, the Textile sector is more prone to it owing to the poor level of EBITA. Thus, managing all kinds of inventory, right from raw materials to finished goods, and proper selection of machines at the pro-ject stage are critical to keep the burden of interest payment low.

indigenous products becoming costly against im-ported goods. However, as there is no way to cur-tail import, we have to be more cost effective by process innovation and automation. Companies in the sector need to strive hard to reduce the cost in all stages of manufacturing, without compromising the quality. This, to my mind, will be the key mantra for survival and success of this Industry.

8. High rental in Retail area: In last 10 years or so, In-dia has seen huge change in terms of retailing and as apparel is one of the largest categories in mod-ern retailing, large number of outlets have come up in the form of EBO/MBO and LFS. Today`s genera-tion has better purchasing power and they willingly spend in this category and thereby flaunt their sta-tus. Hence, many Textile majors are now focused on retailing. Although almost all retail brands have improved their top line in last 10 years or so signifi-cantly, the same does not apply to their bottom line performance. One of the major reasons is a very

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high rental of retail space. High rental has worked as a deterrent to make a healthy bottom line and so many stores have been closed in the last 5 years. Thus, selection of stores in proper locations with a trade-off between sales and rental is highly critical.

9. Fluctuation in Raw Material Rates: As stated above, most of the industry is fragmented and so output of one segment (for example yarn for spinning unit) becomes the input of another industry (the weav-ing industry) and so on. This system does not serve

10. Currency Fluctuations: The textile sector in the country, being heavily dependent on exports, is vulnerable to fluctuation in exchange rate of Ru-

the cause of the final product manufacturers, like apparel makers, to make a proper business plan with a capability to hold the rate at least for one particular season, leading to plethora of uncertain-ties. The domestic rates of raw materials, like fibre, yarn, fabric etc not only fluctuate due to demand and supply side factors but also due other factors, like global market scenario, government policy etc. All these factors have a cascading effect, which makes it difficult to suggest any statistical pricing formula.

pee against USD. It is believed that a week Rupee is favorable to exports, but what is even more im-portant is that there is a minimum volatility in the exchange rate.

ConclusionDue to several challenges associated with Textile industry, it is not an easy task to run this business in sustainable manner but at the same time this could be a very challenging and evergreen business if entrepreneurs keep a strong eye on above factors and make the business plan accordingly. This is one of the oldest industry of the world in general and India in particular which has significant contribution towards our economy. This industry will always be there as demand for clothing is bound to increase in coming days due to several factors like population growth, higher per capita income, more awareness towards fashion and also growing demand in the area of high quality fabrics. For country like India where creation of job and inclusive growth will remain key challenge, growth of tex-tile industry can contribute significantly towards these objectives.

(Views are Personal)

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Since the turn of 21st century, a myriad of changes in the economic, technology, social and political land-

scape have made an irreversible impact on how busi-nesses will function globally in the years to come. The rise of China as a superpower, the 2008 financial crisis, Europe’s sovereign-debt crisis, a slowing down of key global economies, the tremendous growth of digital and web based technology, are among the landmark events that have shaped the world.

For textile and apparel sector, these years have been no less eventful. The major event that set the ball rolling was the phase out of Multi-Fibre Arrangement (MFA) in 2005. While Asian exporter countries like China, Bang-ladesh, Vietnam, India, etc. became the major benefi-ciaries, countries like Italy, Spain, Mexico, Portugal, etc. faced the brunt of a shifting of the global manufactur-ing chain. While initial years were more about Asian countries exporting to the developed markets of USA, EU and Japan, by the end of very first decade China and India themselves emerged as major consuming markets propelled by their large population and growing econo-mies.

The present scenario and emerging trends strongly in-dicate that by the end of first quarter of this century i.e. 2025, it is not going to be the sector that we know as of now. In the text below, 5 global level sector trends are discussed that are expected to have far reaching impact.

