Economy Matters - July-August 2014

US economy is slowly but steadily limping towards recovery. Growth in economic activity
has rebounded in recent months. Labor market indicators have generally shown further im-provement.
Household spending appears to be rising moderately and business fixed invest-ment
has resumed its advance, while the recovery in the housing sector has remained slow.
Despite acknowledging the rebound in growth, the US Federal Reserve has made it amply
clear that it has no plans to raise interest rates anytime soon though it announced a further
reduction to the amount of money it is injecting into the economy through monthly bond
purchases. The other major ‘mover & shaker’ of the world economy- China, has been caught
on the crossroads of growth and reforms. The second quarter GDP growth witnessed a mar-ginal
uptick, though problems concerning the asset quality of the banks have kept the poli-cymakers
1
FOREWORD
JULY - AUGUST 2014
worried.
On the domestic front, a string of poor economic data has raised the concerns on durability
of the economic recovery. IIP growth slowed to 3.4 per cent in June compared to an average
4.2 per cent growth in the previous two months.However, its overall performance in Q1FY15
is signaling a gradual recovery. Retail inflation rose in July driven by a faster price rise in food
articles, especially vegetables, fruits, and pulses. However, in some good news, upside risks
to inflation from a sub-normal monsoon has moderated with rainfall deficiency narrowing
sharply. Moreover, the latest round of RBI inflation expectations survey (Q1FY15) indicates
that the number of respondents expecting an increase in inflation over the coming three
months as well as one year has declined. This, we feel, should give RBI the necessary leg-room
to cut rates, going forward.
Textiles have an overwhelming presence in the socio-economic scenario in India. The sector
contributes about 14 per cent to industrial production, 4 per cent to the gross domestic prod-uct
(GDP), and 17 per cent to the country’s export earnings. It provides direct employment to
over 35 million people. The textiles sector is the second largest provider of employment after
agriculture. Thus, the growth and all round development of this industry has a direct bear-ing
on the improvement of the economy of the nation. However, this age-old industry in the
country is facing many challenges for its survival and sustainability too. In this context, we
cover this crucial sector in this month’s ‘Focus of the Month’, providing an in-depth analysis
of the sector by experts.
Chandrajit Banerjee
Director General, CII

5
EXECUTIVE SUMMARY
JULY - AUGUST 2014
Global Trends
The US economy rebounded with a growth rate of 2.4
per cent on a yearly basis, in the second quarter of the
current fiscal year, as compared to 1.8 per cent in the
same quarter in the previous year, sending out posi-tive
signals to the rest of the world. The surge reflected
positive contributions from personal consumption ex-penditures,
private inventory investment, exports, non-residential
fixed investment, state government spend-ing,
and residential fixed investment. In another major
developed economy, China, the gross domestic product
witnessed a marginal improvement to 7.5 per cent in
the second quarter of the current year, compared with
7.4 per cent in the first quarter. While agricultural pro-duction
showed good momentum, industrial produc-tion
grew steadily.
Domestic Trends
The fiscal deficit in the first quarter of 2014-15 (1QFY15
henceforth) stood at Rs 2.97 lakh crore which translates
into 56.1 per cent of the budgeted figure for the entire
financial year. The jump in fiscal deficit in the 1QFY15 was
underpinned by rise in expenditure growth and con-traction
in revenue growth during the said quarter. In
some more sombre news for the economy, after grow-ing
at a modest pace in the last two months, industrial
production growth eased to 3.4 per cent in June 2014.
WPI based inflation, however provided some cheer as it
slowed down to a five-month low of 5.2 per cent in July
2014 from 5.4 per cent in the previous month, at a time
when retail inflation (as measured by CPI) accelerated.
Reserve Bank of India (RBI) kept the key policy rates un-changed
in its third bi-monthly monetary policy review
held on August 5, 2014, citing the upward risks still hov-ering
over inflation in the wake of sub-par monsoons.
Corporate Performance in 1QFY15
Indian firms posted an impressive performance in the
first quarter of the current fiscal (1QFY15), as net sales
and profit rose at the fastest pace in seven quarters,
spurring investor optimism that the worst is over for
corporate earnings. The net sales of companies (manu-facturing
plus services) in the first quarter expanded by
10.0 per cent on a y-o-y basis, up from 5.7 per cent in
the comparable period last year. Our analysis is based
on the financial performance of 1613 companies (840
Manufacturing and 773 Services and excluding oil & gas
companies), using a balanced panel, extracted from the
Ace Equity database. On an aggregate basis, growth in
PAT improved significantly to 25.4 per cent in the first
quarter as compared to contraction to the tune of 4.5
per cent in the same quarter of last year. This was driv-en
by sharp improvement in PAT growth of both manu-facturing
and services sector.
Sector in Focus: Jobless Growth
and its Implications
With almost 270 million people below the poverty line,
India confronts the huge task of reviving growth and
raising incomes. Its best asset is its human talent, but
to effectively deploy this will require concerted effort
at creating jobs and building productivity levels. India’s
demographic dividend is a historic opportunity for de-velopment.
A number of areas would need to be ad-dressed
to create adequate and productive jobs for the
expected growth in workforce, estimated at 10 million
annually. The key would be to boost growth to 8 per
cent plus growth trajectory and revive investments.
Above all, it is important to re-examine labour laws and
regulations, many of which are misaligned with the cur-rent
economic environment and discourage the growth
of employment in the organised sector.
Focus of the Month: Rejuvenat-ing
the Textiles Sector
Textiles is one of the most important sectors of Indian
economy, in terms of, its contribution to industrial out-put,
employment generation, and the export earnings
of the country. India’s dominance in global textiles can
be gauged from the fact that the country is second larg-est
producer of fibre in the world. It is also counted
among the leading textile industries in the world. Abun-dant
availability of raw materials such as cotton, wool,
silk and jute and skilled workforce has made India a ma-jor
sourcing hub. The textile industry in India tradition-ally,
after agriculture, is the only industry that has gen-erated
huge employment for both skilled and unskilled
labor in textiles. The textile industry continues to be the
second largest employment generating sector in India.
Going forward, the Indian textile industry is poised for
strong growth, given the strong domestic consump-tion
as well as export demand. However, this age-old
industry in the country is facing many challenges for its
survival and sustainability too. In this context, we cover
this crucial sector in this month’s ‘Focus of the Month’,
providing an in-depth analysis of the sector by sectoral
experts.

GLOBAL TRENDS
Sliver of Hope amidst Concerns for US
The US economy rebounded with a growth rate of
2.4 per cent on a yearly basis, in the second quarter
of the current fiscal year, as compared to 1.8 per cent
in the same quarter in the previous year, sending out
positive signals to the rest of the world. On a quarterly
basis, the headline figure which stood at 4.0 per cent
growth came as a breather after a contraction of 2.1
per cent in the previous quarter this year, even more
so since, the latest batch of disappointing news from
East to West has reinforced the view of sluggish global
growth and increased the risk weighing on the U.S. re-covery.
The surge in GDP in the second quarter reflect-ed
positive contributions from personal consumption
expenditures, private inventory investment, exports,
non-residential fixed investment and state government
spending.
Growth in real personal consumption expenditures
stood at 2.3 per cent in the second quarter, remaining
at same levels as in the second quarter of 2013. Expendi-ture
on durables witnessed softening of growth to 6.9
per cent, as against 7.5 per cent in the same quarter last
year. Non-durables showed positive improvement in
ECONOMY MATTERS 6
growth of expenditure to 2.0 per cent, compared with
an increase of 1.4 in the second quarter previous year.
Expenditure on services witnessed a slight moderation
in growth to 1.7 per cent compared with a growth of 1.8
per cent previously.
Growth in real non-residential fixed investment im-proved
hugely to 5.7 per cent in the second quarter,
compared with a growth of 1.9 per cent in the second
quarter last year. This was largely led by investment in
structures which grew massively by 8.0 per cent, com-pared
with a contraction of 3.3 per cent previously. In-vestment
in equipment too rose by 6.1 per cent, in con-trast
to a growth of 3.8 per cent in the second quarter
in 2013. Real residential fixed investment witnessed a
colossal drop, as the growth stood at a meager 0.9 per
cent, in contrast to a growth of 15.2 per cent previously.
While the federal government consumption expendi-tures
and gross investment growth improved in com-parison
on a yearly basis, it continued to witness a con-traction
standing at -3.2 per cent as compared to -5.0
per cent previously. Both defense and non-defense
components added to this de-growth. The improve-ment
in growth of state and local government con-sumption
expenditures and gross investment to 0.9 per
cent, as compared with 0.4 per cent in the same quar-ter
last year, could only partially offset the deficiency in

7
GLOBAL TRENDS
JULY - AUGUST 2014
federal expenditure and hence the net government ex-penditure
continued to see a contraction.
The marginal increase in growth of exports of goods
and services to 3.5 per cent in the second quarter on
a yearly basis, on the back of increase in export of in-dustrial
supplies and consumer goods, in contrast to a
growth of 2.2 per cent in the second quarter of 2013,
was however counterpoised by imports, whose growth
stood at 3.9 per cent, with major contributions from
food and capital goods, as compared to growth of 1.0
per cent previously.

ECONOMY MATTERS 8
GLOBAL TRENDS
Labor markets witnessed a rosy scenario as the total
nonfarm payroll employment increased by 209,000 in
July 2014. Job gains occurred in professional and busi-ness
services, manufacturing, retail trade, and construc-tion.
The unemployment rate stood at 6.2 per cent in
July 2014. Over the past 12 months, the unemployment
rate and the number of unemployed persons have de-clined
by 1.1 per cent and 1.7 million, respectively. The
employment-population ratio, at 59.0 per cent, has
edged up by 0.3 per cent over the past 12 months.
Professional and business services added 47,000 jobs
in July 2014 and 648,000 jobs over the past 12 months.
Manufacturing added 28,000 jobs in July 2014. Job gains
occurred in motor vehicles and parts (+15,000) and in
furniture and related products (+3,000). Over the prior
12 months, manufacturing have added an average of
12,000 jobs per month, primarily in durable goods in-dustries.
In July 2014, retail trade employment rose
by 27,000. Over the past year, retail trade has added
298,000 jobs. Employment continued to trend up in au-tomobile
dealers, food and beverage stores, and gen-eral
merchandise stores.
Employment in construction increased by 22,000 in July
2014. Within the industry, employment continued to
trend up in residential building and in residential spe-cialty
trade contractors. Over the year, construction has
added 211,000 jobs. Social assistance added 18,000 jobs
over the month and 110,000 over the year.
Mining added 8,000 jobs in July 2014, with the bulk
of the increase occurring in support activities for min-ing
(+6,000). Over the year, mining employment has
risen by 46,000. Employment in leisure and hospitality
changed little in July 2014 but has added 375,000 jobs
over the year, primarily in food services and drinking
places. Employment in other major industries, including
wholesale trade, transportation and warehousing, in-formation,
financial activities, and government, showed
little change in July.

