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Economy Matters, March 2014

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CII's monthly journal on economic affairs for the month of March 2014. The wave of easy liquidity from US is ebbing, with the Federal Reserve having embarked on the much-discussed QE-tapering. Global Trends section covers this story. In the section on Domestic Trends, the trends emanating out of the recent releases on IIP, Inflation. Monetary Policy, Fiscal & Trade Scenario are discussed. In Corporate Performance, we analyse the latest data for 3QFY14. The Sectoral spotlight for this issue is on Business of Sports. In Focus of the Month, we discuss the important issue of ‘Growth & Employment’, which goes with CII’s theme for the current year.

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Page 1: Economy Matters, March 2014
Page 2: Economy Matters, March 2014

www.dcmshriram.com

This is our heritage. This is our future.

The future that we all dream of is built on the foundation of our legacy. The name DCM Shriram comes from a great heritage that will guide us in times to come. Strong values, quality resources and the pursuit of excellence. It's time for us to further build on these and make a vibrant future.

‘DCM Shriram Consolidated Ltd.’ is now ‘ ’

S H R I R A M F E R T I L I S E R S & C H E M I C A L S | S H R I R A M A L K A L I & C H E M I C A L S

D S C L S U G A R | B I O S E E D | F E N E S TA B U I L D I N G SY S T E M S | S H R I R A M C E M E N T

Page 3: Economy Matters, March 2014

MARCH 20141 www.dcmshriram.com

This is our heritage. This is our future.

The future that we all dream of is built on the foundation of our legacy. The name DCM Shriram comes from a great heritage that will guide us in times to come. Strong values, quality resources and the pursuit of excellence. It's time for us to further build on these and make a vibrant future.

‘DCM Shriram Consolidated Ltd.’ is now ‘ ’

S H R I R A M F E R T I L I S E R S & C H E M I C A L S | S H R I R A M A L K A L I & C H E M I C A L S

D S C L S U G A R | B I O S E E D | F E N E S TA B U I L D I N G SY S T E M S | S H R I R A M C E M E N T

The wave of easy liquidity from US is ebbing, with the Federal Reserve having em-barked on the much-discussed QE-tapering. The Fed started tapering its asset pur-chase program by US$10 billion/month in December last year. Since then Fed has re-duced asset purchases to US$55billion/month from US$85 billion/month previously. The labour market in US meanwhile has strengthened over the last few months, though the pace of job addition has been gradual. The unemployment rate, which dropped to a five-year low of 6.7 per cent in February 2014, has fallen much more rapidly than market expectations.

On the domestic front, industrial production growth has now entered the positive territory after 3 consecutive months of negative growth. However, manufacturing still continues to be in the red for the fourth consecutive quarter. The slowdown is yet to show any visible signs of bottoming out. What is extremely worrisome is that the decline in investment and consumption demand is showing no signs of reversing. We anticipate a pick-up in industrial production as downside risks gradu-ally abate on account of anticipated global recovery. Inflation, measured by both CPI and WPI, has now started to abate sharply, giving RBI the necessary leg-room to stimulate the economy by cutting interest rates. Hence, we were disappointed by RBI’s ‘status-quo’ stance in its first bi-monthly monetary policy review held on April 1, 2014.

Growth has slowed down sharply in the last few years, while inflation continues to remain persistently high. Slowing growth and high inflation have adversely impact-ed employment creation in the economy. Measures are needed to revive economic growth on an urgent basis, which would also help in job creation. Mass manufac-turing sectors and labour-intensive services sectors need to be encouraged. Job creation has to be complimented with adequate skill development too, especially in the informal sector. Keeping this important motivation in mind, the current issue of Economy Matters dwells on Growth and Employment, which mirrors the CII theme for 2014-15 as “Accelerating Growth, Creating Employment”.

Chandrajit BanerjeeDirector-General, CII

FOREWORD

Page 4: Economy Matters, March 2014
Page 5: Economy Matters, March 2014

MARCH 20143

GROWTH

EMPLO

YMENT

Growth & Employment

CO

NT

EN

T

Focus of the Month

I n d i a n e c o n o m y h a s u n d e r

performed in the last few years as

growth has slowed down to an

estimated 4.9 per cent in 2013-14

from a high of 8.9 per cent in 2010-

11. The loss of four percentage

points over a period of mere 3 years

is a matter of great concern for the

policymakers. One of the main

adverse consequences of slow

growth has been its impact on

employment creation. Hence, steps

are needed to revive growth on an

urgent basis, which would also help

in job creation. However, growth

alone is not a guarantee to create

employment, we also need to focus

on employment-oriented policies.

The is on

Growth and Employment, which

m i r r o r s t h e C I I ' s t h e me o f

"Accelerating Growth, Creating

Employment" for 2014-15 as well.

'Focus of the Month'

Inside This Issue

Executive Summary .................................................05

Growth Outlook for 2014-15..................................06

Global Trends

07US Fed Reduces Tapering Programme,Keeps Interest Rates Low

Domestic TrendsIIP, Inflation, Monetary Policy,Trade & Fiscal Data10Taxation

19

Special Feature........................................................ 44

Economy Monitor ................................................... 45

Focus of the Month

Sector in FocusBusiness of Sports

25

Interview with Mr. Sunil Gupta,Joint Secretary, CBDT

Mr. Ajay S. Shriram, President, CII, Chairman &

Senior Managing Director, DCM Shriram Ltd

Edited Version of a Panel Discussion

Skill Challenges of Informal Sector in India

Indian Economy: Is a Recovery in Sight?

Ms. Sunita Sanghi, Adviser & Mr. Kuntal Sensarma,

Director, Planning Commission, GoI

Accelerating Growth, Creating Employment

Corporate PerformanceProfitability Shows a Dip as Costs Rise

22

30Growth & Employment

Page 6: Economy Matters, March 2014
Page 7: Economy Matters, March 2014

MARCH 20145

EXECUTIVE SUMMARY

Global TrendsIn line with market expectations, the US Federal Re-serve announced that it will maintain its bond pur-chase tapering programme, albeit reduce it by US$10 billion per month, and keep interest rates at his-torically low levels, in its monetary policy review an-nounced on March 20, 2014. Meanwhile, inflation rate in China as measured by consumer price infla-tion dropped to 2.0 per cent year-on-year in Febru-ary 2014, down from 2.5 per cent in January 2014, eliciting the fears that the risk of deflation was rising.

Domestic TrendsMoving into the positive territory after a gap of 3 months, industrial sector output improved to 0.1 per cent in January 2014 as compared to an upwardly re-vised print of -0.2 per cent for December 2013. Though this seems to augur good news for the beleaguered sec-tor, but we feel that it’s still too early to conclusively say that the tides have turned for the sector. WPI based inflation, meanwhile, eased to 9-month low of 4.7 per cent in February 2014 as compared to 5.05 per cent in the previous month as food and fuel prices moder-ated. Despite inflation going down, RBI, in its first bi-monthly monetary policy held on April 1, 2014, chose to keep the repo rate and cash reserve ratio (CRR) un-changed at 8.00 per cent and 4.0 per cent respectively.

Corporate PerformanceThe analysis of the results of the firms in India for the third quarter (Q3) of 2013-14 shows that in terms of net sales, firms at the aggregate level have shown an improved performance since 1QFY14. Growth in net sales, on an aggregate basis, stood at 6.7 per cent in the third quarter of 2013-14, as compared to 5.8 per cent in the same quarter of the previous fiscal. On the other hand, expenditure costs of the firms, on an ag-gregate basis, witnessed an increase by 16.7 per cent in the reporting quarter, as compared to 13.1 per cent in the comparable time period last year. This resulted in subdued profitability levels during the quarter.

Sector in Focus: Business of SportsThe global sports industry is estimated to be worth around US$600 billion, comprising a range of associ-ated businesses such as sports manufacturing, retail, tourism, sports medicine, venues & infrastructure, me-dia & hospitality and merchandising. While sports is an organized business in developed economies, this has been a Government- led initiative in India, where cor-porate sector’s presence have often been through cor-porate social responsibility channels. The exception has been the commercial sporting formats leagues, espe-cially in cricket, where corporate sector has been very active in recent years. It is critically important to build a dynamic sporting culture in India and there is need for the government and the private sector to collaborate to strengthen the sports industry. Inadequate public re-sources for sports and low prominence of non-cricket sports impede our performance in the global sporting arena. Corporate funding in sports may therefore be the answer to ignite sports development in India. The gestation period for realizing return on such invest-ments may be long, but global experience shows us that it could be potentially rewarding.

Focus of the Month: Growth & EmploymentIndian economy has underperformed in the last few years as growth has slowed down to an estimated 4.9 per cent in 2013-14 from a high of 8.9 per cent in 2010-11. The loss of four percentage points over a period of mere 3 years is a matter of great concern for the policy-makers. Coupled with persistently high inflation, things have not looked so bright for the Indian economy. One of the main adverse consequences of slow growth has been its impact on employment creation. Hence, steps are needed to revive economic growth on an urgent ba-sis, which would also help in job creation. Besides this , job creation specific policies have become the need of the hour. Job creation must also be complimented with adequate skill development, especially in the informal sector. The focus of the month is on ‘Growth and Em-ployment’, which mirrors the CII’s theme of “Accelerat-ing Growth, Creating Employment” for 2014-15 as well.

Page 8: Economy Matters, March 2014

ECONOMY MATTERS 6

GROWTH FORECAST

GROWTH OUTlOOk FOR 2014-15

2013-14 2014-15 (F) Rationale

Agriculture 4.6% (AE) 2.8-3.3% After a spectacular show in the last fiscal, we expect agriculture to grow at near trend rate in the current fiscal. Our cautioness stems from the not-so-propitious signs emerging from the El-Nino effect which has made the prospects of a normal monsoon little difficult this year. But its too early to decisively conclude anything, hence we are sticking with trend rate of growth for the farm sector.

Industry 0.7% (AE) 3.8-4.3% After a dismal showing by the industrial sector last year, we expect growth to recover to a range of 3.8-4.3 per cent in the current fiscal aided by a low base, pick-up in external demand and debottlenecking of the mining sec-tor. The lifting of mining ban on iron ore in Karnataka and Goa is a good sign and bodes well for the sectors outlook.

Services 6.9% (AE) 7.0-7.5% Services sector GDP growth is expected to lie in a range of 7.0-7.5 per cent in the current fiscal. The spillovers from higher industrial growth is expect-ed to positively impact services sector growth. Higher exports growth, es-pecially by the IT/ITeS sector will provide additional thrust to the services sector.

(Business as Usual)

Sectoral Growth Forecasts Under Business As Usual Scenario

Note: F- CII Forecast, AE: Advance Estimates

Alternative GDP Growth ScenariosBusiness as Usual Time to Panic Aspirational

• The economy may improve moder-ately in 2014-15 as delayed projects begin to get implemented, infla-tion moderates and the RBI reduc-es interest rates, albeit gradually

• WPI inflation will tend to moder-ate though CPI inflation could re-main sticky due to bottlenecks in the food supply chain

• Further deceleration in GDP growth not likely; in fact, growth could recover to 5.5-6.0 per cent with a moderate recovery in indus-trial growth; no change in rate of job creation

• Fiscal deficit and current account deficit to remain under control, as government restrains spending and imports remain subdued

• Any external trigger could affect the economy adversely.Examples include:

• In the event of a fractured mandate, there would be loss of investor con-fidence; jobs are destroyed in the organised sector with no sign of economic reforms

• An oil price shock, which could again lead to an increase in the fiscal and current account deficits to unsus-tainable levels

• A shortfall in agricultural produc-tion, possibly due to impact of the El Nino; this would again trigger an increase in food inflation; this com-bined with inflation targeting by the RBI could further hurt the economy.

• GDP growth accelerates sharply to reach 8%+ by 2016-17 as a result of economic reforms implemented soon after the new government is in place.

• Focus on mass manufacturing sec-tors and labour-intensive service sectors such as education, tourism results in reversal of decline in job creation of the last few years.

• Restructured labour laws are effec-tive in encouraging employment creation

• Investment in agriculture removes supply bottlenecks

• Infrastructure expansion takes place to create new capacity in roads, ports, airports and railways

GDP Growth: 5.5-6.0% GDP Growth: <5.0% GDP Growth: 6.0-6.5 %

Page 9: Economy Matters, March 2014

MARCH 20147

GlOBAl TRENDS

US Fed Reduces Tapering Programme, keeps Interest Rates low

In line with market expectations, the US Federal Re-serve announced that it will maintain its bond pur-chase tapering programme, albeit reduce it by US$10

billion per month, and keep interest rates at historically low levels, in its monetary policy review announced on March 20, 2014. The Fed has reduced its asset purchase program from US$65 billion/month to US$55 billion/month. Component wise, Fed would trim its purchases of long-term Treasury bonds to US$30 billion/month (from US$35 billion previously) and mortgage-backed securities (MBS) to US$25 billion/month (from US$30 billion).

Announcing its monetary policy review, the Committee maintained its existing policy of reinvesting principal payments from its holdings of agency debt and agen-cy mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-

increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which, in turn, should promote a stronger economic re-covery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

However, to counter (any) adverse impact of tapering on financial markets, the Fed altered its guidance from a quantitative target of 6.5 per cent unemployment rate to a more qualitative assessment which includes (but not limited to) labour market conditions, inflation ex-pectations and financial markets outlook. This implies that the Fed will assign less weight to the unemploy-ment rate as a guide for interest rate outlook, indicat-ing that unemployment rate is too limited an indicator of the labour market’s health.

The Fed provided mixed outlook for economic activity and labour market conditions in 2014. On the one hand, the Fed has revised down its assessment of economic outlook for the year 2014. The Fed expects the economy

Page 10: Economy Matters, March 2014

ECONOMY MATTERS 8

GlOBAl TRENDS

to grow at a slightly lower pace of 2.8 - 3.0 per cent in 2014 (previous expectation: 2.8 - 3.2 per cent). Howev-

er, it expects unemployment rate to reduce to 6.1 - 6.3 per cent range in 2014 as against its previous projec-tions of 6.3 - 6.6 per cent range.