Trend 1: Global Apparel Market will Cross US$2 trillion Mark

The current global apparel market is estimated at US$ 1.1 trillion which converts to nearly 1.8 per cent of the world GDP and US$ 154 per capita spend. Almost 75 per cent of this market is concentrated in markets of EU-27, USA, China and Japan. In terms of population, these regions are home to only one-third of the global pop-ulation, signifying high per capita spend on apparel in these markets. The projected growth in PCA and popu-lation will cause the world apparel market to grow at a CAGR of ~5 per cent and attaining a size of ~US$ 2.1 trillion by 2025.

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The per capita spend on apparel in China is significantly higher than that in India. From 2007 to 2012, the per cap-ita apparel spend in China grew at CAGR of 14 per cent

In both countries, demand for clothing is expected to outpace the overall growth of each economy. As dis-cussed above, it is projected that the per capita spend on apparel in China will rise from a current value of US$109 (2012) to US$377 by 2025 thereby registering a CAGR of 10 per cent. In India, the growth will be from US$36 (2012) to US$138 by 2025, with a CAGR of 11 per cent. This in value terms would cause the market size in China to swell from US$150 billion in 2012 to US$540 billion, whereas India’s apparel market size we estimate

and reached US$109 by 2012. During the same period in India, the growth rate registered was approximately 11 per cent from a much lower base.

will reach US$220 billion by 2025 from US$ 45 billion in 2012.

On one hand where these two economies will drive the growth of global apparel consumption, the traditional markets of USA and EU will face a slower growth rates on account of market maturity and weaker economic growth. It is expected that by 2025, the cumulative size of Indian and Chinese markets will overtake that of USA and EU.

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Trend 3: China’s Increased Focus on Domestic Supplies will create a Global Trade Gap of US$ 100 billion

China has gained the title of “the world’s factory” with the help of its huge population, cheap labour rates, low manufacturing costs and infrastructure available for mass production. Higher productivity of workers and commendable Government support are the markers of

Exports have played an important role in China’s eco-nomic success but today China is starting to turn the corner in becoming an economy where private con-sumption will replace investment as the major driver of GDP growth and eventually constitute the largest share of GDP. China is at the zenith of its growth cycle where high levels of investment will turn into consumption over time creating significant structural changes in the export oriented sectors, like textile and clothing differ-

China’s progress and its emergence as an economically developed society. A focus on mass export has resulted in large investments from within the country as well as FDI in the sector. In textiles and clothing specifically, China has dominated the global trade over the last two decades. China is the single largest exporter of textiles and clothing in the world with a mammoth 40 per cent of the global trade.

ing significantly from where it stands today.

Domestic demand of apparel in China is slated for a high growth. As discussed above, the per capita spend on apparel in China is expected to grow from US$109 in 2012 to US$377 by 2025, whereas the total apparel mar-ket will rise from US$150 billion in 2012 to US$540 billion in 2025, thereby registering a CAGR of 10 per cent. Such a demand will put pressure on exports and increase im-ports as well.

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Chinese Government is also taking initiatives towards shifting to advanced industries and service sector. From a GDP split of Industry, Services and Agriculture, which stands at 47:44:9 today, it is projected that by 2025 the split will be 46:46:8. By 2030, the service sec-tor will overtake the industry sector. Basic textiles and apparel industry will no longer be the prime focus of Government, as has been the case since the 1990’s, for enhancing exports and generating employment. This will eventually result in a slower growth of textile and apparel output, to a level of 5-6 per cent from 7 per cent currently. In addition, China is no longer a low cost des-

Such a long term slowdown is in contrast to a regime of high growth attained by Chinese exports over the last two decades. This lower-than-market performance will create a vacuum of ~108 billion by 2015. China’s loss of share in global trade will throw up opportunities for other exporting nations like India, Bangladesh, Paki-stan, Vietnam, etc. to take up the market share. But, the main issue to be addressed is lack of textile capability and scale outside China.

Trend 4: Intra-Asia Trade will Double to US$350 billion

Four of the largest trade partners in Asia will determine the shape of intra-Asia trade by 2025 viz. China, India, South Korea and Japan, having cumulative exports of US$335 billion. Another important influence for trade over the next few years will be the trade agreements between Asian countries. India and China, the major

tination as it used to be at the turn of the century. For a labour intensive sector like textile and clothing, this can put a brake on the fast growth in manufacturing output recorded historically.