9
GLOBAL TRENDS
JULY - AUGUST 2014
While the Federal Reserve has acknowledged that
growth has rebounded, it has made clear that it has no
plans to raise interest rates anytime soon. It described
the chances of faster growth as roughly even with the
chances that the expansion would slow down. The
U.S. Central Bank announced a further reduction to
the amount of money it is injecting into the economy
through monthly bond purchases. The Federal Reserve
too has said it would continue to ease back on its stimu-lus
efforts.
Growth in economic activity has rebounded in recent
months. Labor market indicators have generally showed
further improvement. The unemployment rate, though
lower, remains elevated. Household spending appears
to be rising moderately and business fixed investment
resumed its advance, while the recovery in the hous-ing
sector remained slow. Fiscal policy is restraining
economic growth, although the extent of restraint is
diminishing. The FOMC intends to take a balanced ap-proach
consistent with its longer-run goals of maximum
employment and inflation of 2 per cent. The Committee
currently anticipates that, even after employment and
inflation are near mandate-consistent levels, economic
conditions may, for some time, warrant keeping the
target federal funds rate below levels the Committee
views as normal in the longer run.
While concerns abound, the latest growth figures are
a positive signal. As the Euro-zone and Asian econo-mies
struggle with dismal growth statistics, the United
States seems steady enough to be at helm and ferry the
rest of the world to recovery.

China on Crossroads between Growth and Reforms
ECONOMY MATTERS 10
GLOBAL TRENDS
In the first six months, the growth in investment in fixed
assets (excluding rural households) softened as the in-crease
of 16.3 per cent was 0.3 per cent lesser than that
in the first quarter. Specifically, the investment in the
state-owned and state holding enterprises saw a rise of
14.8 per cent; growth in private investment improved to
20.1 per cent, accounting for 65.1 per cent of the total
investment. The investment in the primary industry was
up by 24.1 per cent; in the secondary industry by 14.3 per
cent; and the tertiary industry saw a growth in invest-ment
of 19.5 per cent.
While the economic situation in China has sent out
encouraging signals, complicated external and inter-nal
conditions have made stabilization of economic
growth, reforms and restructuring major concerns for
the Chinese government lately.
The gross domestic product of China witnessed a mar-ginally
improved year-on-year growth of 7.5 per cent in
the second quarter of the current year, compared with
7.4 per cent in the first quarter. While agricultural pro-duction
showed good momentum, industrial produc-tion
grew steadily.

11
GLOBAL TRENDS
JULY - AUGUST 2014
In July 2014, China’s manufacturing purchasing man-agers
index (PMI) stood at 51.7 per cent, 0.7 per cent
higher over last month, increasing for 5 consecutive
months, indicating continued momentum of growth in
China’s manufacturing sector. The PMI of large-sized
enterprises was 52.6 per cent, an increase of 1.1 per cent
month-on-month; that of medium-sized enterprises was
50.1 per cent, a slight moderation by 1.0 per cent month-on-
month; that of small-sized enterprises was 50.1 per
cent, up by 1.7 per cent month-on-month. Production
index stood at 54.2 per cent rising to a high point of this
year, with an increase of 1.2 per cent month-on-month.
New orders index was 53.6 per cent, which increased
0.8 per cent month-on-month. New export orders in-dex
was 50.8 per cent, which went up by 0.5 per cent
month-on-month. Production and business activities
expectation index was 55.3 per cent, witnessing an in-crease
of 0.5 per cent month-on-month.
Sales in domestic markets enjoyed a steady growth.
In the first half year, the total retail sales of consumer
goods saw a growth of 10.8 per cent, 0.1 per cent faster
than that in the first quarter.
Imports and exports reversed to positive growth. Ex-ports
in July 2014 jumped 14.5 per cent from a year earli-er
- the fastest pace in 15 months, doubling from 7.2 per
cent in June and roundly beating market expectations.
However, imports contracted 1.6 per cent year-on-year,
indicating soft domestic demand and a downward pres-sure
on growth. In the first half year, the total value of
exports was up by 0.9 per cent; the total value of im-ports
saw an increase of 1.5 per cent. The trade balance
was 630.6 billion yuan or 102.9 billion dollars.
The growth of consumer price remained stable. In July
2014, the consumer price index went up by 2.3 per cent
year-on-year. The prices grew by 2.3 per cent in cities
and 2.1 per cent in rural areas. The food prices went up
by 3.6 per cent, while the non-food prices increased 1.6
per cent. The prices of consumer goods went up by 2.2
per cent and the prices of services grew by 2.5 per cent.
On average from January to July, the overall consumer
prices were up by 2.3 per cent over the same period of
the previous year. The month-on-month change of con-sumer
prices was up by 0.1 per cent, of which, prices
increased 0.1 per cent in cities and remained at the same
level in rural areas. The food prices went down by 0.1
per cent, while the non-food prices went up by 0.1 per
cent. The prices of consumer goods decreased 0.1 per
cent, and the prices of services went up by 0.5 per cent.

ECONOMY MATTERS 12
GLOBAL TRENDS
Residents’ income continued to increase. In the first
half year, the per capita cash income of rural and urban
residents went up by 9.8 and 7.1 per cent respectively.
The national per capita disposable income stood at
10,025 yuan, rising by 8.3 per cent.
Structural adjustment has achieved stable progress.
The industrial structure continued to be optimized. In
the first half year, the value of the tertiary industry ac-counted
for 46.6 per cent of GDP, 1.3 per cent higher
than the same period last year, 0.6 per cent higher than
that of the secondary industry. The structure of domes-tic
demand was further improved. In ¬the first half year,
the final consumption expenditure accounted for 52.4
per cent of GDP, 0.2 per cent point higher than the same
period last year. The income gap between urban and ru-ral
households was further narrowed. In the first half
year, the real growth of the per capita cash income of
rural households was 2.7 per cent higher than the per
capita disposable income of urban households. The per
capita income of urban households was 2.77 times of
the rural households, 0.06 less than that of the same
period last year. Energy conservation and consumption
reduction continued to make new achievements. In the
first half year, the energy consumption per 10,000 yuan
of GDP decreased by 4.2 per cent.
Money supply maintained a steady growth. By the end
of June, the balance of broad money saw a year-on-year
growth of 14.7 per cent; the balance of narrow money
was up by 8.9 per cent; and the balance of cash in cir-culation
saw a rise of 5.3 per cent. To revitalize a slow-ing
economy, Beijing in recent months has adopted
“mini-stimulus” measures such as loosening credit for
rural banks, expanding loans to smaller borrowers and
reducing fees and taxes for businesses.
China’s rapid growth has been sustained by heavy reli-ance
on capital spending and credit and, while this has
provided a welcome lift to the global economy, growth
prospects are now threatened by declining efficiency
of investment, a significant build-up of debt, income
inequality and environmental costs. The challenge is to
shift gears, reduce the vulnerabilities that have built up,
and transition to a more sustainable growth path. Key
reforms include further strengthening regulation and
supervision, freeing up bank deposit interest rates, in-creasing
reliance on interest rates as an instrument of
monetary policy, and eliminating implicit guarantees
across the financial and corporate landscape
China’s economic stature, its newly accumulated eco-nomic
assets and its transition to middle-income eco-nomic
status are real. The achievement is also now a
reality that Chinese policymakers have to face as they
struggle to stay on course in guiding the economy
through middle-income to OECD advanced country liv-ing
standards over the next two decades or so. With a
GDP growth rate that has slipped below the average
10 per cent at which the economy barrelled along for
more than three decades, China faces more and more
questions about how its leadership and policymaking
authorities should manage the next phase of the coun-try’s
economic development.
Three problems currently plague the Chinese economy.
The first is the slow global recovery and negative ef-fects
of previous stimulus policies that generated over-investment
and capacity. The second is a growth model
that no longer attacks the burning problems of the time,
such as over-investment and income inequality. The
third is steering a way through the middle-income trap
challenge. Only the first of these is cyclical in character.
The second two are structural and underline the chal-lenge
of maintaining higher growth potential through
lifting productivity as the supply of cheap labour dries
up. Long-term growth cannot occur via fiscal stimulus,
which will create more zombie firms, inhibit productiv-ity,
profitability and job creation in viable firms and de-liver
white elephant public investment projects.

13
DOMESTIC TRENDS
India’s Oil Economy
JULY - AUGUST 2014
India’s significant dependence on oil makes it the
fourth largest oil consumer in the world. However,
India is not self sufficient in oil production and relies
heavily on imports. At present India imports about 80
percent of its oil needs. In the first quarter of the cur-rent
fiscal year, India has already imported 48 million
tons of crude oil worth US$36.4 billion as compared to
total oil imports of 189 million tons in fiscal year 2013-
14. From the chart below, we can see that over the last
few years, the quantity of crude oil imports as well as
the oil import bill has stabilized a bit because of some
stability in the international crude oil prices. However,
any supply disruption in any country or any global risk
that tends to raise international crude prices creates ex-treme
repercussions for India.

ECONOMY MATTERS 14
DOMESTIC TRENDS
Recent Geo-Political Tensions have
Raised Concerns
India’s dependence on oil imports is markedly skewed
towards the Middle East, as India imports more than 60
per cent of total oil import from this region.
The recent geo-political tensions in Iraq raised concerns
regarding the continuity of economic recovery in India
as Iraq accounts for about 12 per cent of India’s total oil
imports and historically the Indian economy has been
Impact of Oil Prices on the Economy
The Indian economy is so heavily dependent on oil that
any change in global oil prices creates significant policy
implications for the economy. It is evident from the ta-ble
below that the slowdown in India’s growth in the
last three years has also coincided with an increase in in-ternational
crude oil prices. This has also been associat-highly
sensitive to any changes in oil prices. As of mid-
June, militants had seized an important oil field in the
northern region of Iraq, and were slowly progressing
towards the major oil fields in the southern region- caus-ing
oil prices to shoot up to US$115 per barrel. However
over time, with no apparent risks to the southern Iraq
oil fields and resumption of oil supplies from Libyan oil
fields, oil prices steadily declined to US$104 per barrel,
before witnessing renewed volatility on recent news re-garding
US airstrike on Iraq.
ed with higher inflation, higher fiscal deficit (on account
of higher subsidies) and higher current account deficit.
In the event of a rise in fuel prices, the government can
choose to either pass on the burden to the consumer
or bear the burden itself through an increase in subsidy
expenses. However, no matter who shoulders the bur-den,
when global oil prices increase, there is definitely a
negative impact on the economy.