In its review, the Federal Open Market Committee (FOMC) said that the inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 per cent, as measured by the annual change in the price index for personal consump-tion expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly an-chored, thereby fostering price stability and moderate long-term interest rates.

Information received since the FOMC met in January 2014 indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending and business fixed investment continued to advance, while the recovery in the hous-ing sector remained slow. Fiscal policy is restraining

economic growth, although the extent of restraint is diminishing. Inflation has been running below the Com-mittee’s longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Commit-tee seeks to foster maximum employment and price stability. In its report, the Committee said that “with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market condi-tions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate”. Currently, however, the Committee sees the risks to the outlook for the economy and the labor mar-ket as nearly balanced.

As regards its forward guidance, the Committee said that when it decides to begin to remove policy accom-modation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 per cent. The Committee currently antici-pates that, even after employment and inflation are near mandate-consistent levels, economic conditions

Source: Federal Reserve

Central Tendency of Economic Forecast of Federal Reserve

Dec-13 2.8 - 3.2 3.0 - 3.4 2.5 - 3.2 2.2 - 2.4

Mar-14 2.8 - 3.0 3.0 - 3.2 2.5 - 3.0 2.2 - 2.3

Dec-13 6.3 - 6.6 5.8 - 6.1 5.3 - 5.8 5.2 - 5.8

Mar-14 6.1 - 6.3 5.6 - 5.9 5.2 - 5.6 5.2 - 5.6

Dec-13 1.4 - 1.6 1.5 - 2.0 1.7 - 2.0 2.0

Mar-14 1.5 - 1.6 1.5 - 2.0 1.7 - 2.0 2.0

Dec-13 1.4 - 1.6 1.6 - 2.0 1.8 - 2.0 NA

Mar-14 1.4 - 1.6 1.6 - 2.0 1.8 - 2.0 NA

Real GDP

Unemployment Rate

PCE Inflation

Core PCE Inflation

2014 2015 2016 Longer Run

Page 11: Economy Matters, March 2014

MARCH 20149

GlOBAl TRENDS

may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal

in the longer run.

Deflation Fears as China’s Inflation drops to 2 per centChina’s inflation rate as measured by consumer price inflation dropped to 2.0 per cent year-on-year in Febru-ary 2014, down from 2.5 per cent in January 2014, elic-iting the fears that the risk of deflation was rising. To add to the worries, producer price index (PPI), which measures costs for goods at the factory gate, too de-clined by 2.0 per cent in February, accelerating from January’s 1.6 per cent fall. Falling prices are bad for an

economy like China as they encourage consumers to put off spending and companies to delay investment, both of which act as brakes on growth, although they leave room for more stimulus measures by authorities. Beijing has been looking to wean the world’s second-largest economy off its dependence on exports and be-come more consumer-oriented.

Food prices -- which often increase during the Lunar New Year, which fell mostly in February this year -- went up by only 2.7 per cent, although the figure included wide variations, with pork prices falling 8.7 per cent

while fresh fruit went up 19.7 per cent. Prices for to-bacco and liquor went down by 0.7 per cent year, while prices for clothing rose by 2.2 per cent.

Consumer Prices by Different Types in February (y-o-y%)

2.7

-0.7

2.2

1.31.0

-0.4

2.12.8

Food

Tobacco

&Liq

uor

Clo

thin

g

Household

facilt

ies,

Art

icle

s&

Main

tenance...

Health

care

and

Pers

onalS

erv

ices

Tra

nsp

ort

atio

n&

Co

mm

un

ica

tio

n

Recre

ation,E

ducation,

Culture

Art

icle

s&

Serv

ices

Resid

ence

3.23.5

2.5

1.5

0.5

-0.5

-1.5

Feb/1

3

Ma

r/1

3

Ap

r/1

3

Ma

y/1

3

Jun

/13

Jul/

13

Au

g/1

3

Se

p/1

3

Oct

/13

No

v/1

3

De

c/1

3

Jan

/14

Feb

/14

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

2.01.1

0.5

Inflation in China Comes Down Sharply

3.23.5

2.5

1.5

0.5

-0.5

-1.5

Feb/1

3

Ma

r/1

3

Ap

r/1

3

Ma

y/1

3

Jun

/13

Jul/

13

Au

g/1

3

Se

p/1

3

Oct

/13

No

v/1

3

De

c/1

3

Jan

/14

Feb

/14

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

2.01.1

0.5

Source: National Bureau of Statistics, China

Source: National Bureau of Statistics, China

Page 12: Economy Matters, March 2014

ECONOMY MATTERS 10

GlOBAl TRENDS

Other Global Developments During the Month• • The Consumer Price Index (CPI) in the UK grew 1.7 per cent on y-o-y basis in February 2014, as against

1.9 per cent in January 2014. The largest negative contribution came from ‘transport’—especially fuel & lubri-cants—wherein prices declined 0.4 per cent in February, marking its lowest level since July 2009. On the other hand, the contribution of ‘furniture & furnishings’ to inflation increased in February 2014.

• • The Canadian economy grew by 2.9 per cent on q-o-q basis (annualized) in Q4 2013, faster than prior print of 2.7 per cent, primarily driven by the consumption sector. The Central Bank expects the domestic economy to expand by 2.5 per cent this year, though the contribution of exports and investment sectors are likely to remain subdued. Meanwhile, outlook on global growth also remains positive and BoC expects growth in developed economies to be led by US.

• • The European Central Bank (ECB) kept all its major policy rates - main refinancing rate, deposit facility and marginal lending facility - unchanged at 0.25 per cent, 0 per cent and 0.75 per cent respectively in its meeting held on April 3rd, 2014. Notably, ECB expects real GDP to grow 1.2 per cent this year (slightly higher than earlier forecast of 1.1 per cent), 1.5 per cent in 2015 (unchanged from earlier projections) and 1.8 per cent in 2016. More importantly, the Bank lowered its inflation forecast to 1.0 per cent this year (vs. 1.1 per cent projected in Decem-ber 2013), which is expected to rise to 1.7 per cent in Q4 2016.

• • According to the second estimate, UK real GDP growth was confirmed at 0.7 per cent on q-o-q basis in Q4 2013, while the full-year growth was revised slightly lower to 1.8 per cent, as against previously estimated 1.9 per cent.

• • Reserve Bank of Australia (RBA) expects economic growth to improve in 2014, aided by a pick-up in con-sumption demand. GDP growth had accelerated in Q4 to 2.8 per cent from 2.4 per cent in Q3 and contribution of consumption increased to 1.4 percentage points (pp) from 1.13 pp.

• • U.S. non-farm private employment rose less-than-expected in March 2014, fuelling concern over the strength of the U.S. labor market. Non-farm private employment rose by a seasonally adjusted 191K in March 2014, below expectations for an increase of 195K.

Page 13: Economy Matters, March 2014

MARCH 201411

DOMESTIC TRENDS

Industrial Production Continues to Remain in a Weak Zone

Moving into the positive territory after a gap of 3 months, industrial sector output improved to 0.1 per cent in January 2014 as compared

to a upwardly revised print of -0.2 per cent for Decem-ber 2013. Though this seems to augur good news for the beleaguered sector, we feel that it’s still too early to conclusively say that the tides have turned for the sector. The sectoral data reveals that much of the im-

provement in the industrial output during the month was due to reduction in the negative data print of the sectors, especially manufacturing and consumer goods. Worryingly, the major sub-sectors are still languishing in the red. However, on a positive note, the sequential momentum, as indicated by the movement in the sea-sonally-adjusted month-on-month series, accelerated to 1.6 per cent during the month from 0.6 per cent in the previous month. On a cumulative basis, for the first ten months of the previous fiscal, industrial output has now remained flat as compared with a growth of 1.0 per cent during the same period last year.

Source: CSO

IIP Moves into the Positive Territory

-0.7

0.1

10

5

-05

Sep/1

2

Nov/1

2

Jan/1

3

Mar/

13

May/1

3

Jul/13

Sep/1

3

Nov/1

3

Jan/1

4

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

Page 14: Economy Matters, March 2014

ECONOMY MATTERS 12

DOMESTIC TRENDS

On the sectoral front, manufacturing sector, which con-stitutes over 75 per cent of the index, continued to re-main in the negative territory for the fourth consecutive month, albeit the magnitude of contraction declined. In terms of industries, eleven (11) 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 January 2014 as compared to the corre-sponding month of the previous year of manufacturing sector. The industry group ‘Medical, precision & optical instruments, watches and clocks’ showed the highest positive growth of 17.6 per cent, followed by 15.2 per cent in ‘Electrical machinery & apparatus n.e.c.’ and 14.4 per cent in ‘Wearing apparel; dressing and dyeing of fur’. On the other hand, the industry group ‘Radio, TV and communication equipment & apparatus’ showed a negative growth of (-) 28.2 per cent followed by (-) 14.0 per cent in ‘Motor vehicles, trailers & semi-trailers’ and (-) 9.5 per cent in ‘Fabricated metal products, except machinery & equipment’. The mining sector displayed an encouraging trend and printed the third consecutive month of positive growth in January 2104. Electricity

growth too remained robust on expected lines at 6.5 per cent, which takes the year-to-date average to 5.7 per cent.

On the use-based front, volatile capital goods segment output declined by 4.2 per cent in January 2014 as com-pared to 2.5 per cent in the previous month. Notably, industrial output growth excluding capital goods stood at 0.7 per cent during the month. Rate of contraction in the other key nemesis of industrial output- consumer goods-declined in January 2014, but the sector still re-mains in wobbly waters. Within consumer goods, du-rables printed -8.3 per cent, which is an improvement over the previous print of -16 per cent. The growth in non-durables has actually picked up pace (4.4 per cent compared to 2.5 per cent in the previous month), which is heartening as it bodes well for consumption demand in the economy, provided the trend sustains. Going ahead, we expect further recovery in this component as good agricultural GDP this year will support rural de-mand, which will prop up non-durables even if urban demand remains weak.

Source: CSO

Sectoral Growth

General 1000.0 2.5 -1.3 -0.2 0.1 1.0

Manufacturing 755.3 2.7 -2.7 -1.2 -0.7 0.8

Mining 141.6 -1.8 1.7 0.7 0.7 -1.8

Electricity 103.2 6.4 6.3 7.5 6.5 4.7

Basic 456.8 3.7 2.7 2.5 0.9 2.8

Capital 88.3 -2.5 -0.1 -2.5 -4.2 -9.4

Intermediates 156.9 3.5 3.4 4.9 3.4 1.8

Consumer Goods 298.1 2.5 -8.8 -4.7 -0.6 2.7

- Durables 84.6 -0.7 -21.5 -16.1 -8.3 3.3

- Non durables 213.5 4.6 2.1 2.5 4.4 2.1

0.0

-0.4

-1.5

5.7

Use-Based

1.3

-0.8

3.0

-2.7

-12.5

5.6

Apr-Jan

Weight Jan-13 Nov-13 Dec-13 Jan-14 FY13 FY14

Page 15: Economy Matters, March 2014

MARCH 201413

DOMESTIC TRENDS

OutlookWe are glad to note that industrial output has entered the positive territory after 3 consecutive months of negative growth. However, manufacturing still continues to be in the red for the fourth consecutive quarter. The slowdown is yet to show any visible signs of bottoming out. What is extremely worrisome is that the decline in investment and consumption demand is showing no signs of reversing. CII anticipates a pick-up in industrial production as downside risks gradually abate on account of anticipated global recovery.

Both WPI and CPI Inflation Tread Downwards

WPI based inflation eased to 9-month low of 4.7 per cent in February 2014 as compared to 5.05 per cent in the previous month as food and fuel prices moderated. However, the rise in core inflation to 3.1 per cent, close to the RBI’s comfort threshold, is a cause for concern. Amongst the food prices, vegetable prices, which have been the main drivers behind pushing overall WPI high-er in the last few months, moderated sharply to 3.9 per cent in February 2014 from 16.6 per cent in January 2014 and after it hit record high of 97.7 per cent in Novem-

ber-2013. However, an uncertain outlook for this sum-mer’s monsoon rains due to the El Nino weather pattern is also worrying policymakers as it holds the potential of flaring up food prices once again. Encouragingly, con-sumer price inflation (CPI) too maintained the down-ward trend for the third consecutive month and came at 8.1 per cent in February 2014, the lowest level since Janu-ary 2012, when it clocked 7.6 per cent. The drop in infla-tion is primarily on account of easing vegetable prices. Vegetable prices eased to 14 per cent in February 2014 from 21.7 per cent in January 2014.

Source: Office of Economic Advisor

Both WPI & CPI Inflation Moderate

7.6

4.7

9.9

8.1

12

10

8

6

4

2

Jun-1

2

Aug-1

2

Oct-

12

Dec-1

2

Feb-1

3

Apr-

13

Jun-1

3

Aug-1

3

Oct-

13

Dec-1

3

Feb-1

4

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

Primary inflation moderated to 6.3 per cent in February 2014 from 6.8 per cent in the previous month. This was mainly attributable to the sharp slowing down of food inflation to single-digits at 8.1 per cent as compared to

high of almost 20 per cent in November 2013. Encour-agingly, the decline in food inflation was broad-based, with prices of cereals and eggs, meat & fish too witness-ing downward pressure during the month. In contrast,

Page 16: Economy Matters, March 2014

ECONOMY MATTERS 14

DOMESTIC TRENDS

primary non-food inflation accelerated to 5.1 per cent as against 4.4 per cent in the previous month. Inflation in minerals declined further to 1.6 per cent from 0.2 per cent in the previous month.

Fuel inflation slowed down to 8-month low of 8.7 per cent in February 2014 as compared to 10.0 per cent in the previous month. Inflation in both high-speed diesel and petrol moderated to 12.8 per cent and 6.5 per cent respectively during the month. Going forward, we ex-pect fuel inflation to moderate due to stabilisation wit-nessed in global crude prices and the recent strength-ening of the Rupee.