Despite all the indicators for a slowdown, it is important to express that China’s exports will only slowdown to the extent that China’s domestic market will become in-creasingly attractive for its local firms as well as increas-ingly becoming a significant importer of value added textiles and apparel. The share of Chinese exports in global trade is expected to reduce from 41 per cent cur-rently to around 35 per cent by 2025.

emerging Asian powerhouses, have either signed or are contemplating trade agreements with exporters like Bangladesh, Vietnam, Cambodia, Myanmar, Sri Lanka, etc. All other Asian countries are also covered under at least one FTA. Apparel and textiles are among the ben-eficiary segments in almost all such agreements. This will help in increasing Intra-Asia trade (and investment) by creation of a larger regional supply chain and market base.

At an overall level, the intra-Asia trade of textile and ap-parel products is expected to grow from US$ 180 billion in 2011 to US$ 350 billion by 2025, registering a CAGR of 5 per cent. China will remain the biggest exporter, how-ever, its share will come down from ~66 per cent to ~55 per cent and other exporting countries like India will get an opportunity to gain in export market share.

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Trend 5: Global Textile and Apparel Manufacturing Val-ue Chain will Attract Investment Worth US$ 350 billion

The manufacturing value chain from yarn spinning up to garment manufacturing operation is a capital-intensive affair. In order to cater to the increase in global apparel demand by 2025, significant investment will be required for the new capacity addition. In the very first stage i.e. yarn spinning, the investment to turnover ratio is al-most 1:1 which improves at the fabric stage (weaving/knitting and processing) to become ~1:1.5 and finally at the garment stage becomes ~1:4. To generate a Value of Production (VoP) of US$ 100 million at garment stage, an investment of ~ US$ 85 million is required for produc-tion of equivalent volumes of yarn, fabric and garments. Industry will also need to allow for the replacement /modernization of the existing machinery.

The additional global apparel demand by 2025 is pro-jected to be US$1 trillion. This growth will be on account of an increase in value (price) and volume. It is estimat-ed that the long term global price inflation at retail level

will be ~3 per cent CAGR whereas the balance of market growth will be on account of additional consumption. This implies that an additional manufacturing capac-ity will be required to cater to a market demand of ~ US$410 billion (retail level). Moving backwards in the value chain, this number converts to ~ US$165 billion of VoP at garment level from 2012 to 2025. Going by the analogy mentioned earlier, an investment of ~ US$142 billion will be required to create the entire manufactur-ing infrastructure – from yarn to garments.

On the other hand the existing manufacturing infra-structure (as well as that being added annually) will be required to be replaced/upgraded gradually. The esti-mation of such an investment is possible considering the average age of machinery in each sector and the level of replacement/upgradation compliance actually being followed by the industry. This works out to be ~ US$210 billion in the 13 year period between 2012 and 2025. Hence, the total investment required between 2013 and 2025 in the global textile and apparel manufac-turing sector is estimated at US$350 billion.

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Implications of these Trends for Indian Companies

Indian domestic apparel consumption will touch US$200 billion in 2025, surpassing that of Japan, Brazil and Rus-sia. The market will grow more than 5 times from its 2012 value of US$45 billion, adding US$160 billion, mak-ing it one of the most attractive destinations for global brands and retailers. This attractiveness will bring major changes in the manufacturing and retail landscape in India.

In order to increase their market share, the retailers and brands will have to focus beyond the Tier- I cities. The price sensitivity of this larger proportion of India’s population will cause brands and retailers to develop low cost business models in which ecommerce will play a major role.

On the manufacturing aspect, focus on domestic market over the next decade can bring unparalleled growth, provided the business model of manufactur-ers is geared to tap the opportunities which will appear in various market segments. The key will be to develop economies of scale and establish strong business tie-ups with domestic brands and retailers by providing value added services, which may include inventory man-agement, product development and IT enabled produc-tion tracking.

The trend that China’s share in exports will reduce over next year will provide an opportunity for Indian export-

ers to take up the share in global exports market. They should be ready to undertake suitable product and infrastructure expansion drives to meet the demand which China may no longer cater for exclusively.