15
DOMESTIC TRENDS
JULY - AUGUST 2014
Any change in price of oil impacts domestic economy
through multiple channels as highlighted below:
• Impact on Current Account Deficit (CAD)
Any change in oil prices leads to a subsequent
change in our import bill as oil imports account for
about 30 per cent of our total imports. As per our
calculations, for every US$5 per barrel increase in
international crude oil price, there is a subsequent
US$7.3 billion increase in our import bill for that par-ticular
year. If we assume a constant exchange rate,
this would imply that our oil import bill would in-crease
from US$144.7 billion in 2013-14 to US$159.6
billion in 2014-15.
Typically, when there is upward pressure on the
trade and current account deficits, the domestic
currency tends to weaken and foreign investment
inflows recede, leading to further pressure on the
balance of payments. Currency depreciation could
pose further problems for the fiscal deficit and for
the under-recoveries borne by the public sector Oil
Marketing Companies (OMCs).
On similar lines, any decline in international crude
oil prices would be beneficial for our import bill
hence will mean lower stress on our current ac-count
deficit, domestic currency and fiscal deficit.
• Impact on Fiscal Deficit (FD)
Higher oil prices also impact the government fi-nances
as fuels such as diesel, LPG and kerosene
are sold at fixed rates by public sector OMCs.
If oil prices increase internationally, the govern-ment
can either raise retail prices and pass the
entire burden onto the consumer or keeps the
retail prices fixed and share the losses from OMC
under-recoveries. If the government decides to
keep the retail prices of diesel, LPG and Kerosene
unchanged, then public sector OMC’s will suffer
losses from selling these fuels at a subsidized rate.
To make up for the losses of the OMC’s, the under-recoveries
are shared among the OMC’s, upstream
oil companies – ONGC, Oil India Limited (OIL) and
GAIL – and the government in such a way that the
government and upstream oil marketing compa-nies
bear a significant proportion of these losses
(under-recoveries). Usually each year, the govern-ment
contributes more than 40 per cent and the
upstream companies share more than 30 per cent,
with the rest being borne by the OMC’s.
According to PPAC estimates, for every US$1 per
barrel increase in crude oil prices, the government
has to shell out an extra US$733 million in the form
of under-recoveries. This burden of under-recov-eries
puts an upward pressure on the fiscal deficit
as oil subsidies constitute ~32 per cent of the total
subsidy bill.
The Petroleum Planning and Analysis Cell (PPAC)
has also estimated that for every INR 1 per USD de-preciation
in the rupee, there is an INR 8,000 crore
(US$1.3 billion) increase in our under-recoveries.
To counter this huge build-up in under-recoveries
the government is steadily moving towards de-regulating
diesel prices as well, after deregulating
petrol prices in 2002. From the table below we can
see that diesel forms a big chunk in the total under-recoveries
and to counter this, the government has
progressively raised diesel prices each month by
about 60 paise, based on the recommendations of
Kirit Parekh committee. It is expected that by the
end of this year diesel prices will be at their interna-tional
level, thus generating no under recoveries, if
crude prices remain stable.
Additionally, from the below table, we can expect
that OMC under-recoveries in FY 2014-15 will be
lower than the previous year levels, even if crude
oil prices average at US$110 per barrel through the
year. The table shows that till Q1: 2014-15, the total
under-recovery bill was INR 286 billion and diesel
under-recoveries had declined considerably com-pared
to last year. Hence, the continuous decline in
diesel under-recoveries due to an increase in retail
prices would help us achieve a lower fuel subsidy
bill this year, even if global oil prices average at
US$110 per barrel in FY 2014-15.

ECONOMY MATTERS 16
DOMESTIC TRENDS
• Impact on Inflation
In the event of an increase in international crude
prices, if the government decides to pass on the
burden onto the consumers then higher oil prices
feed into inflation through both, a direct increase in
fuel prices and an indirect increase in prices of vari-ous
other commodities, via an increase in transpor-tation
cost. Even if it decides to bear the burden it-self,
persistently higher subsidies and fiscal deficits
can be inflationary. As per RBI’s estimates, a US$10
per barrel increase in crude oil price, if sustained,
can push up inflation by 1 per cent directly, and by
up to 2 per cent if indirect effects are taken into ac-count.
On the contrary, if international crude oil prices fall,
then government transmits this to the consumers
in the form of a cut in fuel prices, thus reducing in-flationary
pressures directly. Also, the fuel subsidy
bill shrinks, which translates into lower fiscal deficit
and aides indirectly in inflation management.
• Impact on Growth
Inflationary pressures play a major role in direct-ing
an economy’s growth trajectory. High inflation
can force the country’s Central Bank to tighten its
monetary policy thus squeezing both consumer
demand and investment demand, hence impact-ing
economic growth. While on the other hand low
inflation, gives the Central Bank the freedom to
pursue pro-growth policies thus generating invest-ment
demand.
Outlook is Mixed
With the domestic economy on the path of recovery and oil prices receding in recent weeks (owing to uninter-rupted
oil supplies from southern Iraq and restoration of oil production in Libya’s largest oil field, El Shahara) there
are no immediate concerns to the domestic growth. However, given the volatile nature of the global oil prices and
the historical performance of the domestic economy in times of sudden increases in international crude prices, it is
very difficult to define the outlook for the country. It is important to shield the economy from any such crisis in the
future and this would require reducing our dependence on oil imports. In the short term, oil importing companies
would have to diversify the source of crude away from the Middle East while in the medium term it is imperative
that we expedite the exploration of newer oil fields to support domestic production of crude oil and natural gas.
(Contributed by: Ms. Bidisha Ganguly, Principal Economist, CII)

High Fiscal Deficit in 1QFY15 Raises Worries
17
DOMESTIC TRENDS
JULY - AUGUST 2014
The fiscal deficit in the first quarter of 2014-15 (1QFY15
henceforth) stood at Rs 2.97 lakh crore which translates
into 56.1 per cent of the budgeted figure for the entire
financial year. The jump in fiscal deficit in the 1QFY15 was
underpinned by rise in expenditure growth and contrac-tion
in revenue growth during the said quarter. In y-o-y
terms, fiscal deficit recorded a growth of 13.3 per cent
in the 1QFY15 as compared to 38 per cent growth in the
same quarter last year. To be sure, while presenting the
It is interesting to see how the monthly fiscal numbers in
the current year stack up as compared to the situation
in the last year. In the below graph, it becomes amply
clear that fiscal deficit in the first three months of 2014-
15 has been on the higher side as compared to the last
year. And if the trend observed last year, wherein the
fiscal deficit was progressively increased in the subse-quent
months of the year, is repeated this year, the 4.1
first budget of the newly elected NDA government in
July 2014, Finance Minster (FM), Mr Arun Jaitley had laid
stress on fiscal prudence, lowering the fiscal deficit tar-get
of 4.1 per cent of GDP for 2014-15 as compared to
4.6 per cent in 2013-14. However, given the situation of
the government finances in the 1QFY15, it would be an
uphill task for the FM to meet these ambitious targets
of the current fiscal.
per cent of GDP target for fiscal deficit is clearly under
threat. The only silver lining appears to be the proposed
disinvestment programme of the government, which is
slated to begin in October 2014. To start the ball rolling,
government stake in SAIL and Coal India is expected to
be disinvested first, followed by a dozen other PSUs
identified by the Finance Ministry (see below table).

ECONOMY MATTERS 18
DOMESTIC TRENDS
The deficit crossed more than 50 per cent of its annual
target in the first quarter of the year itself mainly be-cause
of weakness in revenues. Total receipts declined
by 3.1 per cent to Rs 1.15 lakh crore during April-June
2014, which translates into only 6.4 per cent of the
budgeted estimates for the full year. This was due to
the fact that revenue receipts collection remained weak
during the first two months of the current year due to
huge refunds. Mirroring the sluggish economic scenar-io,
gross tax revenues growth too remained anemic at
3.4 per cent as compared to a healthy 11.2 per cent in
the last quarter and 4.2 per cent in the same quarter last
year. Income and service tax were the star performers
in boosting the government coffers in the first quarter.
Non-tax revenue growth remained dismal in the report-ing
quarter as well.

19
DOMESTIC TRENDS
JULY - AUGUST 2014
Expenditure rose by 8.2 per cent to Rs 4.14 lakh crore
during April-June 2014. This translates into 23 per cent
of the budgeted targets for the current year. The non-plan
spend rose by 12.9 per cent in the 1QFY15, as the
The government reduced its reliance on market bor-rowings
to finance fiscal deficit in the 1QFY15. Net mar-ket
borrowings declined by 3.2 per cent to Rs 1.71 trillion
The performance of the government finances was not
up to the mark in 1QFY15. It would need to tighten its
purse strings and boost revenue growth in order to
meet the fiscal deficit target for 2014-15. To be sure, in
order to lower the fiscal deficit to 4.1 per cent of GDP
in 2014-15, the government is betting on both revenue
and expenditure growth of 12.9 per cent as compared
former UPA government tried to clear its subsidy ar-rears
in the first two months of the year. However, plan
expenditure was kept on a tight leash as it declined by
2.6 per cent to Rs 1.12 trillion in 1QFY15.
during April-June 2014. These financed 57.3 per cent of
the fiscal deficit as compared to 67.1 per cent a year ago.
to the revised estimates for 2013-14. In order to achieve
the revenue growth target, tax revenues, which form
around 80 per cent of total revenues, need to prop
up. Moreover the nature of expenditure compression
needs to be kept in mind as trimming of capital expendi-ture
will further slow down the economic recovery pro-cess