Manufacturing inflation remained stable at 2.8 per cent in February 2014, led by across-the-board correction in prices. Non-food manufacturing or core inflation, which is widely regarded as the proxy for demand-side pres-sures in the economy, however, increased marginally to 3.1 per cent during the month as compared to 3.0 per cent in January 2014. In the coming months, we expect core WPI to remain at sub 3 per cent, RBI’s comfort level for this inflation measure. Mirroring the sharp de-celeration in primary food inflation, manufactured food products inflation also slowed down to 0.9 per cent in February 2014 from 1.5 per cent in the previous month.

OutlookFebruary month’s inflation data print, both at retail and wholesale level, has been reassuring and conforms to RBI’s expectation of a notable correction on account of decline in vegetable prices. Moreover, the lagged effects of ef-fective monetary tightening since September 2013 would also exert an opposite force on inflation in the coming months. However, the uncertainty arising from possible El Nino effect hampering the advent of normal monsoons along with the uncertainty on setting of MSPs for agricultural commodities poses upside risks to inflation.

Source: Office of Economic Advisor

Sectoral Components of Inflation

100.0 7.3 6.4 5.0 4.7 7.5

20.1 10.5 10.8 6.8 6.3 10.0

- Food 14.3 12.0 13.2 8.8 8.1 10.1

- Non-Food 4.3 10.7 6.0 4.4 5.1 10.6

- Minerals 1.5 2.8 2.2 -0.2 -1.6 9.2

14.9 10.6 10.9 10.0 8.7 10.6

- Petrol 1.1 4.8 5.5 7.2 6.5 6.8

- High Speed Diesel 4.7 20.8 17.0 14.0 12.8 10.8

65.0 4.8 3.0 2.8 2.8 5.5

- Food 10.0 8.8 1.9 1.5 0.9 8.2

- Non-food 55.0 4.0 3.3 3.0 3.1 5.0

General 5.9

Primary 10.1

13.0

5.6

0.1

Fuel 10.0

3.1

19.1

Manufacturing 2.9

3.4

2.7

April-Feb

Weight Feb-13 Dec-13 Jan-14 Feb-14 FY13 FY14

Page 17: Economy Matters, March 2014

MARCH 201415

DOMESTIC TRENDS

RBI Keeps Interest Rates Unchanged

In its first bi-monthly monetary policy review held on April 1, 2104, the Reserve Bank of India (RBI) treaded on expected lines as it chose to keep the repo rate and cash reserve ratio (CRR) unchanged at 8.00 per cent and 4.0 per cent, respectively. However, envisaging pressures from large currency demand and tax outflows from mid-March, the Central Bank did announce some pres-sure to improve the liquidity situation. Like for instance, it increased the liquidity provided under 7-day and 14-day term repos from 0.5 per cent of NDTL of the bank-ing system to 0.75 per cent, and decreased the liquidity provided under overnight repos under the LAF from 0.5 per cent of bank-wise NDTL to 0.25 per cent with im-mediate effect. Consequently, the reverse repo rate un-der the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent. To be sure, RBI had hiked the key repo rate by 75 basis points (bps) between September-January 2013 in order to arrest runaway inflation in the economy. In its policy review, RBI projected the real GDP growth to pick up from a little below 5 per cent in

2013-14 to a range of 5 - 6 per cent in 2014-15, albeit with downside risks to the central estimate of 5.5 per cent.

The policy stance of the RBI was motivated by the fact that since December 2013, the sharper than expected disinflation in vegetable prices has enabled a sizable fall in headline inflation. Further moderation in inflation is also expected as vegetable prices have entered their seasonal trough and further softening is likely. Giving emphasis to the new CPI index as an indicator of the underlying inflationary pressures in the economy as op-posed to the traditional WPI based inflation, in accord-ance with the Urijit Committee’s recommendation, RBI admitted that there were risks to the central forecast of 8 per cent CPI inflation by January 2015 stemming from a less-than-normal monsoon due to possible el nino ef-fects. Additionally, uncertainty arising from the setting of minimum support prices (MSPs) for agricultural com-modities, the setting of other administered prices, espe-cially of fuel, fertiliser and electricity and the outlook for fiscal policy posed other risks to the inflation forecast.

8.00

7.00

4.00

10.00

9.00

8.00

7.00

6.00

5.00

4.00

3.00

Repo rate Reverse repo rate CRR

Jan-

08

Jun-

08

Nov

-08

Apr

-09

Sep

-09

Feb-1

0

Jul-1

0

Dec

-10

May

-11

Oct-1

1

Mar

-12

Aug

-12

Jan-

13

Jun-

13

Nov

-13

Apr

-14

Source: RBI

RBI Maintains 'Status-Quo' (%)

In its latest policy review, the RBI mentions that its fu-ture policy stance will be firmly focussed on keeping the economy on a disinflationary glide path that is intended to hit 8 per cent CPI inflation by January 2015 and 6 per cent by January 2016. “At the current juncture, it is ap-propriate to hold the policy rate, while allowing the rate

increases undertaken during September 2013-January 2014 to work their way through the economy. Further-more, if inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture”, the Central Bank noted in its review.

Page 18: Economy Matters, March 2014

ECONOMY MATTERS 16

DOMESTIC TRENDS

Trade Deficit Narrows as Imports Contraction Intensifies

Exports contracted for the first time in eight months in February 2014, although a sharper decline in imports, led by a fall in gold imports, helped narrow trade deficit and ease the pressure on the external sector. Exports fell 3.7 per cent in February 2014 as compared to growth of 3.8 per cent in the previous month, dragged down by sector such as petroleum, engineering and pharma-ceuticals. Exports had been growing at a double-digit rate until October 2013 but lost momentum in the last four months, signalling that the worst might not be all over as yet for the Indian economy. Cumulative value of exports for the first eleven months of the previ-ous fiscal (Apr-Feb) were valued at US$282.7 billion as against US$269.8 billion a year ago, thus registering a year-on-year growth of 4.8 per cent. Finance Minister in his Budget Speech for 2014-15 highlighted that mer-chandise exports are expected to end the previous fis-cal with an estimated merchandise exports of US$326

billion, indicating a growth rate of 6.3 per cent. This tar-get looks difficult to be met.

Imports during February 2014 were valued at US$33.8 billion, posting a decline to the tune of 17.1 per cent over the same month last year, as weak domestic de-mand and restrictions on gold imports lowered non-oil imports by nearly 24.5 per cent on year-on-year basis. India imports almost all of the gold it consumes. The yel-low metal is the country’s second-biggest import after crude oil and was an important reason for driving the country’s current account gap to a record high last year, pushing the rupee sharply lower. Oil imports contract-ed by 3.1 per cent during the month. Going forward, consumption goods import may pick up as household consumption improves. A revival in household demand would be supported by higher farm incomes due to a good monsoon.

External Sector Performance (y-o-y %)

Source: Ministry of Commerce

3.7

- 17.1

20

10

0

-10

-20

Jun/1

2

Aug/1

2

Oct/12

Dec/1

2

Feb/1

3

Apr/

13

Jun/1

3

Aug/1

3

Oct/13

Dec/1

3

Feb/1

4

Exports Imports

The trade deficit narrowed to US$8.1 billion in February 2014 as against US$9.9 billion in the previous month. The trade deficit during the first eleven months of the

previous fiscal stood at US$128 billion; significantly lower than US$180 billion in the corresponding period in FY2013.

OutlookThe economic conditions in the U.S. and the Euro Zone are not very favorable for exports and we hope the Indian government will help the exporters by providing help by way of including more products and countries for Focus Product Scheme and Focus market Scheme, where we have a comparative advantage. Also we need to relook at the duty drawback rates. These measures, if announced at the earliest will give the necessary push to the industry which can then benefit the industry and help them reach the export target.

Page 19: Economy Matters, March 2014

MARCH 201417

DOMESTIC TRENDS

Fiscal Deficit Remains above Government TargetWorries about the government’s management of the treasury continue as deficit indicators remained above the target the government set in its interim budget in February 2014. As per the latest numbers released by Controller General of Accounts (CGA), the fiscal deficit widened to Rs 5.9 lakh crore in the April-February pe-riod of 2013-14, or 114.3 per cent of the target for the fis-cal as compared to 97.4 per cent in the same period last year. This translates into 5.3 per cent of GDP. This was mainly attributable to the tax collections and disinvest-ment proceeds falling short of the target. Government had revised the fiscal deficit to Rs 5.24 lakh crore in its interim budget presented in February this year, which translated into 4.6 per cent of GDP.

More worryingly, the revenue deficit, the gap between

expenditure not incurred for capital generation over receipts, stood at 117 per cent of the revised estimates till February of FY14, which is equivalent to 3.8 per cent of GDP. The interim budget for 2014-15 had pegged the revenue deficit at 3.3 per cent of GDP in 2013-14. Net tax receipts stood at Rs 6.27 lakh crore till February, consti-tuting 75.0 per cent of revised estimates outlined in the interim budget 2014-15. At this point of time, the receipts accounted for 77.1 per cent of the revised estimates in 2012-13. Proceeds from disinvestment have reached Rs 5929 crore so far as compared to the revised target of Rs 16027 crore for the year. Apart from the expected shortfall in tax revenue collections, the Union govern-ment may not be able to meet its disinvestment target, which in turn is going to result in meeting of the revised target for fiscal deficit difficult for the previous year.

As far as expenditure front is concerned, till February of 2013-14, plan expenditure stood at Rs 4.08 lakh crore, representing 86.0 per cent of the revised target. Non-plan expenditure was also a bit higher as a percentage of the revised estimates in the April-February 2013-14 period. It stood at Rs 9.9 lakh crore, about 88.9 per cent

of the revised estimates. The percentage stood at 86.5 per cent in the corresponding period last year. Total ex-penditure stood at Rs 13.9 lakh crore in the year to date upto February 2014, which is lies well under the revised target for the year.

5.24

5.99

3.70

4.34

2013-14 (RE) Apr 2013 to Feb

2014 (Actual)

Fiscal Deficit

2013-14 (RE) Apr 2013 to Feb

2014 (Actual)

Revenue Deficit

Not so Rosy Picture on the Fiscal & Revenue Deficit Front (Rs trillion)

Source: Controller General of Accounts (CGA)

Page 20: Economy Matters, March 2014

ECONOMY MATTERS 18

DOMESTIC TRENDS

CII Business Confidence Index Moves Down in 4QFY14The CII Business Confidence Index (CII-BCI) for fourth quarter of the previous financial year dropped to 49.9 from a level of 54.9 in the third quarter. Decline in investor sentiment, despite positive signals emanating from various macroeconomic indicators, can primarily be linked to the political uncertainty in the backdrop of the impending general elections scheduled to be held shortly. This is substantiated from the fact that over 51 per cent of the respondents held domestic economic/political uncertainty as the top most concern for their businesses currently.

“With general elections round the corner, we are not overly concerned with the drop in the index value for the cur-rent quarter. Post elections and the formation of a stable government, we believe that the index will start moving up and would start to reflect the improving macroeconomic conditions, both domestic as well as global, stated Mr. Chandrajit Banerjee, Director General, Confederation of Indian Industry. The 86th Business Outlook Survey is based on the responses from large-scale (66 per cent), medium-scale (11 per cent) and small-scale & micro firms (23 per cent). Of these, 66 per cent were from manufacturing sector while 33 per cent were from the services sector.

As per the survey result, fiscal deficit is expected to lie in the range of 4.5-5.0 per cent of GDP in the previous year, which is in line with the government’s revised estimates of 4.6 per cent for the year. However, the upside risks to fiscal deficit have not fully abated yet. From the expenditure side, the risk emanate from the bloating subsidy bill along with push to government expenditure in view of the forthcoming general elections. The danger looms large from the revenue side too, with weak economic growth translating into sluggish tax collection and disinvestment falling much short of the target.

The survey reveals improvement in sales and new orders in the 4QFY14. Over 48 per cent of the respondents ex-pect increase in their sales in the fourth quarter, much higher than 36 per cent in the previous quarter. On the other hand, percentage of respondents expecting an increase in inputs cost in the fourth quarter declined in all cases except wages & salaries cost. This in turn resulted in an expected increase in pre-tax-profits to 31 per cent from 26 per cent in the previous quarter.

Worryingly, the survey reveals that the increase in sales and exports may not translate into proportionate expan-sion in capacity. As per the survey results, majority of the respondents (55 per cent) did not plan increase in their capacity expansion in the January-March 2014 quarter. There is an indication that firms, instead of making new investments, are enhancing their capacity utilization to meet the growing domestic and global demand.

“With the country heading for general elections, introduction of key economic legislations would be on hold for some time. However, this is an opportune time to take care of procedural simplifications, which would improve the ease of doing business in India and make the environment investment friendly in order to provide a fillip to growth. Moreover, RBI can also take centre-stage and start lowering interest rates, in order to kick-start growth”, suggested Mr. Banerjee.

Source: Controller General of Accounts (CGA)

(Rs billion) Revised April-February Percentage toEstimates (BE) (Actual) Revised Estimates

2013-14 2013-14 2012-13 2013-14

1. Revenue Receipts (i+ii) 10292.5 7835.9 77.9% 76.1%

(i) Tax Revenue (net) 8360.3 6271.3 77.1% 75.0%

(ii) Non-Tax Revenue 1932.3 1564.6 82.4% 81.0%

2. Non-Plan Expenditure 11149.0 9908.2 86.5% 88.9%

3. Plan Expenditure 4755.3 4089.3 82.3% 86.0%

6. Total Expenditure 15904.3 13997.6 85.2% 88.0%

7. Revenue Deficit 3702.8 4343.8 101.2% 117.3%

9. Gross Fiscal Deficit 5245.4 5992.9 97.4% 114.3%

Fiscal Trends in April-February of 2013-14

Page 21: Economy Matters, March 2014

MARCH 201419

TAXATION

Government Aims to Reduce Tax litigations

Q1. OECD has released its 15- point BEPS Action Plan. Your thoughts on the same, in light of criticism from well known tax experts like Philip Baker, who have said that the BEPS report has ‘no concrete and detailed’ proposals. Do you think it will achieve its stated objec-tive of addressing complicated international tax issues like digital economy taxation, artificial avoidance of PE, TP documentation, etc.?