India’s emergence as a credible alternate to China for manufacturing and exports will also enhance inflow of FDI into India by large global manufacturers. Indian companies will thus be provided with an opportunity to partner with companies preferring partnerships as the entry mode. In order to capture the opportunity pro-vided by the rise of Asia as a strong trade bloc for tex-tile and apparel exports, it will be important for Indian textile exporters to have business tie-ups in countries like Bangladesh, Vietnam, Myanmar, South Korea etc. as their import values will rise significantly over time. On account of various FTAs, Indian manufacturers will also get an opportunity to invest in identified countries for taking advantage of lower labour costs.

Since the Indian production (for domestic and exports) is poised for a growth faster than the global average, a significant share of this investment will happen in India. This would translate directly into major business oppor-tunity for machinery suppliers and supporting business-es (chemicals, consumables, logistics, etc.), whereas it would also create a positive sentiment in the industry. The investment in these sectors will draw international buyers on one hand, whereas continuous investments will result in improvement of operational efficiencies, thereby improving profitability.

(Views are Personal)

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As Tarun Das, former Director General of CII often said, India has great potential, has always had

great potential, will always have great potential. This is especially true of the Indian clothing industry.

India’s export of clothing faces several challenges which need to be addressed by radical action to unshackle the industry to unleash the animal spirit. This is the third time an opportunity is evolving. Having missed the first two, (first, when quotas were abolished, and sec-ond, arising from opportunity of capturing part of the market yielded by China in 2010, 2011 and 2012), India should not lose this one, no matter what. The oppor-tunity evolving, with international customers reducing their China exposure, is being harvested by countries like Bangladesh/Vietnam – this should logically come to India. Bangladesh is vulnerable due to Human Rights abuses.

There is another niche opportunity available i.e. quick response, which currently Turkey, East Europe (de-creasingly) and North African countries occupy at prices 30 per cent higher than India’s. This is for quick turna-round using European raw material.

The nibbling away of India’s market share by low-wage countries like Bangladesh, Vietnam and several others – Bangladesh has overtaken India in global exports, es-pecially to the EU and to the US a few years ago, with-out having a cotton fabric producing industry worth its name – cannot be overcome by matching their labour costs; given the need for inclusive growth and being driven in that direction by MNREGA, India cannot pay wages at the ridiculous rates of the competitors. We need to address the problem differently, by:

(a) Reduction in cost

(b) Achieving higher realisation

Some suggestions to move in this direction briskly are:

1. Favourable Trade Agreements

Competitor countries have favourable trade terms of zero duty on their export of clothing into the two main target markets (the EU/the US), besides other coun-tries. This is an area we can attack them on which would improve India’s competitiveness by 12 per cent in the EU (we no longer have GSP) and by over 20 per cent in the U.S. The proposed FTA with the EU can now be revived only after a new Government is in place. Since there is already agreement with the EU on zero-for-zero tariffs on textiles and clothing, this should be fast-tracked ei-ther under PTA or any other scheme forthwith, as there is no time to be lost.

Similarly, an arrangement immediately on the above ba-sis is required with the US as well besides 4 or 5 coun-tries on the African continent, South-East Asia, the GCC and Central/Latin America. It is imperative that any ar-rangement should be zero-for-zero with immediate ef-fect and no phasing of any kind is built in.

2. Drastic reduction in time to market resulting in higher realisation

Rationalise Licensing – As was done in 1991, which was the turning point for our economy, we need to scrap the Advance Licence/EODC system altogether, as this scheme belongs to a different era, when several items of textiles were not permitted to be imported, and if they were, the rates of duty were extremely high com-pared to what they are today. Most of our competitor countries have a system where data is maintained of the value of fabric imported duty free and value of to-tal clothin g exports, with a separate reconciliation in

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value terms of exports (without claiming of Drawback) against duty free imports, and is submitted to the au-thorities periodically, and compulsorily squared up at the end of each financial year.

The Advance Licence process for clothing requires that a separate licence needs to be applied for each fabric/blend – the number of permutations with separate li-cences being required for gender, styling, as well as for fabrics of different weights (GSM), print, yarn-dyed, piece-dyed – is mind boggling, and can go up to several hundred licences for a single exporter.