Industrial Output Decelerates in June 2014
ECONOMY MATTERS 20
DOMESTIC TRENDS
After growing at a modest pace in the last two months,
industrial production growth eased to 3.4 per cent in
June 2014, raising doubts about the depth of recovery in
the sector. Notably, the deceleration came on the back
of a low base of last year. Moreover, reading was below
expectations with a negative surprise provided by the
consumer goods segments that contracted by 10 per
cent, its worst performance since February 2009. To be
sure, growth in consumer goods sector had moved into
the positive territory after seven consecutive months of
contraction in May 2014. The sequential momentum as
indicated by the movement in the seasonally-adjusted
month-on-month series also showed that industrial out-put
growth declined in June 2014 (from -0.4 per cent in
Notwithstanding the moderation in IIP growth in June
2014, the output of eight core industries, having a com-bined
weight of 37.90 per cent in the IIP, recorded an
increase of 7.3 per cent in June 2014, highest since Sep-tember
2013 when it recorded a growth of 8 per cent.
The output has shown an increase of 4.6 per cent for
May 2014 to -1.7 per cent in June 2014). However, the
fact that the April-June 2014 average IIP growth still
stands at a respectable 3.9 per cent is encouraging.
This clearly shows that the nascent signs of a revival in
manufacturing growth are very much evident on the
horizon. As per CII ASCON Survey, as high as 24 industry
segments registered a growth rate of more than 10 per
cent in the 1st quarter (April-June 2014) and 58 indus-try
segments continued to be in the growth trajectory
of 0-10 per cent. We expect the pace of recovery to in-crease
going forward, on the back of significant deci-sions
announced in the budget to boost manufacturing
sector.
April-June 2014. Coal production increased by 8.1 per
cent, while the electricity generation increased sharply
to 15.7 per cent in June 2014. However, the production
of natural gas and fertilizer declined by 1.7 and 1.0 per
cent respectively in June 2014.

21
DOMESTIC TRENDS
JULY - AUGUST 2014
On the sectoral front, output of the manufacturing sec-tor,
which constitutes over 75 per cent of the index,
moderated sharply to 1.8 per cent in June 2014 as com-pared
to a healthy 5.1 per cent in the previous month,
inspite of a supportive base of last year. In terms of in-dustries,
fifteen (15) out of the twenty two (22) industry
groups (as per 2-digit NIC-2004) in the manufacturing
sector showed positive growth during the month of
June 2014 as compared to the corresponding month
of the previous year. The industry group ‘Electrical ma-chinery
& apparatus n.e.c.’ showed the highest positive
growth of 69.2 per cent, followed by 10.3 per cent in
‘Luggage, handbags, saddlery, harness & footwear; tan-ning
and dressing of leather products’ and 9.8 per cent
in ‘Other non-metallic mineral products’. On the other
hand, the industry group ‘Radio, TV and communication
equipment & apparatus’ showed the highest negative
growth of (-) 62.9 per cent, followed by (-) 60.5 per cent
in ‘Office, accounting & computing machinery’ and (-)
13.4 per cent in ‘Furniture; manufacturing n.e.c. Min-ing
sector, which had turned the corner in the last cou-ple
of months, continued to post healthy growth rate,
growing by 4.3 per cent in June 2014 as compared to 2.9
per cent growth in the previous month. In line with the
core sector data, electricity sector output growth grew
at a brisk pace of 15.7 per cent in the reporting month
as compared to a healthy 6.7 per cent in the previous
month.
Amongst the use-based sectors, capital goods grew at
a robust pace of 23 per cent in June 2014 as compared
to 4.3 per cent in the previous month. The performance
of the volatile sector this year has been good as it has
grown at an average rate of 13.9 per cent as compared
to contraction to the tune of 3.7 per cent in the same
period last year. Intermediate goods, which registered
steady growth for most part of last fiscal, continued its
good performance in June 2014 too, growing by 2.7 per
cent, albeit a moderation from the previous month. In
contrast, basic goods growth galloped to 9.0 per cent
in June 2014 from 6.4 per cent in the previous month.
Consumer goods sector growth collapsed to -10.0 per
cent, pulled down by both poor showing in both its sub-components
of durables and non-durables. Consumer
durable growth declined by a sharp 23.4 per cent, while
non-durables growth stood at an anaemic 0.1 per cent
during the month. With the improvement in the cover-age
of monsoons, consumer non-durables sector is ex-pected
to do well, going forward.

Outlook
Growth in industrial production, which has been on the ascendant for the last two months, has shown a modera-tion
in June 2014 on the back of sluggish performance of the manufacturing sector. However, we would like to see
this as an aberration, as CII’s own Business Outlook Survey and the ASCON survey are showing early signs of an in-dustrial
turnaround. With proper interventions in the areas of land, labour and environment norms, manufacturing
can post a quick revival. We are already seeing a lot of pro active reforms being brought about by the government
in the labour space. Industry also looks forward to change in the areas of land acquisition and other factors that
could promote ease of doing business.
WPI Inflation Moderates, while CPI Inflation Rises in
July 2014
ECONOMY MATTERS 22
DOMESTIC TRENDS
WPI based inflation slowed down to a five-month low of
5.2 per cent in July 2014 from 5.4 per cent in the previ-ous
month, at a time when retail inflation (as measured
by CPI) accelerated. The fall in WPI inflation was mainly
due to a moderation in fuel prices, which slowed to 7.4
per cent in July 2014 from 9.0 per cent a month ago.
However, total food inflation (primary and manufactur-ing)
accelerated to 7.0 per cent from 6.2 per cent. In con-trast
to slowing WPI inflation, retail inflation quickened
to 7.96 per cent in July 2014 from 7.46 per cent in June
2014. The spike was primarily attributable to an increase
in vegetables prices, which rose 17 per cent on month-on-
month (m-o-m) basis in July-2014. In some positive
news, core CPI decelerated to 7.4 per cent in July 2014
from 7.5 per cent a month ago. However, the rise in mo-mentum
to 0.8 per cent on m-o-m basis as compared to
last six-month average of 0.5 per cent m-o-m is worry-ing.
So far, CPI inflation has remained firm and showed
little signs of treading down. However, given that the
rise is primarily attributable to a spike in vegetables
prices, it is expected to be temporary and wane out as
supply hits markets post Diwali. This will help the RBI
to reach its inflation glide path of 8 per cent by January
2015 fairly comfortably.

23
DOMESTIC TRENDS
JULY - AUGUST 2014
Primary inflation remained stable at 6.8 per cent in July
2014 from the previous month. Primary food though ac-celerated
to 8.4 per cent from 8.1 per cent in the pre-vious
month. Amongst primary food prices, the data
showed that vegetable prices fell 1.3 per cent from a
year ago. However, what’s interesting to note is that to-mato
prices were not considered while computing the
wholesale price index from April 2014 onwards, which is
rather convenient, because everybody knows that to-mato
prices have increased sharply recently. That’s not
all. Prices of green peas and cauliflower, too, have not
been considered. Hence, it’s quite possible, that veg-etable
inflation has been underestimated for the month
of July 2014. Primary non-food inflation moderated to
3.3 per cent in July 2014 from 3.5 per cent a month ago,
led by raw rubber (to -27.1 per cent from -16.9 per cent)
and fibres (to -3.2 per cent from 2.8 per cent), and partly
offset by oilseeds (to 6.4 per cent from 4.8 per cent).
Inflation in minerals continued to decelerate, standing
at 2.4 per cent from 4.4 per cent in the previous month.
Fuel inflation decelerated sharply to 7.4 per cent in July
2014 as compared to 9.0 per cent in the previous month,
benefitting from a favourable base effect, despite a 1.1
per cent increase in the index level in m-o-m terms. The
mineral oil sub-index rose to 237.7 in July 2014 from
233.8 in June 2014, reflecting a relatively broad-based
increase in rise in the subcomponents, including the in-crease
in the price of diesel by Rs. 0.5/litre and petrol by
Rs. 1.69/litre in July 2014. Under-recoveries on the retail
sale of diesel eased to Rs. 1.33/litre for the fortnight be-ginning
August 1, 2014 from Rs. 3.4/litre for the fortnight
beginning July 1, 2014, indicating a decline in the sup-pressed
inflationary pressures in the Indian economy.
Manufacturing inflation increased marginally to 3.7 per
cent in July 2014 as compared to 3.6 per cent in the pre-vious
month. Encouragingly, non-food manufacturing
or core inflation, which is widely regarded as the proxy
for demand-side pressures in the economy, eased to 3.6
per cent during the month as compared to 3.9 per cent
in June 2014. In the coming months, we expect core
WPI to hover around 3.0-3.5 per cent, RBI’s comfort
level for this inflation measure. Manufacturing food in-flation
showed a sharp uptick during the month, led by
tea & coffee (to 10.1 per cent from 1.3 per cent), salt (to
6.4 per cent from 3.7 per cent) and dairy products (to
8.2 per cent from 6.6 per cent).

Outlook
Bulk of the upside pressure on CPI inflation was due to high food prices. However, going ahead, we do not expect
food inflation (with close to 50 per cent weight in CPI) to soar further. Recent monsoon update by the Indian
Meteorological Department (IMD) signals 17 per cent below normal rainfall as of August 11, 2014. Moreover, the
government has taken proactive measures to cap the rise in food prices due to monsoons. These include keeping
a strict check on hoarding activities, urging states to abolish the APMC act, raising the minimum export price of
onions, and its willingness to offload excess food grain stocks to meet supply shortages. With core CPI inflation
also continuing to decelerate, we expect RBI to reach its goal-post of 8 per cent CPI inflation by January 2015 fairly
comfortably.
RBI Maintains ‘Status-Quo’ on Interest Rates
ECONOMY MATTERS 24
DOMESTIC TRENDS
Reserve Bank of India (RBI) kept the key policy rates un-changed
in its third bi-monthly monetary policy review
held on August 5, 2014, citing the upward risks still hov-ering
over inflation in the wake of sub-par monsoons.
With this, the repo rate stands at 8 per cent, reverse
repo at 7 per cent and marginal standing facility rate
at 9 per cent. However, RBI did reduce the statutory
liquidity ratio (SLR) of scheduled commercial banks by
50 basis points from 22.5 per cent to 22.0 per cent of
their NDTL with effect from the fortnight beginning Au-gust
9, 2014 and the HTM (Held to Maturity) ceiling to
24 per cent. This reduction in SLR is expected to release
liquidity to the tune of approx Rs 40,000 crore into the
financial system. This infusion of liquidity is expected to
cater to the credit demand of the productive sectors of
the economy as when they recover. But, we at CII have
been continuously pointing out that this reduction in
SLR won’t be able to help the markets in the near-term,
given that the commercial banks are already investing
in government securities in excess of the mandated SLR
requirement (as of May 2014, the actual stood at around
27 per cent). See our note on ‘RBI Reduces SLR- Will it
Help the Market Now? in Economy Matters, May 2014 is-sue.
Additionally, the Central Bank also announced that
it will continue to provide liquidity under overnight re-pos
at 0.25 per cent of bank-wise NDTL and liquidity un-der
7-day and 14-day term repos of up to 0.75 per cent
of NDTL of the banking system.