Ans: With rapid globalization, the nature of cross bor-der transactions has changed and volumes have multi-plied. As per WTO report, in 1980, ratio of world exports of merchandise and commercial services to world GDP was 22.4 per cent. In 2011, it increased to 31.8 per cent, which reflects the impact of globalization and interde-

pendence of the countries. In terms of shares of differ-ent economies in world merchandise exports, the share of developing countries increased from 34 per cent in 1980 to 47 per cent in 2011 and share of developed coun-tries declined from 66 per cent to 53 per cent.

This fast pace of globalization has helped developing economies in achieving higher rates of growth but also exposed them to the challenges of tax base erosion. As the capital and labour both have become global and mobile, it is very easy for Multi National Enterprises to shift their profits to low tax or no tax jurisdictions. The project of the OECD on “Base Erosion and Profit Shift-ing” shows the global concerns as this is adversely af-fecting developed countries also whose share in global trade is declining. The project highlighted that in an increasingly interconnected world, the tax laws have not kept pace with global corporations, fluid capital, and the digital economy, leaving gaps that can be ex-ploited by companies who avoid taxation in their home countries by pushing activities abroad to low or no tax jurisdictions. This undermines the fairness and integrity of tax systems.

The present model conventions of OECD and United Na-

Guest Interview

Mr. Sunil GuptaJoint Secretary, CBDT

Ministry of Finance

Government of India

Page 22: Economy Matters, March 2014

ECONOMY MATTERS 20

TAXATION

tions about sharing of tax revenue between source and residence countries are no longer suitable to the pre-sent business environment. Now the time has come to redesign tax rules in order to ensure fair share of taxes to each jurisdiction based on the economic activity in that jurisdiction. Such rules should ensure that it does not result in double non-taxation and they discourage preferential tax regimes, and at the same time provide taxpayer friendly environment by ensuring certainty, clarity of tax laws, non adversarial tax regime and least compliance burden.

Seen in the above background, the BEPS action plan ap-pears to be a step in right direction.

Q2. The concept of “moral tax” is being talked about a lot nowadays in the West, corporations are being im-plored to avoid aggressive tax planning and pay their “fair” share of tax. In light of so many high profile tax litigations in India, does this concept have relevance in India?

Ans: There is no “moral tax” but tax is becoming a mor-al issue also. Recently, customers of some multinational enterprises boycotted products and services of such enterprises on the ground that these enterprises were not paying fair amount of taxes in the jurisdictions they operate and make profit. Taxes are an important source of revenue for any state and no state would like its tax base eroded through aggressive tax planning, particu-larly when rates of taxes have been moderated over the years. On the other hand, MNEs argued that they have paid taxes as per law and they are entitled to arrange their affairs in a manner so that there is minimum tax liability globally. These MNEs follow the law in letter but not in spirit.

It is, therefore, necessary to redesign the tax rules so that each state gets its due share of taxes based on the economic nexus with that state. Many states, includ-ing India, have enacted statutory General Anti Avoid-ance Rules (GAAR) to deal with aggressive tax plan-ning. These rules intend to disregard any arrangement which seeks to get tax advantage by misuse or abuse of the provisions of law. What is misuse or abuse of law is sought to be decided based on the criterion as to whether it is fair, ethical or acceptable to society. The in-troduction of statutory GAAR in India is objective based

criteria and subject to requisite safeguards, like an inde-pendent approving panel headed by a retired judge and provision for obtaining advance ruling, etc. Moralistic or ethical grounds may be the guiding principles of socie-ties but taxation has to have objective criteria.

Q3. The Indian economy is going through a tough phase, with foreign investment drying up. One of the reasons cited by global investors is the uncertainty created by big ticket tax litigations ( Vodafone, Shell, Nokia etc. ) . Shouldn’t CBDT think of some out of the box solutions to nip these tax disputes in the bud?

Ans: One of the major concerns expressed by MNCs is about increasing aggressive stance and inconsistent in-terpretation by tax administration in international taxa-tion and transfer pricing audits. The concerns of the taxpayers are appreciated. There may be some isolated cases of over enthusiasm but the fact is that in most of the cases, the issues raised are totally new having lim-ited precedence and jurisprudence.

In order to reduce litigation and provide certainty to taxpayers in this area, several measures have been ini-tiated. First of all, guidance notes have been issued to the tax authorities on various issues so that a consist-ent view is taken by all. Advance Pricing Agreement pro-gramme has been initiated. As a large number of cases come up for transfer pricing audit every year and end up in litigation, safe harbour rules have been introduced for a number of sectors and financial transactions speci-fying the acceptable margins. It is expected that a ma-jority of taxpayers coming under transfer pricing audit will take advantage of such measures. Based on the response of the taxpayers, the scope could be further extended and the margins recalibrated, if required.

A large number of requests have been received under Mutual Agreement Procedure (MAP), an alternative dis-pute resolution mechanism. The Competent Authority in India is taking up the MAP proceedings pending with various countries to resolve them to the extent possi-ble.

The conciliation initiative with Vodafone is an out of box measure resorted by the Government, which should be appreciated.

Page 23: Economy Matters, March 2014

MARCH 201421

TAXATION

Q4. The DTC bill has lapsed.... so much effort went into drafting and a lot of stakeholders invested their time and energy in bringing out the DTC. What is the future of DTC, if any? In hindsight, was it a wise idea to rewrite the tax code? Couldn’t the Govt. have chosen the easier route of amending the existing Income Tax Act?

Ans: The present Income-tax Act was enacted in 1961 and since then every year through Finance Acts and other Tax Amendment Legislations, a number of amend-ments were carried out. This made reading of the Act quite complex, particularly with so many provisos and explanations. It was, therefore, decided about 10 years ago to rewrite the Act in a simple form, user friendly and with a new philosophy. The Code also proposes to do away with the need of introducing finance bill every year so that tax amendments may be carried out in an open and transparent manner. Wide consultations were carried out with stakeholders. A number of profession-

als spent their time and energy and gave valuable in-puts. The Direct Taxes Code should be seen as a policy document of the Government of India highlighting the future road map for policy makers. In the past, a num-ber of proposals in the DTC have been incorporated in the Income-tax Act.

Q5. When can we expect the first APA to be signed? Are you happy with the progress so far in APA negotia-tions?

Ans: Advance Pricing Agreement (APA), introduced by the Finance Act, 2012, has received encouraging re-sponse from taxpayers. In the very first year, a large number of applications were received, majority being unilateral. Some of the applications are likely to be con-cluded very soon. It is expected that taxpayers would have more confidence in the APA programme and would seek more bilateral APAs.

Page 24: Economy Matters, March 2014

ECONOMY MATTERS 22

CORPORATE PERFORMANCE

Profitability Shows a Dip as Costs Rise

The analysis of the results of the firms in India for the third quarter (Q3) of previous financial year suggests an improvement in their financial result

at the aggregate level. In terms of net sales, firms at the aggregate level have shown an improved perfor-mance since the last two quarters. From the analysis of the results declared so far, profitability has remained subdued, under the pressure of increase in the overall expenditure. Our analysis of the firms in this section fac-tors in the financial performance during the third quar-ter of 2013-14, using a balanced panel of 2166 manufac-

turing companies (excluding oil & gas) and 1409 services firms, extracted from the Ace Equity database.

Growth in net sales, on an aggregate basis, stood at 6.7 per cent in the third quarter of 2013-14, as compared to 5.8 per cent in the same quarter of the previous fiscal. This indicates that the domestic economy has started to bottom-off and recovery could be in sight. While the net sales growth in services sector recorded a higher jump to 10.9 per cent in the third quarter of the previous fiscal, as compared to a growth of 8.3 per cent in the comparable quarter last year, the growth in net sales in the manufacturing sector was relatively subdued at 4.3 per cent as compared to 8.2 per cent in the comparable quarter of 2012-13.

Page 25: Economy Matters, March 2014

MARCH 201423

CORPORATE PERFORMANCE

Aggregate

Services

Manufacturing

5.8

6.7

8.3

10.9

8.2

4.3

Q3FY14

Q3FY13

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

Source: Ace Equity database & CII calculations

The total expenditure costs of the firms, on an aggre-gate basis, witnessed an increase by 16.7 per cent in the reporting quarter, as compared to 13.1 per cent in the comparable time period last year. Under its vari-ous heads, growth of raw materials cost increased to 14.1 per cent over 7.5 per cent in the same period last year. Growth in wages & salaries and interest cost also showed an uptick.

On an aggregate basis, growth in Profit after Tax (PAT) stood at a subdued 3.9 per cent in the third quarter as compared to 8.8 per cent growth in the same quarter

of last year. This was driven by a moderation in PAT growth of both manufacturing and services sector in the reporting quarter. The main reason attributable to the moderation in PAT growth across all the categories is the rise in expenditure costs. Further, growth in oper-ating profits (profits earned from a firm’s core business operations excluding investments and the effects of de-preciation, interest and taxes) on an aggregate basis, however, saw an increase to 11.8 per cent in the Octo-ber-December, 2013 quarter as compared to a growth 6.7 per cent in the third quarter of last year.

Q3FY14

Q3FY13

Aggregate8.8

3.9

Services8.4

2.4

Manufacturing9.2

5.8

Q3FY14

Q3FY13

Aggregate6.7

11.8

Services12.6

12.7

Manufacturing0.9

10.8

Growth in PAT (y-o-y%) Growth in PBDIT (y-o-y%)

Source: Ace Equity database & CII calculations

The corporate performance of the firms at aggregate level has been encouraging for the last two quarters. However, manufacturing firms have displayed a sub-dued performance so far in contrast to the sharp im-

provement in service sector firms’ performance. Going forward, how far, this recovery will be sustained will remain to be watched, given the fragile nature of the same.

Page 26: Economy Matters, March 2014

ECONOMY MATTERS 24

SECTOR IN FOCUS

Business of Sports

The present section reviews the sports sector based largely on the Report “Business of Sports: Shaping a Suc-cessful Innings for the Indian Sports Industry” prepared by the Confederation of Indian Industry (CII) and KPMG. The report explores and assesses the sports ecosystem in India, identifies the various stakeholders concerned and addresses their specific issues and challenges.

Introduction

The global sports sector is estimated to be worth US$480–620 billion, however, in India, sport is yet to be recognised as a sector and there is no comprehensive study on the industry’s estimated size in the country. The sports sector may comprise several segments such as sports tourism, sporting goods (manufacturing and retail), sports apparel, amateur and professional sports, recreational sports, high school and college athletics, outdoor sports, sports businesses such as sports mar-keting firms, the sport sponsorship industry and sport governing bodies.

A thriving sports sector usually has significant socio-economic impact, as it is instrumental in improving the physical health and mental agility of a nation’s human resources, and in promoting unity and national pride. In fact, sport as an industry contributes to about one to five per cent to the GDPs of various countries. How-ever, a lack of sports culture in India has deferred the formation of a similar industry in the country despite growing awareness, interest and successes in various non-cricket sports such as archery, badminton, boxing, chess, hockey, tennis, snooker, billiards, shooting and wrestling at prominent international competitions.

Due to a lack of industry status and lack of sports cul-ture, corporate investment in sports in India has tra-ditionally been limited to CSR initiatives. However, in-ternational and domestic examples have shown that investment in sports has high potential tangible return on investment (RoI), albeit a long gestation period for commercial returns in case of league franchises, and has significant intangible RoI as well. The intangible RoI stems from increased brand awareness, brand building among target customers and increased brand loyalty through community engagement by utilising the mass medium of sports.

Page 27: Economy Matters, March 2014

MARCH 201425

SECTOR IN FOCUS

The main modes of private investment and private sec-tor association with sports include:

• • Non-profit: These include CSR initiatives and investments in the sector by leading corporate hous-es, and non-profit foundations. These foundations are chiefly involved in providing opportunities to children from the under-privileged sections to take up sports, supporting promising sportspersons in ac-cessing world class training facilities and developing sporting infrastructure.

• • For profit: This pertains to the commercial interests in the sports sector, and covers the entire spectrum of sports goods manufacturing, retailing, establishing sports academies, providing sports cur-riculum services to schools and colleges, owning leagues and franchises, player management agen-cies, media houses, infrastructure development com-panies and other companies that seek marketing avenues for their brands through sponsorship asso-ciation with sports tournaments and players.

In India, non-profit association with sport is more com-mon. For-profit investment in sport in India mainly in-cludes sponsorships and owning leagues and franchis-es. The commercial success of Indian Premier League (IPL) in cricket has led to a surge of similar commercial formats in other sports such as badminton, football and hockey. Thus, with the burgeoning middle class of India and an increasing disposable income, media cov-erage of international and domestic sports and televi-sion and internet penetration, the time is opportune to form an organised sports sector with requisite policy support that further facilitates sports commerce and leagues of this nature.

However, long term sustainability of commercial ef-forts such as leagues may thrive on profitability metrics driven by India’s performance at global events, their popularity in the country and the consequent rise in audience interest. Thus, the leagues that could be an agent to rise in sporting culture require support from a well developed sports ecosystem that can sustain people’s increased interest by breeding more qual-ity sportspersons who can win laurels at international sporting events and elicit further enthusiasm. The suc-cess of leagues and development of sports ecosystem therefore drive each other. This further underlines the long-term nature of commercial returns in leagues due

to its dependence on the development of the sports ecosystem in the country in the long run.