The closure of these licences is a trauma one cannot wish for even one’s worst enemy. Customs, under pres-sure for generating revenue, send out demands wher-ever EODCs have not been furnished. DGFT Regional Of-fices are not able to process these EODCs due to paucity of personnel!

Solutions such as an Advance Exim Scrip or an Actual User Duty Free Replenishment Licence could throw open another Pandora’s box (cost and time) and erode the intended neutralisation. A simple method as fol-lowed in successful competitor countries is the need of the hour.

With India’s established prowess in IT, there is a ma-jor potential to build both B to B and B to C business in clothing: there is already an outstanding example in China’s Alibaba online shopping site.

Transit time from India to the markets – both in the EU/US, as well as other destinations – needs to be reduced drastically. A deep water port on each of the West and East coast (some are under implementation?) would minimise this weakness. This will also drive down freight costs, which make the landed cost overseas higher than pro rata because of the cascading effect of customs du-ties on the CIF value. Similarly, transit time for import of raw material into India would be drastically reduced.

China has started a Container Rail Service from Chong-qing to the heart of Europe (Leipzig, Duisburg and Ham-burg). The transit time is 15 - 16 days and there is a daily service. The Container Rail Service from Schenzen to Rotterdam will be via Myanmar, Bangladesh, India, Paki-stan, Iran and Turkey. It is reported that Deutsche Bahn and Schenker (both German companies) are involved in Container Rail Service as well.The Container Rail Service from India (immediately by hooking on to the Schen-zen – Rotterdam service, which will pass through India) and subsequently our own service originating in India, would not only bring a dramatic transformation to our

two-way trade with Europe, but also address our infra-structure/logistics deficiencies.

3. Arresting the “export” of India’s taxes, efficient mechanism to fully insulate and reimburse taxes of any kind (Central and State) and a delivery sys-tem that eliminates delays

Seamless disbursement of Drawback in full and in a timely manner without arbitrary deductions and with-out demands for repayment of Drawback disbursed because the Bank Realisation Certificate/CA’s Certifi-cate are not traceable at the port where it has been furnished . A system to execute this needs immediate action.

While the interest rate subvention is a step in the right direction, the differential in international cost of funds and the rate of interest in India after subvention, is un-sustainable. Funds must be made available at interna-tional pricing, preferably in Rupees

4. Minor tweaking of Labour Laws (Overtime)

Under the Factories Act, the quantum of overtime is restricted to 2 hours a day. China allows upto 4 hours overtime in a day. It is good for India to take a stand of not allowing more than 2 hours a day to prevent exploi-tation of labour. The limit provided under the Act is 48 hours a month, which is in keeping with the policy of 2 hours a day. However, what is completely illogical is that the Act also provides, in the next sentence, a limit of 50 hours a quarter. Whereas if overtime is limited to 2 hours per day, 24 working days a month which is 48 hours a month, the limit of 50 hours a quarter needs to be revised upwards to 144 hours a quarter, to be in sync with 2 hours a day and 48 hours a month.

5. Reduction/elimination of invisible costs including “Transaction Costs “and change in Administra-tive Laws

The arbitrariness in the interpretation/implementation of laws, now sought to be armed with powers to cat-egorise them into cognizable, non-bailable offences has to be eliminated. Unsustainable demands, merely to meet revenue targets/ timelines drag people into needless expensive litigation, are a national waste.

6. Brand India, innovation, product development

Innovation and Product Development are vital to achieve higher realisations. A scheme to encourage this such as the schemes for R&D for other industries,

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would provide the necessary boost.

Building ‘Brand India’ as done, first by the Japanese, then the Koreans and now even China, is a medium to long term exercise; however today where country of origin is not required to be inserted on the product, clothing products from India are projected under pow-erful international brands as being of possibly a Europe-an or American origin. The challenge is to drill into the trade and consumers’ minds that Indian products are truly world class and compare favourably with anything produced in the Western world, as achieved by Lexus/Toyota, LG, Lenovo, Huawei, etc.