25
DOMESTIC TRENDS
JULY - AUGUST 2014
On inflation, the RBI mentioned that it remains commit-ted
to the disinflationary path of sustaining CPI inflation
below 8 per cent by January 2015. The Central Bank also
reiterated its firm commitment to achieve the target
of 6 per cent CPI inflation by January 2016. Achieving
this target will be a tough challenge as disinflation will
have to be sustained over the medium-term, especially
when GDP growth and demand is picking up. RBI indi-cated
that the risks to the latter are still on the upside
and “warrants heightened state of policy prepared-ness
if these risks materialise”. On growth front, RBI
was reasonably happy with the improving growth pros-pects.
As per the RBI, “if the recent pick-up in industrial
activity is sustained in an environment conducive to the
revival of investment and unlocking of stalled projects,
with ongoing fiscal consolidation releasing resources
for private enterprise, external demand picking up and
international crude prices stabilising, the central esti-mate
of real GDP growth of 5.5 per cent within a likely
range of 5 to 6 per cent that was set out in the April
projection for 2014-15 can be sustained”.
As per RBI, liquidity conditions remained broadly sta-ble
during the months of June and July 2014, barring
episodic tightness on account of movements in the
cash balances of the government maintained with the
Reserve Bank. While the system’s recourse to liquidity
from the LAF, and regular and additional term repos
was around 1.0 per cent of the NDTL of banks, access
to the MSF has been minimal and temporary. In order
to manage transient liquidity pressures associated with
tax outflows and sluggish spending by the government,
the Reserve Bank injected additional liquidity aggregat-ing
over Rs 940 billion through nine special term repos
of varying maturities during the months of June and
July 2014.
Aggregate bank credit growth slowed down to 13.4 per
cent y-o-y as on July 11, 2014 from 14.3 per cent as on
July 12, 2013, owing to sluggish investment demand and
increased risk aversion given the deterioration in the
asset quality of public-sector banks (PSBs). To be sure,
gross non performing asset (GNPA) stood at 4.0 per
cent levels in March 2014 as compared to 3.3 per cent in
March 2013. Growth in bank deposits too slowed down
to 12.9 per cent as on July 11, 2014, from 13.8 per cent
during same period last year as financial savings slowed
down. Consequently, the credit deposit (CD) ratio stood
at 76.6 per cent as on July 11, 2014.
CII Reaction
The RBI, in a bid to safeguard against upside risks accruing from inflationary expectations, kept its rate easing
cycle on hold, which was as per market expectations.
At a time when industrial growth continues to be sluggish, CPI based inflation is moderating and above all, infla-tion
risks are gradually abating due to improvement in monsoon conditions, the RBI could have taken this oppor-tunity
to effect a cut in interest rates.

ECONOMY MATTERS 26
DOMESTIC TRENDS
The high cost of capital has been dissuading industry from undertaking capacity expansion and is causing finan-cial
stress among firms where demand is credit driven. What is more, the government’s commitment to adhere
to the path of fiscal consolidation and recent steps to ease bottlenecks in the food supply chain would help to
alleviate inflationary pressures in the economy while stimulating growth, going forward. All this could have mo-tivated
the RBI to give the primacy to growth by effecting a cut in interest rates. A rate cut at this juncture would
have positively surprised the market and sent a strong signal that both the fiscal and monetary policies are work-ing
in tandem to bring growth back to the economy. Considering the transmission time taken for the impact of
monetary policy to be visible, an impetus to growth could have assumed special importance.
Trade Deficit Widens on Slowing
Exports
Pace of exports growth slowed down to 7.3 per cent
(US$27.7 billion) in July 2014 as compared to 10.2 per
cent in the previous month. Imports growth too slowed
down to 4.3 per cent from 8.3 per cent a month ago.
However, the trade deficit widened to a year’s high of
US$12.2 billion as level of exports moderated at a faster
pace than imports. Among the items in exports, sec-tors
such as drugs & pharmaceuticals grew at 10.78 per
cent, while engineering goods rose 23.89 per cent in
July 2014. However, among the major sectors, gems &
jewellery exports contracted by 17.2 per cent during the
month. Cumulative value of exports for the first four
months of the current fiscal (Apr-July) were valued at
US$107.8 billion as against US$99.2 billion a year ago,
thus registering a year-on-year growth of 8.62 per cent.
Going forward, we expect exports growth to improve
in consonance with improvement in the global trade
conditions. The World Trade Organisation (WTO) ex-pects
global trade to grow by 4.7 per cent in 2014 and at
a slightly faster rate of 5.3 per cent in 2015.
Imports during July 2014 were valued at US$39.9 billion
as compared to US$38.3 in same month last month. The
rise in level of imports was mostly due to purchase of
oil and electronics goods during the month. Oil imports
during July, 2014 were valued at US$14.3 billion which
was 12.75 per cent higher than oil imports valued at
US$12.7 billion in the corresponding period last year.
Non-oil imports, which are an indication of the health
of the domestic demand, grew only by 0.03 per cent to
US$25.6 billion in July 2014.
Outlook
With the global trade scenario improving with some positive developments in the EU, US and emerging econo-mies,
exports should drift upwards in the coming months. However, imports growth would also accelerate as
domestic demand recovers, thus posing upside risks for the trade deficit.

Provisional Results of the Sixth Economic Census
Released
27
DOMESTIC TRENDS
JULY - AUGUST 2014
Ministry of Statistics and Programme Implementation
(MoSPI) on July 30, 2014 released the provisional results
of the Sixth Economic Census. The Central Statistics Of-fice
(CSO) in the MoSPI conducted the Sixth Economic
Census during January, 2013 to April, 2014 in collabora-tion
with Directorates of Economics and Statistics in
all the States and Union Territories. Economic Census
provides detailed information on operational and eco-nomic
variables, activity wise, of the establishments
of the country including their distribution at all-India,
State, district and village/ward levels for comprehensive
analysis of the structure of the economy (micro, macro,
regional levels) and for benchmark purposes. The data-base
also serves as a sampling frame for drawing sam-ples
for socio economic surveys by Governments and
research organizations.
The first Economic Census was conducted in 1977 cov-ering
only non-agricultural establishments employing
at least one hired worker on a fairly regular basis. The
second and third Economic Censuses were conducted
in 1980 and 1990 along with house listing operations of
1981 and 1991 Population Censuses respectively. These
two Economic Censuses covered all agricultural and
non-agricultural establishments excepting those en-gaged
in crop production and plantation. The fourth and
Fifth Economic Censuses were carried out in 1998 and
2005 respectively with the same coverage. The Sixth
Economic Census had also the same coverage as that
of Fifth Economic Census. However, establishments
engaged in public administration, defence and com-pulsory
social security activities have been excluded as
data pertaining to them are available with the Govern-ment
through administrative records and also due to
the difficulties faced in collecting information from such
establishments during the Fifth Economic Census. The
key provisional results of the Sixth Economic Census are
as follows:

ECONOMY MATTERS 28
DOMESTIC TRENDS
Highlights of Prime Minister Shri Narendra Modi’s Maiden
Independence Day Speech
Prime Minister Shri Narendra Modi addressing the nation from the ramparts of Red Fort on the occa-sion
of 68th Independence Day
1. BANKING FOR THE POOREST: Taking banking to the poorest, the Pradhanmantri Jan-Dhan Yojana will give
each family a bank account with a debit card and an insurance cover of 1 lakh. “Today, there are crores of
families that have mobile phones but no bank accounts. We have to change this. Economic development must
benefit the poor and it should start from here,” the PM said. Official data puts the number of poor households
in India at 6.5 crore.
2. ADOPT A VILLAGE : Using their development funds, MPs will adopt a village in their constituencies and turn it
into a model village by 2016. The Sansad Aadharsh Gran Yojana strives to usher improvements in health, sanita-tion,
greenery and cordiality
3. ‘MADE IN INDIA’ : Modi invites global manufactures to ‘come, make in India’ and sell it to the world, with an
aim to strike a balance between imports and exports and create jobs. “We have the skill, talent, discipline and
determination to do something,” he said in his speech.
4. A SKILLED WORKFORCE : The govt’s mission is two-pronged – create a skilled workforce that can be employed
anywhere in the world and encourage entrepreneurship to create more jobs at home. And the aim is to do this
at a rapid pace.
5. ZERO DEFECT , ZERO EFFECT : ‘Made in India’ must stand for quality products. PM encourages domestic manu-factures
to adopt a policy of ‘zero defect, zero effect’ – make top-of-the-line products with no ill effect on the
environment.
6. ENTER THE DIGITAL AGE : PM aims to connect every Indian through technology, provide governance via mo-bile
phones, have every village on a broadband platform. “E-governance is easy governance, effective govern-ance
and economic governance,” he said.
7. CLEAN INDIA CAMPAIGN : No city or village should remain dirty by 2019, when the country observes the 150th
birth anniversary of Mahatma Gandhi. The government plans to achieve this with public and private participa-tions.
8. TOILETS IN SCHOOL : Target before next I-Day: a toilet in every school, and a separate one for girls. MPs to take
the mission forward. Corporate participation also sought under Corporate Social Responsibility
9. NEW WAY : Planning Commission set up by Nehru on its way out. It will make way for an institution that gives
the new direction to the country through creative thinking , public-private partnership and optimum utilization
of resources.
10. POVERTY : Taking the war to end poverty to another level, PM calls for all south Asian countries to join India.
“Why not get together with all Saarc nations to plan the fight against poverty? Let’s fight together and defeat
poverty,” he said.