The Government has been working towards developing the overall sports ecosystem to increase medal wins, al-beit few implementation issues and limited resources. However, concentrated and joint efforts are required from both the Government, in terms of adequate policy support such as provision of industry status and relief on import duty for sports equipment to private sector, and the private sector in terms of building innovative sustainable business models for creation of sports infra-structure, academies and franchises, to allow business of sports to grow beyond leagues and sponsorships and turn India’s sporting vision into reality.

Sports Ecosystem

Sports ecosystem comprises different dimensions or segments that go into establishing and developing a sport and various stakeholders in each segment. The evolution of a sports ecosystem may be evaluated by the extent of interaction and awareness among stake-holders, within and across various segments. The lev-els of transparency and professionalism of the system, coupled with growing awareness of all stakeholders, decide the extent of the sports ecosystem’s evolution.

Identifying key stakeholders and addressing their is-sues and challenges is likely to go a long way towards strengthening the sports ecosystem in India. While the sports ecosystem is largely driven by the Government and Government-run bodies currently, the role of pri-vate sector stakeholders is on a rise and can be crucial to get the desired momentum:

• • Sports Governance: The role of private sector in sports governance is limited. However, there are instances of private sector deals with sports federa-tions for overhauling/improving the respective sport. Such deals provide the usually cash starved National Sports Federations (NSFs) a financial breather to go about implementing plans for their respective sport’s improvement.

• • Talent Scouting and Training Players and Trainers: There is a reasonable presence of private academies being run on a self sustainable basis by former players of various sports. These academies try becoming sustainable by saving on capital expendi-ture through levers such as leasing playgrounds from

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ECONOMY MATTERS 26

SECTOR IN FOCUS

schools and government institutions, rather than owning space. There is also a significant presence of leading corporate houses through their CSR initia-tives, and non-profit foundations in the talent scout-ing and training players segment. Sports coaches and trainers are primarily trained in Government-run insti-tutes. Private sector contribution in this segment is also seen by way of certain academies that provide active consultation to the Government in addressing the skill gap in sports coaching in India, and through private academies and sporting leagues that appoint a foreign coach who in turn shares expertise with In-dian coaches.

• • Infrastructure: Private sector contribution to sports infrastructure is minimal and is limited to PPPs for sports infrastructure development and opera-tion. Some non-profit efforts towards stadia develop-ment have also been witnessed, but they are limited in number.

• • Sports Equipment Industry: Key stakeholders in this industry are equipment manufacturers, retail-ers, consumers, and private sports academies. While India is a major exporter and manufacturing hub of certain sports goods, importing equipment for some non-popular sports significantly increases their cost.

• • Leagues and Tournaments: Key stakeholders involved in this segment are broadcasters, franchis-es, National Sports Federations (NSFs), sponsors and spectators. The role of broadcasters and league own-ers in designing a spectator-friendly format becomes crucial to the commercial success of leagues, for in-stance the IPL, HIL, etc.

• • Performance Incentives: Central and state Governments provide a majority of performance in-centives to sportspersons in the form of government

and PSU jobs, pension funds, educational scholar-ships and cash endowments. The role of private play-ers is currently limited, but it is emerging gradually with the advent of non-profit foundations providing athlete sponsorships, and sports consulting firms that help athletes with post-retirement planning.

The sports sector has long gestation periods for in-vestments. For instance, it took cricket sustained in-vestments a long time to transform itself from being a gentleman’s game to being a game of the masses. Its current mass popularity attracts huge crowds, numer-ous sponsors and high media rights bids for various tournaments. This has helped the Board of Control for Cricket in India (BCCI) become a successful and self sustainable federation and has turned the game into a major source of revenue generation. The task at hand, therefore, is to examine the inherent challenges in the sports ecosystem and address them. The key is to in-culcate a culture of sports that would help improve our players’ performances and generate spectator interest.

Key Issues and Recommenda-

tions

Some key issues have been identified across various segments of the ecosystem and a set of recommenda-tions have been suggested to drive their resolution. The following table highlights these recommendations.

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MARCH 201427

SECTOR IN FOCUS

Segment of the

ecosystem

Issue Recommendation

Lack of sports culture in India �

Nationwide campaign to raise awareness on sports

Implementation of a uniform sports policy across all states

Active regional/local media supporting the cause of

developing sports in India

Limited funding avenues in sports � Provision of industry status to sports

� Strict implementation of the Sports Bill 2013

� Incorporation of a community-level Engagement Team under

the aegis of Ministry of Youth Affairs and Sports(MYAS) which

may also help NSFs organise competitions

� Institution of a Corporate Relations Team under the aegis of

MYAS that could help Sports Authority of India (SAI) and the

community-level Engagement team to deliver on their plans

� Identifying and promoting collaboration among all concerned

stakeholders to encourage more innovative business

collaborations

� Collaboration between SAI and National Sports Federations

(NSFs) to train coaches

� Allowing access of public infrastructure to private training

academies in lieu of reasonable fees

� Consideration of alternative modes of financing such as

revenues from naming rights by private academy owners

� Relief/exemption from duty for private academies if the

equipment is imported for academy players who have

consistently performed well at the inter-state or national level

or above

Lack of transparency

Overall

Sports governance

� Limited community-level engagement

in sports despite the Panchayat Yuva

Krida Aur Khel Abhiyan (PYKKA)

� Limited commercial focus of governing

bodies

Lack of coordination among the

concerned bodies affecting professional

uptake of sports

Lack of coaches and technical know-how

on sports in India

Scarcity of playing spaces and high

capital expenditure required to establish

private training academies

Imposition of customs duty on training

equipment imported by private

academies vs. duty exemption on the

same import by the Government

Inadequate support to former

sportspersons launching private

academies

Lack of awareness on opportunities for

sports coaches

Talent scouting and

training of players

and trainers

Lack of specialised courses in nutrition,

sports medicine and psychology

Insufficient legacy planning for various

games hosted by India leading to poor

asset monetisation

� Continued increase of public-private fund such as the National

Sports Development Fund (NSDF) could provide financial

support to upcoming academies

� Central and state Governments and NSFs may promote

awareness on opportunities for sport coaches by providing

case studies on typical career paths, opportunities for further

development and companies' recruiting coaches

� Evaluation of demand by the Government for these courses

and the establishment of lucrative incentives by the

Government for their inclusion in existing private and public

universities

� Legacy planning to be done before the construction of

stadia/assets begins in order to incorporate future

requirements post international events as per the legacy plan

into design of assets

List of Issues and Recommendations

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ECONOMY MATTERS 28

SECTOR IN FOCUS

Conclusion Lack of sports culture and non recognition of sports as an industry in India are among the major challenges for the business of sports in the country, which is expected to gain momentum by the introduction of more leagues on the lines of IPL. The gestation periods in the sports sector may be long, but it has high revenue generating potential and the Government and private sector should synergize their efforts to establish a flourishing sports industry in In-dia. This can not only generate commercial returns but investment in sports could also lead to high social return on investment (RoI) in terms of brand building by reaching out to a significant segment of the population. Therefore, the time is ripe to facilitate investment mobility so that corporate houses that are already engaging in sports can upgrade to for-profit sporting ventures, while business houses that are not involved in sports so far may consider this sector as an ideal avenue for CSR activities.

Limited implementation of existing

schemes

� Mandatory implementation and periodic review by the

Central Government on the status of implementation of

schemes such as PYKKA and National Playing Fields

Association of India(NPFAI), at the state level

Revision of policies and consideration of methods such as

innovative PPP models by the Government to attract

corporate investment in sports.

Creation of repository of case studies of successful

instances of corporate vestment in infrastructure

Limited corporate investment in sports

infrastructure development

� Integration of sports apparel exports with the Sports Goods

Export Promotion Council (SGEPC) for holistic promotion of

the sports products sector

� Government policy could be targeted at bucketing some

equipment for sports training under sports goods and levying

customs duty accordingly, for instance wrestling mats and

boxing gloves may be treated as just sports goods and not

classified under generic gloves and mats

� Implementation of a uniform robust legal framework for

governance across all leagues

� Better packaging of events can make the leagues spectator-

friendly

� Concentrated efforts by franchises to engage with local

community to build fan base and, hence, attract audiences

� Collaboration among NSFs and sports consulting firms to plan

players' careers post-retirement

� Provision of industry status to sports o Active collaboration

among stakeholders to help strengthen the commercial aspect

of leagues and franchises.

Sports infrastructure

Sports equipment

Lack of a unified representation for the

sports equipment industry

Non-recognition of some sports training

import items as sports goods

Lack of transparency in the governance

of leagues

Poor monetization of leagues

Performance

incentives

for sportspersons

Limited engagement of franchises with

local communities

Lack of policy ensuring financial security

post-retirement for some players

Limited career options within the sports

ecosystem

� Lack of clarity on the: - Rates at which

prize money and unguaranteed

participation fee would be taxed. -

Taxability of global sponsorship and

advertisement revenue and prize money

i.e., whether to tax global sponsorship,

advertisement revenue and prize money

in India and to what extent. - Taxation

mechanism if there is a triangular treaty

scenario.

Leagues and

tournaments

Source: Report on "Business of Sports: Shaping a Successful Innings for the Indian Sports Industry" prepared by CII & KPMG

Direct tax

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MARCH 201429

FOCUS OF THE MONTH

Growth & Employment

Indian economy has underperformed in the last few years as growth has slowed down to an estimated 4.9 per cent in 2013-14 from a high of 8.9 per cent in

2010-11. The loss of four percentage points over a pe-riod of mere 3 years is a matter of great concern for the policymakers. Coupled with persistently high inflation, things have not looked so bright for the Indian econ-omy. One of the main adverse consequences of slow growth has been its impact on employment creation. Hence, urgent steps are needed to revive economic

growth on an urgent basis, which would also help in job creation Further, as growth alone is no guarantee to sufficient job creation, there is also a need for focus-ing on employment oriented specific initiatives like skill formation. Job creation has to be complimented with adequate skill development, especially in the informal sector. Keeping this important motivation in mind, cur-rent issue of Economy Matters dwells on Growth and Employment, which mirrors the CII theme for 2014-15 as “Accelerating Growth, Creating Employment”.

We draw upon experts to give their opinion on how to revive growth alongside creating adequate employ-ment opportunities.

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ECONOMY MATTERS 30

FOCUS OF THE MONTH

India is in the flux of tremendous transformation. Nowhere is this transformation more visible than in the rising aspirations of our citizens, an increasingly

young population transiting into the middle income class. As the gap between villages and cities narrows and technology brings more of the world into homes all over the country, Indians are building a new vision of themselves and their society. The clamor today is for MORE – more opportunities, more incomes, more ac-cess, more jobs.

Such a strong demand can only be met by massive creation of jobs across the board in manufacturing, ser-vices, technology and knowledge industries. Employ-ment grew by 14.9 million between 2004-05 and 2011-12, according to the 68th round of survey by the National Sample Survey Office (NSSO). Nevertheless, while job creation per se is on the rise, the pace of new employ-ment has slowed down considerably during the second half of the decade up to 2011-12. However, this reflects

a structural shift in employment from low-paid farm la-bour to higher quality work in non-farm sectors. For the first time in India’s history, there were more people de-riving livelihood from non-agricultural work than from agriculture.

As per the results from the 68th round of NSSO, share of agriculture in employment for the first time fell be-low 50 per cent in 2011-12 from 56 per cent in 2004-05. Agricultural employment fell as labour force migrated from agriculture to industry and services. As for indus-try, it has witnessed rise in employment from 83 million in 2004-05 to 115 million in 2011-12. Its share in employ-ment has also risen from 18.7 per cent to 24.3 per cent in the comparable period. Services sector on the other hand has not seen a significant rise in it share in employ-ment, though its share in GDP has increased sharply. One of the possible implications of this trend seen in services sector could be that the sector’s productivity is on the rise.

Source: 68th Round of NSS & CII Research

268

231

83

115106

127

Agriculture Industry Services

2004-05 2011-12

Agriculture

Industry

Services

56.6 48.9

18.7 24.3

24.7 26.8

2004-05 2011-12

All-India Employment (in millions) Share in Employment (%)

Accelerating Growth, Creating Employment

Mr. Ajay S. ShriramPresident, CII;

Chairman & Senior Managing Director

DCM Shriram Ltd

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MARCH 201431

FOCUS OF THE MONTH

Amongst the sub-sectors of industry, construction sec-tor created the largest incremental employment be-tween 2004-05 and 2011-12. While, manufacturing also saw a jump, albeit, moderate in employment during the comparable period. In 2011-12, the services sector employed more than manufacturing and construction

combined. Among the services sector, trade, hotels and restaurants were the largest employment genera-tor, accounting for almost half of total service sector employment in 2011-12. Between 2004-05 and 2011-12, education, health and recreation services added even more employment than the fast growing financial, real estate, business and IT services sector.

54

60

26

50

4 5

Manufacturing Construction Mining &

Utilities

2004-05 2011-12

46.6

51.8

26.9

33.5

17.620.8

6.411

8.1 17.9

0.7 2.1

Tra

de,H

ote

l&

Restu

rant

Education,H

ealth

&

Recre

ation

Serv

ices

Tra

nsport

,S

tora

ge

&

Com

munic

ations

Fin

ancia

l,R

ealE

sta

te

&B

usin

ess

Serv

ices

Public

Adm

inis

tration

ITS

erv

ices

2004-05 2011-12

Sectoral Employment in Industry

(in millions)

In Services (in millions)

Source: 68th Round of NSS & CII Research

Moving on from the sectoral distribution of employ-ment, another striking feature of the current growth process has been the rise in employment generation in the unorganized sector even though job creation in the organized sector is faltering. The informal sector pro-vides little job security or social security, leaving work-ers to fall back into poverty if jobs are lost. Yet we are confident that a return to the path of higher growth would help employment generation across sectors. What is more, employment in the tertiary sector would far outstrip that in the primary sector. If India is to de-cisively tackle poverty and move up the global income ladder, it would have to revive the focus on growth which would lead to a rise in employment intensity in the economy and encourage a transition to higher pro-ductivity and incomes.