7. Encourage market diversification into India for ex-porters of clothing to build them into truly glob-ally competitive players

Removing the clothing industry from the purview of Ex-cise was a major positive step.To build a truly successful global clothing industry, it is vital that the Indian cloth-ing industry should not be focused only on international markets, but should also avail of the safety net of Indian markets, which is what the whole world is lusting after. For this to happen, we must first address the serious de-ficiencies in terms of the following:

(a) Non-Tariff Barriers within states in the Indian mar-ket ,where vehicles transporting goods are unable to enter a State unless they are accompanied by a form issued by the Sales Tax/VAT authorities of the importing state which is required to be issued in advance of dispatch of goods. These forms are very difficult to obtain, leading to huge bottlenecks and pile up of inventories across the supply chain. It is NOT done by the importing State with a view to eliminating evasion of Sales Tax/VAT, nor Octroi Entry Tax, and hence this problem will NOT go away with the introduction of GST. These Entry Forms and other Non-Tariff Barriers to enter need to be eliminated immediately.

(b) The applicability of the Weights & Measures Act to the clothing industry is ridiculously irrelevant, be-sides being outdated, impractical and draconian. Retailers of big brands are regularly threatened with criminal prosecution of their board members on absurd matters, some of which are anyway im-possible to implement. The clothing industry needs to be dropped from the schedule of industries cov-ered under the Weights & Measures Act. In any

event, the Act needs to be urgently amended to make it more practical to abide by, as well as imple-ment, and the prosecution of officers be changed to civil instead of criminal.

(c ) It is a matter of national shame that India and In-dian’s fixation with “foreign” remains. Indian companies operating in the area of retail are often told that the ground floors – the most prime loca-tions – are reserved for “foreign” brands. Amaz-ingly, these “foreign” brands (some of them very low segment, some defunct internationally) are often given these spaces “reserved” for them on extremely favourable terms. There should be no discrimination against Indian brands, especially since it is also in the interest of the landlords, be-cause a majority of foreign brands are struggling and will depart in due course; some other such “for-eign” brands could also be fly-by-night operators. This step is especially urgent in view of 100 per cent FDI in retail – taken in isolation, with discrimination continuing, could wipe out fledgling Indian retail companies who are already facing cancellation of existing store leases to make way for inferior but “foreign brands. Indian companies are ready, will-ing and able to take on the challenge of internation-al competition. However, this is provided they are allowed to compete and are not eliminated from the arena.

(d) Further, urgent reform is needed in the retail sec-tor on working days and hours. About 10 years ago, all western countries amended legislation that prevented retail establishments from operat-ing 24 hours a day, 365 days a year. This was done because most consumers have time to visit stores only either after work or on the weekend/holidays. By legislating to keep retailers shut, especially at these times or on these days, governments globally were slowly but surely putting retailers out of busi-ness. Today the global scenario has changed – by and large stores are open 365 days of the year and select the times that they wish to remain open, on the basis of business potential. In India this aspect is still legislated. Not only are stores not allowed to remain open 24 hours a day, shutting down once a week is forcibly enforced in many towns and cities. Urgent liberalisation is needed, while safeguarding employees’ rights, dues, working hours and condi-tions.

(Views are Personal)

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Ushering a New Era of Indian Hospitality

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Travel & Tourism in India is expected to take an up-ward swing in 2014 – a welcome growth after the

World Travel & Tourism Council (WTTC) reported a slow-performing domestic market last year. WTTC’s latest Economic Impact Report revealed that the economic contribution of Travel & Tourism is expected to outper-form the general economy with growth of 7.3 percent this year. The report also forecasts India will see an in-crease in tourism arrivals in 2014, particularly in domes-tic travel, along with an improved visa system in India that could draw up to 12 million inbound international visitors over the next two to three years.

Positive Developments

We see a positive outlook for tourism as the govern-ment increasingly recognises the vital role hospitality plays in generating integral foreign exchange dollars

and creating significant employment opportunities. This has spurred the development of a robust agenda by the government to uplift the travel and tourism in-dustry and increase India’s appeal as a travel destina-tion. Initiatives under this agenda include the plan to develop more domestic tourism routes which will ex-pand the country’s draw as a travel destination; build more airports under public-private partnerships and the introduction of Electronic Travel authorisation (e-visas) at nine airports across the country.