Other Economic Developments of the Month
- Government approved the constitution of an Expenditure Management Commission (EMC) that Finance Min-ister
Arun Jaitley had announced in his Budget Speech in July 2014. CII had been recommending the formation
of this commission since long. The Commission is expected to recommend major expenditure reforms that will
enable the government to lower its fiscal deficit. The Commission will be mandated with the task of suggesting
an overhaul for reducing the food, fertiliser and oil subsidies and other ways of controlling India’s fiscal deficit.
It is expected to submit its interim report before the presentation of the 2015-16 Budget next February. The
final report is expected before the Budget of 2016-17. The Government will shortly issue the terms of reference
for the Commission. Former Reserve Bank Governor Bimal Jalan will head the Commission. Members will in-clude
former Finance Secretary Sumit Bose and former Reserve Bank Deputy Governor Subir Gokarn.
- India refused to sign the Trade Facilitation Agreement (TFA) until the issue of public stockholding for food
security is resolved. The trade facilitation pact reached in Bali, Indonesia, last year is meant to simplify customs
procedures, facilitate the speedy release of goods from ports and cut transaction costs—measures that could
benefit rich nations more than developing countries such as India. At the heart of the problem is a WTO rule
that caps subsidies to farmers in developing countries at 10 per cent of the total value of agricultural produc-tion,
based on 1986-88 prices. Developing countries are complaining that the base year is now outdated and
they need to be given leeway to stock enough foodgrains for food security of millions of their poor. CII is of the
view that a great amount of effort have gone into clinching a balanced Bali deal. Hence, it must not be wasted
and all efforts must be made to use Bali Ministerial outcomes as springboard to conclude the Doha round,
which is into its 13th year of negotiations.
- Government approved 49 per cent foreign investment in insurance companies through the FIPB route ensur-ing
management control in the hands of Indian promoters. The move would help insurance firms to get much
needed capital from overseas partners. The proposal to raise FDI cap has been pending since 2008 when the
previous UPA government introduced the Insurance Laws (Amendment) Bill to hike foreign holding in insur-ance
29
DOMESTIC TRENDS
JULY - AUGUST 2014
joint ventures to 49 per cent from the existing 26 per cent.
- In a similar move, Union Cabinet on August 6, 2014 also cleared the proposal to set the composite cap for
foreign investment in the defence sector at 49 per cent, compared with the current 26 per cent foreign direct
investment (FDI) ceiling. But the management control of companies receiving these investments must remain
in the hands of Indians. The Cabinet also permitted foreign investment in rail operations like dedicated freight
lines, high-speed trains and mining & port connectivity, besides allowing FDI in some projects like construction
of new lines, gauge conversion, doubling of lines and maintenance projects under the public-private partner-ship
model. For joint venture in the area of projects, up to 74 per cent FDI will be allowed. These FDI proposals
will be allowed under the automatic route, so these will not require FIPB approval. This decision, too, is an
executive one and need not go to Parliament.
- The Central Board of Directors of the Reserve Bank of India, approved the transfer of surplus amounting to Rs
526.79 billion for the year ended June 30, 2014 to the Government of India. The amount was Rs 330.10 billion
for the year ended June 30, 2013.
- The latest round of RBI inflation expectations survey (Q1FY15) indicates that the number of respondents ex-pecting
an increase in inflation over the coming three months as well as one –year ahead have declined. This is
true both for expectations of food and overall inflation. However, the expected three-month ahead inflation
rose while that for a year ahead remained high (unchanged as compared to the Q4FY14). This is in line with the
progress of monsoons over this season with rainfall deficiency remaining high for most of the first quarter.
- Data Released by RBI showed that during the first quarter of 2014-15 (April-June), net services exports were
valued at US$17.2 billion, growing at 1.8 per cent over the same period a year ago.
- The Indian Meteorological Department (IMD) in its long range forecast (LRF) for second-half (August-Septem-ber
2014) estimates that the rainfall over the country as a whole during the second half of the 2014 southwest
monsoon season is likely to be 95 per cent of LPA with a model error of ±8 per cent. For the season as a whole,
rainfall over the country as a whole is likely to be 87 per cent of LPA with a model error of ±4 per cent. IMD
has also decreased the probability of weak El Nino conditions to 50 per cent during the remaining part of the
season.

CORPORATE PERFORMANCE
Net Sales Foretell a Recovery
Indian firms posted an impressive performance in the
first quarter of the current fiscal (1QFY15), as net sales
and profit rose at the fastest pace in seven quarters,
spurring investor optimism that the worst is over for
corporate earnings. The net sales of companies (manu-facturing
plus services) in the first quarter expanded by
10.0 per cent on a y-o-y basis, up from 5.7 per cent in
the comparable period last year. Our analysis is based
on the financial performance of 1613 companies (840-
ECONOMY MATTERS 30
Manufacturing and 773 Services and excludes oil & gas
companies), using a balanced panel, extracted from the
Ace Equity database.
It is encouraging to note that the beleaguered manu-facturing
sector witnessed sharp acceleration in sales
growth in the first quarter. Manufacturing sector in the
first quarter grew at its highest pace in the last seven
quarters at 9.8 per cent as compared to paltry 0.7 per
cent in the same period last year, indicating that the
downtrend is over. We expect further improvement in
growth performance during the current fiscal on the
back of the slew of policy measures which the new gov-ernment
has introduced in the recent months to spur
investment and revive growth.

31
CORPORATE PERFORMANCE
JULY - AUGUST 2014
The net sales of services sector in the first quarter
though moderated to 10.3 per cent as compared to 13.8
per cent in the same quarter previous year, it continued
to remain in double-digits. Sustaining this momentum is
important even as the rupee continued to remain vola-tile
against the US dollar and economic growth contin-ues
to remain restrained. Even though the growth of
net sales of services has been relatively impressive, the
sector has shown a sharp deterioration in expansion
rate in last few years and its revival is critical for facilitat-ing
the overall acceleration in economic growth.
The expenditure costs of the firms, on an aggregate ba-sis,
accelerated by 11.4 per cent in the reporting quarter,
as compared to 6.2 per cent in the comparable time pe-riod
last year. Under its various heads, growth of raw
materials cost increased to 10.4 per cent over decline
to the tune of 2.3 per cent in the same period last year.
In contrast, growth in wages & salaries showed mod-eration.
Total expenditure costs for manufacturing sec-tor
also increased to 10.0 per cent in the first quarter
of 2014-15 as compared to decline of 0.3 per cent in the
In sum, both the ‘top-line’ and ‘bottom-line’ of compa-nies
improved in the first quarter of the current fiscal.
However, it would remain to be seen, how far this re-same
quarter last year. All the heads of expenditure
for manufacturing except wages & salaries accelerated
during the quarter. Total aggregate expenditure costs
for services sector too increased to 13.1 per cent in the
reporting quarter, albeit at a marginal pace, as com-pared
to 12.8 per cent in the same quarter a year ago.
The performance analyzed in terms of Profit after Tax
(PAT) exhibits a sharp improvement in financial results
of companies at aggregate level in the first quarter
of the current financial year. On an aggregate basis,
growth in PAT improved significantly to 25.4 per cent
in the first quarter as compared to contraction to the
tune of 4.5 per cent in the same quarter of last year. This
has been driven by sharp improvement in PAT growth
of both manufacturing and services sector. PAT growth
across the manufacturing sector firms, improved sharp-ly
to 36.4 per cent in the first quarter as compared to
decline of 12.0 in the same quarter of previous year. For
services sector, PAT growth accelerated to 16.5 per cent
as compared to an anemic 2.6 per cent in the same quar-ter
a year ago.
covery is sustained. The emerging signs are propitious
though, with the election of a new government which
enjoys absolute majority and hence would face little dif-ficulty
in implementing strong policy measures.

SECTOR IN FOCUS
Jobless Growth and its Implications
As India progresses on its demographic ‘sweet
spot’, the imperative of translating demographic
advantages into tangible gains has emerged as a top
priority. Although the country is expected to have the
world’s fastest growing workforce over the next two
decades, it cannot be taken for granted that economic
growth would follow a declining age-dependency ratio.
ECONOMY MATTERS 32
Since economic reforms commenced in 1991, the Indian
population and workforce structure is marked by sig-nificant
trends.
To begin with, the age pyramid is in the process of shift-ing
from a large base to a wide bulge in the working age
sections. This means that the number of dependents
per worker is declining. In 1991, this ratio stood at 70 per
100 working-age population; by 2013, age dependency
ratio had fallen to 531. It is further expected to fall up to
2030 when India will have the largest workforce in the
world. The declining age dependency ratio is expected
to convert into rising savings, thus driving investments
and growth as workers produce more than they con-sume.
The impact of the demographic window however
depends additionally on numerous factors, such as edu-cation
levels, participation of women in the workforce,
policy environment, and socio-cultural context, among
others.
A second trend in India’s workforce structure is the de-clining
Labour Force Participation Rate (LFPR). As a pro-portion
of the total working age population, the number
of people actually entering the workforce or looking for
employment is falling. Much of this has to do with the
withdrawal of women from the workforce, especially in
rural areas. This is attributable to rising participation in

33
SECTOR IN FOCUS
JULY - AUGUST 2014
education, rise in incomes, and other factors.
Three, the country is seeing a shift in sectoral employ-ment
as workers move from agriculture to non-agricul-tural
sectors for livelihood. In rural India, off-farm liveli-hoods
account for a greater proportion of workers than
those finding livelihood in the field.
Four, the percentage of workers in the organised sec-tors
has declined while informal employment has risen.
Studies show that a vast proportion of new employ-ment
opportunities relates to the informal sector while
the number of workers in the formal sector has stag-nated.
Even within this, the share of the public sector
has fallen while that of the private sector is going up.
i. The Demographic Dividend
India’s demographic dividend refers to the fact India
currently has and will continue to have the largest num-ber
of people in the working age group of 15-59 years.
As of 2010, India’s working age population constituted
62.1 per cent of the total population, of which a little
less than half were in the ‘young’ age group of 15-29.
However, this can be turned into an advantage only
if jobs can be created for the large number of people
joining the working age population every year. Accord-ing
to our calculations, the working age population is
expected to swell by about 200 million between 2010
and 2030. This implies about 10 million people attaining
working age every year. Not all these people join the
Five, the number of jobs created in the economy over
the last fifteen years is not enough to absorb the rising
number of workers. Thus, there has been an increase in
self-employment. The quality of such self-employment
is poor, characterised by low productivity and incomes.
The impact of these trends is far-reaching with implica-tions
for economic growth, poverty alleviation, produc-tivity,
social security and socio-cultural developments
over the long-term future of the country. The discus-sion
paper studies the above trends in the employ-ment
scenario based on recent data and analyses the
implications of a changing workforce structure. It ends
with possible policy responses to leverage India’s best
resource – its people.
This trend will continue well into the next few decades
even as large parts of the world are experiencing an
ageing population. What this means is that the depend-ency
ratio, i.e. the ratio of the population aged 0-14 and
65+ per 100 people in the working age group will keep
declining. With a median age of 26.4, India has one of
the youngest populations among the major countries in
the world.
labour force, as some may opt for further education
or training. India, in particular, has a low rate of labour
force participation probably because the expectation of
finding a suitable job is limited. A complete overhaul of
labour force regulations as well as the business environ-ment
is required in order to change the employment
scenario in the coming years.
1 http://data.worldbank.org/indicator/SP.POP.DPND?page=4
I. Employment Structure and Trends – the Data