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 employability of the workforce and make them contribute to the production process. This would ob-viate the situation wherein an array of unemployed graduates co-exists with huge skill shortages within industry particularly due to non-suitability of a large proportion of graduates to a specified job. The appli-cation of ICT has a vast potential to energize educa-tion and skill development as it provides more oppor-tunities 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 acceler-ated and greatly scaled up in a joint effort of Govern-ment, industry, and civil society.

• 3. Growth: To raise the quality of jobs available to new entrants to the workforce, it is essential to reju-venate growth to at least 7 per cent by the end of the year.

• 4. Industrial Performance: Given that large sec-

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ECONOMY MATTERS 32

FOCUS OF THE MONTH

tions of the workforce are moving off the land and that the demand is for less-skilled jobs, it is the indus-try sector that would have to be promoted to provide such jobs. Employment-intensive mass manufactur-ing sectors would be central to the endeavor.

• 5. Investments: Rejuvenating investments and making 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 business ventures and expansion of existing ventures with stability and clarity is the best way to create em-ployment opportunities. Administrative and bureau-cratic procedures must be simple, transparent and time-bound in order to encourage industry. The use of ICT is of immense benefit to streamline business processes and bring efficiency in commercial transac-tions.

• 7. Export Competitiveness: Strategic security derives much from a nation’s footprint on the global economic stage. India needs to increase its presence in top globally traded goods and services, which is also a key avenue for job creation domestically. Over-seas investors have a significant role to play in plug-ging India into global supply chains.

• 8. Legal and Regulatory Architecture: India’s le-gal and regulatory framework should be geared to-wards employment-creation and in line with global best practices. Social security and worker protection have to be addressed simultaneously with the imper-ative of mass scale employment creation.

• 9. Labour Law Reforms: Provision of more flexi-ble labour laws, which confers to employers the right to take management decisions, is crucial to provide a fillip to labour intensive manufacturing. One of the reasons that our employment growth has not been commensurate with the growth of the economy has been rigid labour laws, which work as disincentive to employment creation in the formal sector. There is need to create a ‘social safety net’ to compensate workers rationalized during the production process.

• 10. Entrepreneurship: Promoting entrepreneur-ship is vital to expanding opportunities for livelihood and employment. In particular, startups must be en-couraged. There is need for a national policy on facili-tating entrepreneurship which would bring together elements of capacity building, access to finance, boosting venture capital and angel investing, and creation of necessary infrastructure such as industrial parks.

In 2014-15, CII would look at all the above issues, and come out with concrete action strategies to converge Government and industry efforts and initiatives. Ongo-ing initiatives for strengthening competitiveness of In-dian industry, globalization and working with society would be scaled up. A new India is on the rise and the aspirations of citizens must be met. Industry is a critical stakeholder in accelerating investments, growth and job creation, and can meet multiple objectives for the development of the nation. As a partner in national de-velopment, CII would play a key role in this endeavor.

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MARCH 201433

FOCUS OF THE MONTH

Skill Challenges of Informal Sector in India

India is experiencing a demographic dividend as more than 50 per cent of the population is in the working age group which can make India the skill capital of the world. It is estimated that by 2020, the average Indian will be 29 years of age compared to average age of 37 years in China and US and 45 years in Europe and 48 years in Japan. However, skilling this youth bulge con-stitutes a challenge particularly when there is prepon-derance of informal/unorganised sector.

The question is what constitutes informal sector and how to define it. The ILO’s Resolutions on Statistics of Employment in the Informal Sector adopted by the 15th International Conference of Labour Statisticians (ICLS), 1993 and 2003, provided a definition of the “informal sector” as consisting of units engaged in the production of goods or services with the primary objective of gen-erating employment and incomes to the persons con-cerned. The units operate at low level of organisation, with little or no division between labour and capital as factors of production and on a small scale. Labour rela-tions– are based mostly on casual employment, kinship or personal and social relations rather than contractual arrangements with formal guarantees.

In India, the National Commission for Enterprises in the Unorganised Sector (NCEUS), 2009, has also made an important distinction between organised or formal and unorganised or informal employment - “Unorganised workers consist of those working in the unorganised enterprises or households, excluding regular workers with social security benefits, and the workers in the formal sector without any employment/ social security

benefits provided by the employers.”

To understand the implications for skill development in the sector, it is necessary to reflect on the sectoral com-position of workers both in terms of organised/ unor-ganised and within these broad categories formal and informal. It is also necessary to understand the size of enterprises, the status of employment and the level of education of the labour force.

The informal sector in India consists of workers in micro enterprises, unpaid family members, casual labourers, home based workers, migrant labourers, out of school youth, domestic workers, street vendors etc. As per the 66th round of NSS survey (2009-10), approximately 92.8 per cent of the total work force in 2009-10 constituted of informal workers. The sector is heterogeneous cov-ering all economic activities both in organised and unor-ganised sector covering both the rural and urban areas. Table1 indicates that between 1999-2000 and 2009-10, the share of organised sector employment in total em-ployment increased merely from 13.6 per cent in 1999-2000 to 15.8 per cent in 2009-10. Over the same period, the share of informal employment in the organised sec-tor increased from 37.9 per cent in 1999-2000 to 57.8 per cent in 2009-10. In other words, the small increase in the share of employment in the organised sector was of poor quality as it was accompanied by increasing infor-malisation. A manifestation of this phenomenon is the fact that organised sector employers are increasingly hiring workers on contractual terms (may be due to la-bour laws and other concerns).

Ms. Sunita SanghiAdviser

Labour, Employment & Manpower

Minorities & VAC

Planning Commission, GoI

Mr. Kuntal SensarmaDirector

Labour, Employment & Manpower

Planning Commission, GoI

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ECONOMY MATTERS 34

FOCUS OF THE MONTH

A further probing into the status of employment in the country shows a decline in the share of self-employed in the work force from 56.4 per cent in 2004-05 to 50.7 per cent in 2009-10 but corresponding increase in casual

The increase in casualization is a matter of great con-cern as these workers are not having access to assured social protection, job security and other benefits which workers in the formal sector enjoy affecting their pro-ductivity level. As a result, they remain engaged in un-

workers from 28.3 per cent to 33 per cent. This is a mani-festation of the increasing informalisation of work force particularly in organised/ formal sectors.

certain low paid jobs. Hence, mainstreaming the infor-mal sector workers is a major challenge in the Indian context. This is more challenging when we look at the size of enterprises where more than 65 per cent of the workers are working in the own enterprises.

Source: 12th Plan Document Volume III, Planning Commission (Table 22.5)

Table 1: Formal and Informal Employment in Organized and Unorganised Sectors (in million)

Sectors/ Years Employment

2009-10 Formal Informal Total

Total 33.0 427.2 460.2

Total 34.9 422.6 457.5

Total 35.0 361.7 396.8

Unorganised 2.3 385.1 387.3

Organised 30.7 42.1 72.9

2004-05

Unorganised 1.4 393.5 394.9

Organised 33.4 29.1 62.6

1999-2000

Unorganized 1.4 341.3 342.6

Organized 33.7 20.5 54.1

Source: 12th Plan Document Volume III, Planning Commission (Table 22.7.)

Figures within parentheses indicate per cent share out of total employment/ workforce

Table 2: Number of Workers According to Usual Status (PS+SS)

Approach by Broad Employment Status (in million)

Self employed 209.3(52.6) 258.4(56.4) 232.7(50.7)

Regular/Salaried employee 58.2(14.6) 69.7(15.2) 75.1(16.4)

Casual labour 130.3(32.8) 129.7(28.3) 151.3(33.0)

1999-00 2004-05 2009-10

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MARCH 201435

FOCUS OF THE MONTH

65.610.5

6.8

17.1

Less than 6

6 & above but

less than 10

10 & above but

less than 20

20 & above

Figure 1: Size of Enterprise in Industry and Services (percentage)

Source: Compiled from NSS, 2009-10 (66th Round) and NSS, 2004-05 (61st Round)

What causes this Informalisa-

tion?

The factors2 affecting the process of informalisation can be classified as (i) labour and (ii) non-labour factors. The

labour factors include the quality of labour in terms of education and training. In India the level of education is low and there is lack of vocational skills in the workers entering the labour force. It is evident from the pie chart below that more than 50 per cent of those entering the labour force are having upto primary level of education.

Not Literate

Upto primary

Middle

Secondary

Higher secondary

Diploma/certificate course

Graduate

Graduate and above

6.17 2.071.28

6.53

12.08

17.6224.54

29.72

Figure 2: Education profile of Labour Force in India in 15-59 years age group

(in per cent)

Source: Based on (Table 22.19) of 12th Plan Document Volume III, Planning Commission

Table 3 below indicates the abysmally low share of those who have received or are receiving vocational training in the country. As per NSS 66th round, only 6.7 per cent persons in the age group 15-59 years fall in this category with the proportion of women being further low at 4.1 per cent. The per cent share of people hav-

ing received or undergoing formal vocational training is even lower at 1.6 per cent and 0.6 per cent respec-tively. With about 92.6 per cent of the persons in this age group not having received any form of skill training speaks volume about the inability of these people to get formal / organised sector jobs – they are compelled

2 Adapted from Economic Survey 2012-13.

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ECONOMY MATTERS 36

FOCUS OF THE MONTH

to take up low paid, unproductive jobs in the informal sector. The structural transformation associated with the process of development is reflected in the declining share of agriculture in the GDP but the relatively slower pace of decline in employment is worrying. Even those

who are migrating from farm to non-farm work are not able to adjust due to skill mismatch. This also restricts the shift of labour towards manufacturing and services particularly in low skilled construction work.

The plethora of labour legislations often act as obsta-cles to growth of private entrepreneurship and industry reliance on capital and resorting to use of contractual labour. Besides these labour related factors, there are non-labour factors viz. regulatory procedures such as initial procedural requirements to obtain a number of clearances when applying for building permits; utility connections like electricity, water etc. In addition the absence of quality infrastructure including roads, un-interrupted power supply, etc. also acts as hindrance to development of manufacturing industries, of which the MSMEs (which are one of the largest sources of em-ployment) face greater problems due to their inability to access credit and funding from institutional sources. Another constraint in setting up industry is land acquisi-tion. In many cases, the MSMEs are unwilling to expand in size to avoid further regulations and taxes.

The huge informal sector and the necessity to generate decent employment opportunities within this sector necessitates the requirement of improved availability of skill training of the workers so that their productivity and in turn income improves. The issue of skill building

has been one of the key objectives of the policy mak-ers. It has been realised that for India to make use of its youth bulge it is necessary to equip its workforce with relevant skills to seize the opportunities both nationally and internationally.

Skill System in IndiaThe low level of education and skills are the prime rea-son for the vulnerability of the workforce in the rapidly developing economy. The heterogeneous nature of informal sector together with differing nature and con-dition of work necessitates different kinds of training. The question is training for whom, for what, what kind and how? Currently there is no mechanism to validate and estimate the training needs of different units in the unorganised sector. The workers are either not aware or deliberately avoid training for loss of income.

The rapidly growing economy and the availability of de-mographic dividend necessitated Government of India

Table 3: Status of Vocational Training Received or Being Received by

Persons in the Age Group 15-59 Years (in per cent) in India (Rural + Urban)

Source: NSS 66th Round (2009-10): Report on Status of Education and Vocational Training in India

Category ofPerson

ReceivingFormal

VocationalTraining

Received Vocational Training Did NotReceive

VocationalTraining

Formal Non - Formal All

(col.3 to7)

Hereditary Self -learning

Learningon the job

Others

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Male 0.7 2.0 2.5 1.4 2.8 0.4 9.2 90.0

Female 0.4 1.2 1.1 0.8 0.5 0.5 4.1 95.4

All Person 0.6 1.6 1.8 1.1 1.7 0.5 6.7 92.6

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MARCH 201437

FOCUS OF THE MONTH

to put in place the necessary institutional and govern-ance structure both in public and the private sector to skill/ up skill/re-skill its labour force to meet the skill demand of the growing economy. In the 11th Plan, a Co-ordinated Action on Skill Development was initiated for the focused attention on skill development aiming at an appropriate policy formulation; synergizing efforts of different Ministries/departments in the skill field to achieve efficiency of expenditure, and catalysing pri-vate sector participation. This has been replaced by the National Skill Development Agency in June, 2013. The National Policy on Skill Development announced in 2009 emphasized on policy coherence, inclusivity, improvement of quality, and employment outcome to achieve the massive ambition of skilling and achiev-ing inclusivity. It laid special emphasis on the skill de-velopment for the informal/unorganised sector. The Scheme of Vocationalisation of School Education along with polytechnics and ITIs are catering to the require-ment of various sectors including informal. The private initiatives supported by the National Skill Development Corporation are also helping the training needs of the unorganised sector. Through Sector Skill Councils and the skill gap studies of the NSDC effort is being made to link the skill demand with the industry and the mar-ket. More than 20 central Ministries are implementing various plan programmes for skilling. The 12th Plan has identified certain issues for the skill development of the people in the unorganised sector:

• a) Recognition of prior learning.

• b) Skill up-gradation and certification.

• c) Expanding the outreach of skill development activities throughout the country. particularly in the backward/ LWE areas by setting Skill Development Centres (SDCs) as the sector is heterogeneous and spread across the country

• d) Provision of literacy and basic education.

• e) Replication of successful models.

• f) Use of ICT and mobile vans for expanding out-reach

• g) Cluster approach for apprenticeship training.

• h) Using the process of Train—Loan-Link—Sup-port system for improvement in the success rate of training in self-employment or job employment.

• i) Developing a pool of certified trainers with ad-equate technical competency.

• j) Developing a transparent system for conduct of the programmes, registration of participants and so on and putting it in the public domain.

Government of India has initiated various steps for im-proving the employability of its labour force which is manly in unorganised sector.