The government’s recent decision to extend visa-on-arrival to tourists from 180 countries, including the UK, US and China, was also welcome news to the industry. This initiative will boost tourism as more international travellers will choose India as their preferred destina-tion for business and leisure travel if there is easier en-try. The visa-on-arrival scheme is expected to extend to significant airports in popular tourism hubs such as Goa, Varanasi, Bodhgaya and Jaipur.

Hotel owners and operators received more positive news last year when the Reserve Bank of India widened the definition of infrastructure lending to include hotel projects amounting to more than Rs 200 crore and con-vention centres totalling more than Rs 300 crore. The relaxation of lending rules for infrastructure develop-ments will help accelerate hotel projects and speed up

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the supply of hotels to cater to the expected rise in de-mand in the coming years.

Areas of Focus

Whilst the industry has seen positive developments, there remain a number of challenges that need to be addressed in order to boost the tourism industry:

Improving Infrastructure

In order to harness India’s tourism potential, basic in-frastructure, such as air, rail and road connectivity; and the availability of facilities and services at and en route to various tourist locations, will need to be improved. A strong aviation industry is particularly vital as it is the prevalent mode of entry into India for inbound tourism, while accessibility in transportation within India is es-sential to encourage people to stay longer and explore more of the country.

Developing a Skilled & Motivated Workforce

Another challenge in the development of the tourism sector is the lack of a skilled workforce. As a service sec-tor, hospitality is one of the world’s most labour inten-sive industries and therefore provides diverse employ-ment opportunities. By 2020, the hospitality sector here will require an additional 180,000 additional rooms and more than 200,000 people to run them.

Skills development is essential for a successful and ro-bust tourism industry.

In order for India to meet the projected demands of the industry, more people need to be trained. The World Bank forecasts that 250 million people will be joining the Indian workforce by 2030 and the challenge is to turn the working-age population into an employable workforce with skills that match the demands of the economy. It is great to see that this has been made a na-tional priority with the government establishing a new ministry to take up the agenda of skills development.

The goal: a skilled workforce of 500 million people by 2022. In order to succeed, it is crucial to establish ways to identify and attract suitable people who are currently not working in the tourism sector. The industry itself has to play a role here. One good example is the partnership between IHG and one of India’s largest vocational train-ing organisations, IL&FS. Such collaborations provide

hotel companies opportunities to share industry knowl-edge and enhance the skills of those who want to build a career in tourism and hospitality. It also allows us to contribute to local communities in a sustainable and meaningful way.

In order to encourage the perception of the sector as a long-term career option, more postgraduate pro-grammes in Travel & Tourism need to be established to cater to all segments of the industry. Programmes like these will equip India with a skilled and motivated workforce that will deliver better service to travellers, making India a world-class tourist destination.

Implementing Sustainable Practices

Travellers are becoming more educated about environ-mental issues, and in turn increasingly environmentally conscious. This has not gone unnoticed by the industry and we now see hotels actively adopting sustainable practices such as measures to reduce water and energy consumption.

On an industry level, we also see hotel companies in-vesting in systems to help their hotels implement sus-tainable practices. For example, we have an online system we call IHG Green Engage which measures the impact our hotels have on the environment, and helps them manage costs. This is done by tracking the energy, carbon and water our hotels use and how well they’re managing waste. It also tells our owners what they’re spending and saving.

There are over 200 Green Solutions our hotels can choose from to help them reduce their environmental impact. Our goal is to reduce our carbon footprint per occupied room by 12 per cent across all of our hotels and offices and use 12 per cent less water per occupied room in water-stressed areas by 2017.

Conclusion

India holds immense potential as a business and leisure travel destination and both the government and hospi-tality industry are evolving to meet the rising demands of new age travellers. Whilst there are no quick fixes to existing challenges in today’s operating environment, we are confident that a new era of India hospitality is at hand and we now have reason to believe India is well on track to achieving its target of nearly 9 million arriv-als by 2020.

(Views are Personal)

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