ECONOMY MATTERS 34
SECTOR IN FOCUS
ii. The Employment Imperative
In order to take advantage of India’s demographic divi-dend,
job opportunities have to be created on a large
scale. Further, as the share of agriculture in GDP shrinks,
so should its share in employment. Labour being ren-dered
surplus from agriculture needs to be absorbed in
either industry or services. However, the experience so
far has not been encouraging in that employment has
not increased to the extent it should have, given the
additions to the labour force and the high rate of eco-nomic
growth till 2007-08. As the growth rate slowed
down in the recent period, the data does not show an
increase in unemployment. Instead, it shows a decline
in the labour force participation rate (LFPR). This could
indicate that instead of reporting as unemployed and
available for work, respondents prefer to remain out-side
the labour force.
iii. Sectoral Shares in Employment
Comparing the shares of the three broad sectors in em-ployment,
it is apparent that agriculture remains by far
the largest employer. However, the share of agriculture
in employment fell below 50 per cent for the first time
in 2011-12 from 56.6 per cent in 2004-05. Agricultural em-ployment
fell as the labour force migrated from agricul-ture
to industry and services. As for industry, it has wit-nessed
a rise in its share of employment from 18.7 per
cent to 24.6 per cent in the comparable period. How-ever,
this is mostly attributable to the rise in workers
The NSS conducts Employment-Unemployment Sur-veys
(EUS) every five years, but the latest survey for
2011-12 was carried out two years after the EUS 2009-
10, as the latter had shown some contentious results
in terms of low employment growth. The table below,
reporting the results from the last few surveys, shows
the number of people in the labour force (persons who
are either working or available for work) and the work
force (persons working).
It is apparent that additions to the labour force out-stripped
the additions to the work force till 2004-05
when the growth rates were high, while additions to
the labour force itself declined in the period after 2004-
05. In terms of employment creation, there has been
a slowdown in the latter period – while 60 million jobs
were created in the five-year period between 1999-00
and 2004-05, only 15 million were created in the seven-year
period between 2004-05 and 2011-12.
engaged in construction. The services sector has seen
a smaller increase in its share in employment, from 24.7
per cent in 2004-05 to 27.9 per cent in 2011-12. Since its
share in GDP has increased sharply in the same period,
one possible implication of this trend could be that the
sector’s productivity is on the rise.
It needs to be noted that industry continues to have the
lowest share in total employment and within industry,
the share of employment in manufacturing is merely
13.0 per cent. Employment in manufacturing increased
by merely 5.4 million between 2004-05 and 2011-12 while
employment in construction increased by a much larger

35
SECTOR IN FOCUS
JULY - AUGUST 2014
23.9 million. The Planning Commission is projecting that
by the end of the 12th Plan period (2016-17), the share of
agriculture would decline to 45.0 per cent with a com-mensurate
rise in industrial and services sector employ-ment.
The share of manufacturing is expected to rise to
18.0 per cent by 2016-17.
This pattern of employment clearly sets India apart
from other countries that have entered a high-growth
period which have all typically experienced an increase
iv. Low Share of Organised Sector in
Employment
Another unique characteristic of the employment
scenario in India is the very low level of employment
in the organised sector. Enterprises with more than
10 workers are supposed to register with the govern-ment,
and are regarded as the ‘organized sector’ of the
economy. The ‘organized sector’ is subject to govern-ment
regulations regarding many aspects of economic
activity including more stringent labour regulation and
procedural requirements. It is well known that regula-in
the share of output and employment in manufactur-ing
and other industrial activities. In India, this is yet to
happen due to the lack of large scale job opportunities
outside agriculture. In fact, the NSS data shows that
there has been a decline in manufacturing employment
between 2004-05 and 2009-10. While this could be relat-ed
to the onset of the global economic crisis in 2009-10,
it is indeed worrying that manufacturing employment
declined during a period of relatively high growth.
tory requirements for businesses are quite stringent in
India, as a result of which India gets a low rank of 134
out of 185 countries in the World Bank’s Ease of Doing
Business rankings. These regulations have acted as a
disincentive for firms to increase employment and be
categorised as part of the ‘organised sector’.
The Planning Commission considers an increase in or-ganised
sector employment as one of its objectives
since this is associated with some security of tenure and
higher wage rates. Also, the productivity of labour is
higher in the organised sector. However, it is pertinent

ECONOMY MATTERS 36
SECTOR IN FOCUS
to note that only 29 million out of a workforce of 472
million are employed in the organised sector, as regula-tions
imposed on it are certainly a deterrent to increas-v.
Large Share of Self-Employed
The workforce is dominated by the self-employed, who
account for more than 50 per cent of workers. The
share of those in regular salaried or wage employment
is the lowest but a good sign is that it has been rising
since 2004-05. Some concern has also been expressed
about the increasing casualization of the workforce,
even within the organised sector. This has happened
vi. Women workers
According to NSSO, the Labour Force Participation
Rate (LFPR) for women came down from 29 per cent in
2004-05 to 22.5 per cent in 2011-12. This accounts for the
major proportion of the declining LFPR in the country.
There has been speculation about the factors causing
ing employment. A concerted effort is required to ease
the regulatory burden on the organised sector so that
better quality employment can be generated in much
larger numbers.
largely to get around the stringent labour laws that are
applicable to regular or salaried employees. The data,
shown below, does indicate some increase in the share
of casual labour in 2009-10 over 2004-05 but this has
moderated in 2011-12. However, it should be noted that
this data is for the entire workforce that includes those
employed in agriculture and not just those employed in
organised industry or services.
this at a time when women are increasingly entering the
workforce in other countries. Possibly, as household in-comes
rise, women prefer not to work, especially when
work opportunities relate to physical labour. Other fac-tors
could be the rise in women in higher education,
preference to raising children, etc. Whatever the cause,
the decline in proportion of women participating in the
economy is of deep concern.

37
SECTOR IN FOCUS
JULY - AUGUST 2014
In the ultimate analysis, job creation is a matter of hu-man
rights as has been recognised by the Indian Consti-tution.
Article 41 of the Constitution provides that “the
State shall within the limits of its economic capacity and
development, make effective provision for securing the
right to work, to education and to public assistance in
cases of unemployment, old age, sickness and disable-ment,
and in other cases of undeserved want.” Article
43 states that it shall endeavour to secure a living wage
and a decent standard of life to all workers.
The question therefore is how the state would ensure
that all workers can secure a living wage and a decent
standard of life. Given the ‘limits of its economic capac-ity
and development’, the government can make ‘effec-tive
provision’ by facilitating job creation through the
private sector.
The challenges of job creation are inextricably linked to
multiple economic dimensions:
1. Education system: Our education system should
be responsive to market needs to enhance the em-ployability
of the workforce and make them con-tribute
to the production process. This would obvi-ate
the situation wherein an array of unemployed
graduates co-exists with huge skill shortages within
industry. The application of ICT has vast potential
to energize education and skill development as it
provides more opportunities for extended learning.
2. Skill development: While employment is one side of
the challenge, employability is the obverse. The skill
development endeavor has to be accelerated and
greatly scaled up in a joint effort of government, in-dustry,
and civil society. While the 12th Plan targets
skilling of 50 million people in five years the actual
number of beneficiaries has been much lower. Ar-eas
to be examined could include raising resources,
scaling up infrastructure and institutions, voucher
system, teacher training institutes, building capac-ity
of state governments, ensuring quality teaching,
convergence with MNREGA, etc.
3. Growth: To raise the quality of jobs available to new
entrants to the workforce, it is essential to rejuve-nate
growth to at least 7 per cent by the end of
2014. Some issues of top priority at the policy level
would be governance, project implementation,
taxation, interest rates and inflation, public private
partnerships, long-term financing, and FDI, among
others.
4. Industrial performance: Given that large sections
of the workforce are moving off the land and that
the demand is for less-skilled jobs, it is the industry
sector that would have to be promoted to provide
such jobs. Employment-intensive mass manufactur-ing
sectors would be central to the endeavor.
II. Recommendations

III. Some Innovative Ideas to Push Employment
ECONOMY MATTERS 38
SECTOR IN FOCUS
5. Investments: Rejuvenating investments and mak-ing
them more efficient is a top priority. New in-vestments
and projects including in infrastructure,
power and manufacturing can strengthen the envi-ronment
for job creation.
6. Ease of doing business: A business climate that
fosters entrepreneurship and promotes new busi-ness
ventures and the expansion of existing ven-tures
with stability and clarity is the best way to
create employment opportunities. It is important
to examine each of the regulations covered under
the World Bank Ease of Doing Business Indicators
and set a target of reaching rank 50 within 5 years.
Administrative, environmental and bureaucratic
procedures must be examined in detail to minimize
them.
7. Export competitiveness: Strategic security derives
much from a nation’s footprint on the global eco-nomic
stage. India needs to increase its presence
in top globally traded goods and services, which
is also a key avenue for job creation domestically.
Overseas investors have a significant role to play in
plugging India into global supply chains. A National
Export Competitiveness and Market Promotion
Council could be considered to assist domestic sup-pliers
and build overseas markets. Reducing trans-action
costs would be required.
8. Legal and regulatory architecture: India’s legal and
regulatory framework should be geared towards
Mass Manufacturing Enterprises: In most countries,
enterprise size is defined by the number of workers on
the payroll. In India, just as there is a separate category
of MSME based on investments, there could be a sepa-rate
category of enterprises that employ large numbers
of people. Enterprises employing more than a certain
minimum – say, 4000 workers – would be eligible for
tax relief, deductions for skill development or worker
housing, benefits in terms of land, special provisions re-garding
labour regulation applicability, etc.
employment-creation and in line with global best
practices. Social security and worker protection
have to be addressed simultaneously at, with the
imperative of mass scale employment creation. The
regulatory architecture should be relooked with
the idea of light-handed, fair, and independent
regulation that encourages competition. A number
of bills would need to be reintroduced and a new
Parliament offers a chance to redraft some of them.
Mining, insurance, pension, etc. are some impor-tant
pending bills.
9. Labour Law Reforms: The provision of more flex-ible
labour laws, which confer to employers the
right to take management decisions, is crucial to
provide a fillip to labour intensive manufacturing.
There is need to create a ‘social safety net’ to com-pensate
workers rationalized during the produc-tion
process. Outdated laws need to be weeded out
and existing laws would need to be adapted in tune
with current realities.
10. Entrepreneurship: Promoting entrepreneurship
is vital to expanding opportunities for livelihood
and employment. In particular, start-ups must be
encouraged. There is need for a national policy on
facilitating entrepreneurship which would bring
together elements of capacity building, access to
finance, boosting venture capital and angel invest-ing,
and the creation of necessary infrastructure
such as industrial parks.
Taxation benefits: A graded system of corporate taxes
could be considered for manufacturing enterprises de-pending
on employment. For example, enterprises em-ploying
more than 1000 workers could get 2 per cent
discount on tax, enterprises employing more than 3000
workers could get 4 per cent discount, etc.
Services: The manufacturing sector may not be able to
take up the entire responsibility for employment and
many services sectors too could provide large scale
employment opportunities. This can be scaled up with