Measures/ Initiatives of the Gov-ernment for Skilling:

Government of India has initiated several measures in-cluding implementation of plan schemes under various Central Ministries/ Departments aiming to expand the outreach of skill training to the informal sector workers. The major systemic initiatives undertaken by the Gov-ernment of India which have bearing on the informal sector includes:

• 1. Setting up of an autonomous body, namely, National Skill Development Agency (NSDA), in June 2013, with the single point focus on coordinating and harmonizing skill development activities in the country so as to meet skilling targets and to ensure that the skilling needs of the disadvantaged and the marginalized groups like SCs, STs, OBCs, Minorities, Women and differently-abled persons are taken care of.

• 2. Notifying the National Skill Qualification Frame-work (NSQF) to provide learning pathways with hori-zontal and vertical mobility between general educa-tion and vocational education/training, recognition of prior learning, credit accumulation and transfer etc. NSDA is mandated to operationalize by bringing together the key stakeholders sector-wise through the National Skills Qualifications Committee (NSQC).

• 3. Setting up of Sector Skills Council by the Na-tional Skill Development Corporation (NSDC), which are striving to complement the existing vocational

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education system for the Industry/ Services sectors in meeting the entire value chain’s requirements of ap-propriately trained manpower in quantity and quality across all levels on a sustained and evolving basis.

• 4. Development of National Occupational Stand-ards (NOS) for entry level jobs in a number industrial/ services sectors.

• 5. Indian Banks’ Association (IBA) has launched a Model Loan Scheme for providing loans from Rs. 20,000 up to Rs.1.50 lakh for skill development train-ing for various durations.

• 6. A Credit Guarantee Funds Scheme for Skill De-velopment to provide a guarantee against default in repayment of education loans extended by the lend-ing institutions has also been approved.

• 7. Under the new Companies Act 2013, vide Sec-tion 135 of the Act, 2 per cent spending on Corporate Social Responsibility (CSR) is mandated out of the av-erage net profit made by the company during every block of three years which would cover activities like employment enhancing vocational skills.

• 8. To motivate a large number of youth to vol-untarily join skill development programmes, Central Government has started a new scheme titled STAR (Standards Training Assessment and Reward) where-in on successful completion of training and obtaining a certificate, every candidate will be provided with a monetary reward of an average of Rs. 10,000/-. The scheme is operated by NSDC.

Programmatic Intervention for the Informal/ Unorganised Sector

• 1. Skill Development Initiative based on Modu-lar Employable Skills (MES) is implemented by the Ministry of Labour & Employment. This has been developed in close consultancy with Industry, State Governments & Experts in pursuance of excellence in vocational training. MES is the ‘Minimum Skill Set’ which is sufficient to get an employment in the world of work. MES allows skills upgradation / formation, multi entry and exit, vertical and horizontal mobil-ity and lifelong learning opportunities in a flexible

manner and allows recognition of prior learning. The major objective is to provide vocational training to school leavers, unorganised sector workers, ITI graduates, etc. to improve their employability by op-timally utilizing the infrastructure available in Govern-ment, private institutions and the Industry. Existing skills of the persons can also be tested and certified under this scheme and to build capacity in the area of development of competency standards.

• 2. Hunar Se Rozgar Scheme implemented by the Ministry of Tourism is aim to bridge the gap of skilled manpower in hospitality sector with focus on youth belonging to economically weaker sections of the so-ciety. The courses are conducted by the Institutes of Hotel Management and Food Craft Institutes spon-sored by the Ministry of Tourism and the India Tour-ism Development Corporation.

• 3. Entrepreneurial Skill Development Programme (ESDP) implemented by the Ministry of Micro, Small and Medium Enterprises with objectives of (a)up-grading existing skills and to create new skills in work-ers and technicians of existing units and educated un-employed youth; (b) providing training to unskilled/ semi-skilled workers engaged in SME sector and to equip them with better and improved techno-mana-gerial skills of production; and (c) implement specific tailor made programmes for the skill development of socially disadvantaged groups in remote regions/ pockets of the States are offered. Also called “Out-Reach Programmes”.

• 4. The major objectives of the Aajeevika / Nation-al Rural Livelihood Mission (NRLM) are (i) to create efficient and effective institutional platforms for the rural BPL youth. The Special Projects under Aajeevika scheme provides placement linked market driven skill trainings; and (ii) to train rural BPL youth in the age group of 18-35 years in marketable skills and place them in suitable jobs.

• 5. Support to Training and Employment Pro-gramme for Women (STEP) implemented by the Ministry of Women & Child Development targets the marginalized, asset less rural women and urban poor. This includes wage labourers, unpaid daily workers, female headed households, migrant labourers, tribal

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FOCUS OF THE MONTH

and other dispossessed groups. The scheme’s ob-jectives include (i) mobilising women in small viable groups and making facilities available through train-ing, access to credit and other inputs; (ii) provide training for skill up gradation;(iii) enabling groups of women to take up employment-cum-income genera-tion programmes of their own, or to access wage em-ployment.

• 6. A new scheme “Roshni” within NRLM/ Aajee-vika Skill Development Programme for tribal areas and critical LWE affected districts involving training of 3, 6, 9 or 12 months. 50 per cent of the beneficiar-ies under the scheme would be women. In addition, allocation for skill development under National Rural Livelihoods Mission (Ministry of Rural Development) from 15 per cent to 25 per cent has been enhanced.

• 7. Seekho Aur Kamao scheme of the Ministry of Minority Affairs for upgrading the skills of the minor-ity youth in various modern/traditional vocations.

• 8. Revamping the Swarna Jayanti Shahari Rozgar Yojana of the Ministry of Housing & Urban Poverty Alleviation into National Urban Livelihoods Mission with enhanced allocation for skill components – (i) Employment through Skills Training & Placement (EST&P) by providing assistance for development / upgrading of the skills of the urban poor so as to enhance their capacity for self-employment and sal-aried employment and (ii) Support to Urban Street Vendors which aims at skilling of street vendors, support micro-enterprise development, credit ena-blement and pro-vending urban planning along with supporting social security options for vulnerable groups.

• 9. Various Central Ministries are also implement-ing schemes for providing wage/ self-employment opportunities including MGNREGA and NRLM by the Ministry of Rural Development, Prime Minister’s Em-ployment Generation Programme (PMEGP) of the Ministry of MSME and NULM under the Ministry of

Housing & Urban Poverty Alleviation. ITIs and Poly-technics are also helping with skilled manpower.

International Experience

As per available literature 3 in the informal sector, the traditional apprenticeship training has emerged as a mechanism for training. This involves observing and imitating the master trainer over long period in a spe-cific product. So the training is not broad-based but product specific. This is found to be self-regulating and self-financing catering to individuals who lack the edu-cational requirement for formal training, cost effective and serves the target group. There are examples where state encourages the employers to take on apprentice-ship beyond their needs and pay the allowances, both to trainee and the master. Since informal sector lacks safety net, for those who are retrenched and fall back in the informal sector, countries like China have undertak-en initiatives of re-employment training particularly for poor people which helps to raise their vocational skills, generate market awareness and assist them towards reemployment. Kenya under the JUA KALI project aims at increasing access of informal sectors entrepreneurs to services and improving the policies and institutional environment by removing restrictive laws and policies. The project provides choice to informal sector opera-tors to undergo training wherever they want to avail of such training.

Some of the best international models for informal sector training in practice are Cooperative, Enterprise based, Voluntarist and state driven:

3 NCEUS Report” Skill Formation and Employment Assurance in the Unorganised Sector, April 2009”, Axmann,M(2004) Facilitating Labour Market Entry for Youth through Enterprise Based Schemes in Vocational Education and Training and Skills Development. Seed working Paper No.48 Geneva:ILO .

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In the Indian context, state driven training is predomi-nant. However, both the “cooperative” method and “enterprise-based” training can be undertaken. Skilling the informal workers will be beneficial to all the stake-holders in the system – employers’ organisations, the Government and trade unions. India adopts a tripartite mechanism in dealing with labour issues. It is, therefore, essential that there needs to be stronger cooperation in imparting training undertaken by these three stakehold-ers. Enterprise-based training is also limited in India and needs to be expanded to cover the large number of MS-MEs to impart apprenticeship training. The big enterpris-es do undertake training of their employees on a limited scale to meet their own requirement. A cluster of MS-MEs working in the same sector or locality can be plat-form to impart such training. The Government should provide necessary support – financial, technological and marketing to incentivise such MSMEs.

It is clear that re-skilling/re-training require support from Government to equip workers to make them available for market by anticipating demand. It also emerges that the apprenticeship and enterprise ship based system al-lows trainees to use their skills with suitable incentives provided to employers and those training is essential.

What’s NextIt is evident that the scale of challenge in mainstream-ing more than 90 per cent of workers engaged in infor-mal/ unorganised sector is a daunting task. The Gov-ernment’s sectoral and other specific initiatives as also systemic reforms are making a difference in addressing the needs of the sector but much more needs to done during and after the 12th Plan period to make an appre-ciable impact. Some of the immediate initiatives that can be taken to address the skill challenges as identi-fied in the 12th Plan as also emerging from the above analysis are:

• • Expanding the coverage of formal and infor-mal apprenticeship training by amending the present Apprenticeship Act, 1961, and the relevant Rules to cover more enterprises including MSME clusters. The 7000 plus MSME cluster can act as a centre for ap-prenticeship training.

• • Expand the training infrastructure, upgrade the quality of training and ensure greater use of ICT for reaching out in the remote and difficult areas. This may involve documenting best practices both nation-ally as well as internationally for replication.

• • There is a need to develop a pool of certified

Training Systems across the world for the Informal Sector

System Countries Main Features

Co-operative Australia, Germany, Switzerland and Pressures to undertake training resulting from strong co operation

many countries in Latin American amongst employers' organizations, the state and trade

counties unions

Enterprise-based

- Low labour turnover Japan Low Labour mobility, lifetime employment for many staff,

'longtermism' arising from absence of stock market pressure,wage

system based.

- Voluntarist The United Kingdom, United States Few institutional pressures on firms to provide training

"State-driven"

a) Demand-led Hong Kong, Malaysia, Republic of State plays a leading role in coordinating the demand for a supply

Korea, Singapore, Taiwan, China of skills, Operates in an open and competitive economic

environment.

b) Supply -led Economies in transition, many Govt. taken on a prime responsibility for formal sector training in

developing countries especially training institutes, Little or no pressure on employer to train.

in Asia and Africa

Source: Skill Formation and Employment Assurance in the Unorganised Sector, April 2009, NCEUS

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trainers with adequate technical competency as the country suffers from an acute shortage of quality trainers.

• • Advocacy and awareness generation among the informal sector workers about the availability of schemes and other facilities on vocational training and its impact on their productivity. The examples on the impact on productivity and its consequential ef-fect on wages in the formal sector can be provided.

• • Strong cooperation among employers, gov-ernment and trade unions to ensure that this large segment of workers is actually covered by skill train-ing and social protection.

• • Creating flexible and short cycles of enterpris-es-based schemes that directly respond to training needs of this category of workers. MES programme of the Ministry of Labour & Employment can be the base for such models.

• • Speedy operationalization of the National Skill Qualification Framework, National Occupation-al Standards and development of a dynamic labour market information system (LMIS) are important sys-temic reforms for helping in the skilling needs of the informal sector.

• • Financing skill development for the informal sector is another challenge towards which creation of a dedicated corpus, namely, National Skill Develop-ment/ Training Fund would be very useful. Presently, funding of skill development in India is predominant-ly a state driven activity. However, a dedicated fund

can be financed through a cess like the current cess for education on income tax or through some new levy on luxurious services/ consumption. The private sector which may not be undertaking apprenticeship training or contributing towards any CSR activity may also contribute certain per cent of their net profit.

• • An essential condition for reducing the size of the informal sector involves creating large number of formal sector jobs. For that to happen, it is necessary to ease the regulatory framework, provide flexibility in labour legislations, provision of incentives/ support to MSME sector, improving the infrastructural facili-ties etc. Unless there is adequate availability of for-mal sector jobs, skilling or re-skilling alone may not be able to address the humongous challenge of main-streaming the informal sector in India.

• • Finally to realise the benefits of skill training programme and to achieve decent employment ob-jective there is need for provision of social security measures to the informal sector workers. The Gov-ernment has enacted the Unorganised Workers So-cial Security Act, 2008 and is implementing the Rash-triya Swasthya Bima Yojana (RSBY), Aam Admi Bima Yojana along with other social protection measures. It is also contemplating a comprehensive social se-curity scheme encompassing life, health, maternity and retirement benefits to all the unorganised sector workers.

(Views expressed are personal)

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Economic growth has slowed down to multi-year lows, leading to much attention being drawn towards finding ways and means of navigating out of the current abyss. Though much of the growth slowdown has been attrib-uted to the external factors, domestic factors too are equally responsible. Under this backdrop, the most per-tinent question to ask is – when is a recovery in sight? Motivated by finding answers to this crucial question, in the recent CII’s National Conference and Annual Gener-al Meeting held on 26-27th March, 2014, there was panel discussion among the discussants- Dr Subir Gokarn, Dr Surjit Bhalla, Mr Nimpesh Kampani, moderated by Dr. Janmejaya Sinha. In this article we cover the highlights of the discussion in a bid to find answers to our ques-tion.

Commenting on the economic scenario, Dr Gokarn said that the recent stabilisation in the macro environment is a major green-shoot for the drivers of growth to start

Indian Economy: Is a Recovery in Sight?

kicking in. But a lot more still needs to be done as it is a necessary condition but not sufficient condition. He was happy with the sharp improvement in Rupee’s value against the US Dollar, which he thought was pos-sible mainly due to the improvement in current account deficit (CAD). CAD has narrowed sharply in the wake of pick-up in exports momentum coupled with compres-sion of gold imports. The latter, according to him was a temporary solution; hence there was a need for finding some sustainable long-term solution to the problem of containing imports. He was of the view that despite be-ing a coal-rich country, we have been forced to import coal and that according to him has been a big stress fac-tor in the durability of the reduction of CAD.

Speaking of structural issues plaguing the country, Dr Gokarn highlighted the perverse consequences of having runaway food inflation for the last many years now. This in turn has constrained the ability of the mon-

1 Panel Discussion held at CII’s National Conference and Annual General Meeting (26th -27th March, 2014) among the discussants Dr Subir Gokarn, Director-Research, Brookings India; Mr. Nimesh Kampani, Chairman, JM Financial Group and Dr. Surjit Bhalla, Chairman, Oxus Re-search & Investments. The discussion was moderated by Dr. Janmejaya Sinha, Chairman- Asia Pacific, BCG.

(L-R) Dr. Janmejaya Sinha, Chairman- Asia Pacific, BCG; Dr Subir Gokarn, Director-Research, Brookings India; Mr. Nimesh Kampani, Chairman, JM

Financial Group; and Dr Surjit Bhalla, Chairman, Oxus Research & Investments

Edited Version of a Panel Discussion1

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MARCH 201443

FOCUS OF THE MONTH

etary policy to stimulate economy. He also stressed on the larger role of government in pushing through the PPP projects as the private sector finds itself in a cash crunch situation due to their stressed balance-sheets. He laid emphasis on creating adequate employment op-portunities for the rising workforce complimented by proper skill training too. Coming to the future prospects of the Indian economy, he was of the view that growth in the current fiscal year will be not very different from the previous fiscal, though we would be better-off on certain fronts, like CAD for instance.

Mr Kampani, viewed that going forward, formation of a stable government after the general elections in 2014 will be an important psychological factor for stimulating growth. According to Mr Kampani, reviving growth in medium-term would require looking at import substitu-tion, developing a robust export strategy, addressing issues in the infrastructure development and financing. For stimulating the growth in the short-run, Mr Kampa-ni advocated reduction in the interest rates for the sec-tors like automobiles and housing, which have a large multiplier effects on the other sectors of the economy. He also highlighted the importance of tourism sector in creating an impact on the other sector of economy, by creation of jobs and other indirect benefits. In conclu-sion, he said that being a capital scarce economy, there was a need to mobilise the financial savings of people in the capital market.

Dr Bhalla, highlighted the importance of low inflation and interest rates for spurring growth. He was of the view that the last 6 years have been the worst the coun-try has ever seen in terms of macroeconomic problems. But he was optimistic of the current period as inflation has now started to recede and growth in some sectors is slowly coming along. According to him, one of the main factors responsible for moderation in food prices has been the decline in the procurement costs in the last few years. Moderation in inflation will result in low-ering of interest rates by RBI, which will help in improv-ing growth, Dr Bhalla commented. He projected a 7 per cent plus GDP going forward with CPI coming down to 5.5 per cent and IIP moving up to a 5- 6 per cent range. Commenting further on the growth outlook, Dr Bhalla emphasized that “while a stable government at the centre after the elections will be crucial for the bounce back of the growth, the new government will need to focus on economic reforms and faster decision making to address the concerns”.

Moderating the session Dr Sinha, The Boston consult-ing Group, viewed that while bottoming out of growth is already happening, moving forward sustaining of the growth momentum would require a greater push for the pending reforms and improving the Incremental Capital Output Ratio (ICOR).

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ECONOMY MATTERS 44

SPECIAl FEATURE

Indian Infrastructure: Realizing the Trillion Dollar Opportunity

In order to propel growth, investment in infrastructure is the need of the hour. Given the significance of push-ing infrastructure investment in the economy, one of the sessions in CII’s AGM 2014 was dedicated to this topic. The panel discussants were Dr Rakesh Mohan, Ex-ecutive Director, International Monetary Fund; Mr Anil Swarup, Additional Secretary & Chairman, PMG, Cabi-net Secretariat; Mr Ashok Lavasa, Secretary, Ministry of Civil Aviation; Dr Vishwapati Trivedi, Secretary, Ministry of Shipping; Mr Pradeep Kumar Sinha, Secretary, Min-istry of Power, moderated by Mr Vinayak Chatterjee, Chairman, Feedback Infra Private Limited. This article is based on that session.

Dr Mohan, said that to get the Indian growth story to the growth rate of 7-8 per cent, total investments will need to increase to almost 40 per cent of GDP of which around 10 per cent of GDP would be in infrastructure.

Speaking at the session, Mr Swarup, Cabinet Secretary, said that there are a lot of people who are imagining, planning and thinking about India and now we need to start “Doing India”. Mr Swarup iterated that since the establishment of the Project Management Group (PMG), 6 lakh crores worth of projects, which were

stuck at various stages of the process of clearances, have been cleared for implementation.

Mr Lavasa, mentioned that Civil Aviation has three pe-culiar features, one of these being that airport construc-tion and services provided by airlines are equal partners in Civil Aviation and both these parts provide a good opportunity for private partnerships. He further high-lighted the paradigm change in the Civil Aviation Sec-tor over the past decade as the airlines have discovered immense value at the Bottom-of-the-pyramid, and this shift has resulted in quantum growth of the sector.

Dr Trivedi, said that there was no shortage of entre-preneurship or funds for the shipping sector but there was a need to unshackle the economy by creating an enabling environment by getting the right people in the right place. The final panelist for the session, Mr Sinha, started his speech by stating that if the growth of economy remains as it is, India will require importing more than 83 per cent of its energy needs by 2045. For meeting the highly under-supplied power need, there is an urgent need for private participation in power generation, transmission and more importantly power distribution sector.

(L-R) Mr Anil Swarup, Additional Secretary & Chairman, PMG, Cabinet Secretariat; Dr Vishwapati Trivedi, Secretary, Ministry of Ship-

ping; Dr Rakesh Mohan, Executive Director, IMF; Mr Pradeep Kumar Sinha, Secretary, Ministry of Power, and Mr Ashok Lavasa, Secretary,

Ministry of Civil Aviation

Edited Version of a Panel Discussion

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MARCH 201445

ECONOMY MONITOR

GDP GROWTH (y-o-y%)

WPI INFLATION (y-o-y%)

INDEX OF INDUSTRIAL PRODUCTION (IIP) (y-o-y%)

US GDP Growth Japan GDP Growth

IndustryOverall GDP

Overall

Euro Area GDP Growth China GDP Growth

Agriculture Services

Primary Fuel Manufacturing

General Manufacturing Electricity Mining

4Q12 1Q13 2Q13

7.97.7 7.5 7.8

2.01.3

2.5

-1.2

-0.3

4Q12 1Q13 2Q13

-0.3

0.11.2

4Q12 1Q13 2Q13

4.84.4

3QFY13 4QFY13 2QFY14

1.4

3QFY13 4QFY13 1QFY14

0.2

6.96.76.6

6.0

3QFY13 4QFY13 1QFY14

4Q12 1Q13 2Q13 3Q13

Oct-13

14.6

Oct-13

10.5

Oct-13

2.9

Oct-13

Sep-13

12.9

GLOBAL GDP (y-o-y%)

3Q13

1.6

2.71.4

3.6

-1.0

-0.6

3Q13 3Q13

2.4

4.7

1QFY14

3.6

2QFY14

3QFY13 4QFY13 1QFY14 2QFY14

2QFY14

7.2

Nov-13 Nov-13

11.1

Nov-13 Nov-13

3.0

-1.2

Oct-13

-2.7 -2.9

7.7

4Q13

4.7

6.3

Dec-13 Dec-13

10.9

Dec-13

2.8

Dec-13

-1.3

Nov-13

-0.7

6.3

0.7

2.0

4Q13

1.0

4Q13

3QFY14

4.4 4.4

0.8

2.7

4.6

3QFY14

1.7

2.7

2.3

-0.7

3QFY14

7.6

3QFY14

7.5

6.4

15.3

10.8

Jan-14 Jan-14

8.7

Jan-14

2.8

Jan-14

0.1

Dec-13

-1.3

1.3

7.5

1.7

0.5

4Q13

5.0

Feb-14

6.8

Feb-14

10.0

Feb-14

2.8

Feb-14

-0.2

Jan-14

-1.2

Sep-13 Oct-13 Nov-13 Dec-13 Jan-14

6.5

Sep-13 Oct-13 Nov-13 Dec-13 Jan-14

0.7

Sep-13 Oct-13 Nov-13 Dec-13 Jan-14

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ECONOMY MATTERS 46

ECONOMY MONITOR

Exports (%) Imports (%) Trade Deficit (US$ Bn) Current Account Deficit (US$ Bn) Avg Exchange Rate (Rs/US$)

Source: RBI, CSO, SEBI, Office of Economic Advisor, Bureau of Economic Analysis, Euro Stat, Bank of Japan, National Bureau of Statistics

MONETARY VARIABLES (%)

CAPITAL FLOWS (US$ billion)

OTHER IMPORTANT VARIABLES (y-o-y%)

Non-Food Credit Growth (y-o-y%) M3Growth (y-o-y%) Cash Reserve Ratio (%)

Net FII Flows (US$ billion) Net FDI Flows (US$ billion) Forex Reserves (US$ billion) ECB flows (US$ billion)

4.00 4.00 4.00 4.00 4.00

10.5

Oct-13

32.6

18.1

21.8

3QFY13 4QFY13 1QFY14

61.9

16.8

14.1

3.2

Sep-13

281.3

Oct-13

3.3

1.9

3.54.6

EXTERNAL ACCOUNT

62.6

Oct-13 Nov-13 Nov-13

9.2

5.2

2QFY14

62.1

Nov-13

14.6

Oct-13 Nov-13

14.5

Oct-13 Nov-13

0.3

Nov-13

1.8

Oct-13

291.3

Nov-13

1.8

3.3

-15.8

Dec-13

10.1

Dec-13

62.3

14.8

Dec-13

Dec-13

14.9

Dec-13

3.5

Dec-13

1.9

Nov-13

295.7

Dec-13

13.5

-14.5

5.8

-16.4

3.8

-18.1

Jan-14

9.9

Jan-14

61.0

Jan-14

Jan-14

14.6

Jan-14

14.5

Jan-14

2.2

Dec-13

2.4

Jan-14

291.2

4.2

3QFY14

Repo Rate (%)

7.75

Dec-13

8.00

Jan-14

8.00

Feb-14

Core Sector Growth (y-o-y%) Cement Production Growth (y-o-y%) Steel Production Growth (y-o-y%)Commercial Vehicles

Production Growth (y-o-y%)

-22.6

Aug-13 Sep-13 Oct-13

-19.6

-28.6

-0.6

Oct-13

1.0

3.5

1.7

Nov-13

4.23.9

Nov-13

-15.2

-25.3

Dec-13Dec-13

2.1

1.1

4.8

-3.7

-17.1

Feb-14

8.1

Feb-14 Feb-14 March-14

14.9

Feb-14

14.5

Feb-14

8.008.00

Mar-14 Apr-14 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14

2.0

5.2

Feb-14 Mar-14

0.8

Jan-14

294.4

Feb-14 Oct-13 Nov-13 Dec-13 Jan-14Sep-13

1.6

4.5

Jan-14 Feb-14

1.52.3

Oct-13 Nov-13 Dec-13 Jan-14 Feb-14

3.1 3.4

Oct-13 Nov-13 Dec-13 Jan-14 Feb-14

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MARCH 201447

ECONOMY MONITORECONOMY MONITOR

Agriculture Industry Services

Source: RBI, CSO, SEBI, Office of Economic Advisor, Bureau of Economic Analysis, Euro Stat, Bank of Japan, National Bureau of Statistics

ANNUAL GDP GROWTH: DEMAND-SIDE (y-o-y%)

RATIO OF SAVINGS & INVESTMENT TO GDP

ANNUAL WPI INFLATION (y-o-y%)

GDP at Market Prices Private Consumption Expenditure Govt Consumption Expenditure Gross Fixed Investment

Gross Capital Formation Rate (%) Gross Savings Rate (%) Financial Savings Rate (%) Savings in Physical Assets (%)

Overall WPI Primary FuelManufacturing

FY 10 FY 11 FY 12

36.5

12.0 13.513.2 13.2

15.8

3.8

12.7

ANNUAL GDP GROWTH: SUPPLY-SIDE (y-o-y%)

34.310.1

8.1 11.0

FY 13

9.9

14.8

17.8

35.5

7.0

8.9

9.8

8.6

0.8

5.0

1.44.6

34.8

7.1

7.4

GDP at Factor Cost

8.9

FY 10 FY 11

8.6

FY 12

6.7

4.5

FY 13

4.9

FY 14 (AE) FY 10 FY 11 FY 12 FY 13 FY 14 (AE) FY 14 (AE)

9.2

7.67.8

1.0 0.7

FY 10 FY 11 FY 12 FY 13 FY 14 (AE)

10.59.7

6.67.0 6.9

8.5

10.3

6.6

4.7 4.6

FY 10 FY 11 FY 12 FY 13 FY 14 (AE)

7.48.7

9.3

5.0

4.1

FY 10 FY 11 FY 12 FY 13 FY 14 (AE)

13.9

5.8

6.9

6.2

5.5

FY 10 FY 11 FY 12 FY 13 FY 14 (AE)

7.711.0

12.3

0.80.2

FY 10 FY 11 FY 12 FY 13 FY 14 (AE)

FY 10 FY 11 FY 12 FY 13FY 09

36.5

33.7

32.0 31.3 30.1

FY 10 FY 11 FY 12 FY 13FY 09

33.7

FY 10 FY 11 FY 12 FY 13FY 09 FY 10 FY 11 FY 12 FY 13FY 09

9.6

FY 10 FY 11 FY 12 FY 13FY 09

9.8

FY 10 FY 11 FY 12 FY 13FY 09

12.311.6

14.0

10.3

-2.1

FY 10 FY 11 FY 12 FY 13FY 09

5.7

6.2

2.2

FY 10 FY 11 FY 12 FY 13FY 09

7.3

5.4

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ECONOMY MATTERS 48

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