39
SECTOR IN FOCUS
JULY - AUGUST 2014
appropriate training. Some top services sectors with
huge employment potential are tourism and hospital-ity,
healthcare, education and skill development, retail
trade especially multi-brand retail, logistics services, etc.
It is necessary to devise policy frameworks that would
expand services with high employment potential. These
also benefit from short lead times.
Non-farm employment in rural areas: Since the share
of agriculture in employment in rural areas is declining
and more and more workers need to find work off the
farm, rural non-farm sectors can be identified and pro-moted.
Some of these sectors could be food process-ing,
construction, large-scale poultry and fish farms,
horticulture, floriculture, sericulture, packaging, etc. Ex-port
processing from rural areas can also be promoted
in an employment-enhancing manner in products such
as bovine meat, poultry, fisheries and marine products,
flowers, vegetables, etc.
National Entrepreneurship Policy: It is necessary to de-vise
a policy which clearly lays out the benefits that a
new enterprise would be accorded and the administra-tive
and facilitative architecture for its operation. This
would include elements of training and skill develop-ment,
finance, technology, marketing, cluster format,
etc. Entrepreneurship could also be considered as part
of the regular secondary school curriculum to inculcate
awareness on its dimensions, as a large proportion of
school-leavers would go into self-employment/small en-trepreneurship.
Resources for skill development: A National Skill De-velopment
Bank could be set up to finance skill devel-opment
training, fund skill development institutes and
provide seed capital for new entrepreneurs. MNREGA
should include a component of skill development to ef-fectively
deploy employment funds for building employ-ability
capacity. Weighted deduction could be offered
to companies for providing certifiable skill development
for employees.

FOCUS OF THE MONTH
Rejuvenating the Textiles Sector
Textiles is one of the most important sectors of In-dian
economy, in terms of, its contribution to indus-trial
output, employment generation, and the export
earnings of the country. India’s dominance in global
textiles can be gauged from the fact that the country
is second largest producer of fibre in the world. It is
also counted among the leading textile industries in
the world. Abundant availability of raw materials such
as cotton, wool, silk and jute and skilled workforce has
ECONOMY MATTERS 40
made India a major sourcing hub. The textile industry in
India traditionally, after agriculture, is the only industry
that has generated huge employment for both skilled
and unskilled labor in textiles. The textile industry con-tinues
to be the second largest employment generating
sector in India.
Going forward, the Indian textile industry is poised for
strong growth, given the strong domestic consump-tion
as well as export demand. However, this age-old
Industry in the country is facing many challenges for its
survival and sustainability too. In this context, we cover
this crucial sector in this month’s ‘Focus of the Month’,
providing an in-depth analysis of the sector by sectoral
experts.

The Indian Textiles Industry: Pivotal in
Increasing the Share of Manufacturing in GDP
41
FOCUS OF THE MONTH
JULY - AUGUST 2014
Q1: What is the vision of the Confederation of Indian
Industry for the Indian Textiles Industry?
CII envisions creation of a strong and competitive textile
and apparel manufacturing value chain with creation of
employment and value addition in focus. It aims to cre-ate
a platform for sharing, nurturing and disseminating
information on industry best practices and assisting in-dustry
and government in making India a preferred des-tination
for Textile manufacturing.
Q2: What is current status of Textile Industry in India
and how does it stack up in comparison?
Today, the Indian textiles industry is one of the largest
in the world. It is a US$100 billion industry. The domes-tic
consumption is estimated at US$67 billion whereas
the exports are about US$33 billion. The domestic tex-tile
and apparel industry in India is estimated to reach
US$141 billion by 2021. In addition to providing one of
the basic necessities of life, the textiles industry in India
plays a vital role through its contribution to industrial
output, employment generation, and the export earn-ings
of the country.
It is the second largest sector after agriculture in terms
of employment and provides direct employment to
over 45 million. Besides, another 60 million people are
engaged in its allied activities. During April-September
2013, textile exports from India reached US$16 billion,
which is 8 per cent higher than the exports during the
same period last year.
The industry also accounts for about 14 per cent of in-dustrial
production, 5 per cent of the country’s gross
domestic product (GDP), 11 per cent of export earnings,
23 per cent of the world’s spindle capacity, 4 per cent
of the global textile and apparel trade and 12 per cent
of the world’s production of textile fibres. The global
demand of textile and apparel products is on rise and
within India the demand growth is still faster.
Over last 10 years, some interesting progress has hap-pened
in Indian Textile industry. New investment in
spinning and shuttle less weaving machines have re-sulted
in ~ 40 per cent of India’s spinning capacity and
almost entire shuttle –less weaving capacity being less
than 10 years old leading to higher efficiency.
Also, India is faster becoming competitive in factor cost,
particularly in power and wage cost, though there ex-ists
a huge potential to improve productivity per unit of
factor cost.
Q3: What according to you are the key opportunities
and challenges being faced by this industry today?
While India is the country with second largest produc-tion
infrastructure, it lags far behind China in terms of
scale and technology level. It also faces competition
from several other countries which have carved a niche
for them e.g. Bangladesh, Vietnam, Turkey, etc. Indian
textile industry faces several challenges like low value
addition, higher power and financial cost, gaps in skill

ECONOMY MATTERS 42
FOCUS OF THE MONTH
level at all levels, fragmentation, smaller capacities,
etc. Since the industry’s growth is directly linked with
its huge employment generation capability and export
potential, focused initiatives to uplift the industry will
result in significant growth for the overall economy as
well.
Some of the key challenges are
• Lack of infrastructural support especially in power,
road and ports, enabling faster lead time to con-sumption
centers
• Lack of long term policy regime which otherwise
would have attracted investors to put long term in-vestment
without fear of policy changes
• To maintain raw material security at competitive
price
If we are able to tackle these challenges India can be-come
a formidable force in the global textile value
chain.
Q4: What are your recommendations for leveraging
the opportunities and combating the challenges de-tailed
above?
To achieve competitive edge within the domestic indus-try
as well as in the global arena, a few policy reforms
and amendments are required. In order to tap the op-portunity
for growth and role in global textiles at this
important juncture of time, CII recommends efforts re-quired
in 4 broad areas for the overall growth and im-provement
in competitiveness of the industry.
1. Attracting Investments – establishing Textile Mega
Parks, Special Incentives for Value Added Textile
and Apparel Manufacturing, Attracting Foreign Di-rect
Investments (FDIs), Attracting investment in
Machinery Manufacturing Segment;
2. Enhancing Manufacturing Competitiveness -
Amendment in Labour Laws, promoting Skill Devel-opment,
Rationalization of Taxation, Revising Pow-er
Tariffs and Improving Availability and Supporting
Technical Textile Manufacturing;
3. Market Development - expediting negotiations
with regard to Free Trade Agreements, particularly
India-EU FTA and creating “Brand India” through
Exhibitions and Region Specific Textile Parks;
4. Support services - Custom Clearance Process and
setting up of Centers of Excellence.
Apart from this focus on higher value addition and de-veloping
niche sectors should be a priority. One of the
areas to focus can be supporting of technical textiles
manufacturing.
Technical textiles are among the most promising and
fastest growing areas of Indian textiles industry. The
technical textile sector has demonstrated encouraging
growth trends in India with a CAGR of 8 per cent for
the last few years it has reached a size of US$13 billion.
The sector is expected to show a CAGR of 16 per cent
to reach US$31 billion by 2016-17.Globally, these textiles
account for more than one third of all textile consump-tion.
Currently, India accounts for only 8.6 per cent of
global technical textiles consumption.
Technical textiles are bound to play an important role as
our economy grows. Increasing disposable income and
the growth of various end user segments like health-care,
roads and highways, agriculture, automobiles etc.
are expected to drive the demand for these products at
a much higher rate in India.

Tiruppur – An Industry with Great Growth
Potential
43
FOCUS OF THE MONTH
JULY - AUGUST 2014
Tiruppur is a major textile export hub with special-ized
expertise in cotton knitted garments with over
18000 Crores of apparel exports and significant turno-ver
on account of domestic sale of garments in India to
the tune of 8000 Crores, thereby providing direct em-ployment
to over 5 Lakh people.
It is called the knit capital of India as it caters to famous
retail brands from all over the world. Almost every inter-national
knitwear brand in the world has a strong pro-duction
share from Tiruppur. It has a wide range of fac-tories
which export all types of knits fabrics and supply
garments for kids, ladies, men’s garments - both under
garments and tops. Some of the world’s largest retail-ers
including C&A, Switcher, Wal-Mart, Primark, Die-sel,
ARMY, Tommy Hilfiger, M&S, FILA, Respect, H&M,
HTHP, Whale, NIKE and Reebok import many textile
items and clothing from Tiruppur city.
Tiruppur was a small village about a couple of decades
ago. Despite several disadvantages including lack of
proper infrastructure facilities, difficult access to ports
and airports, etc., Tiruppur has emerged as a major play-er
in world apparel market because of unstinted hard
work and enterprise of the entrepreneurs in and around
the region.
Most of the entrepreneurs hail from agrarian back-ground
with very few qualified and educated. It is due
to their dedicated hard work that these entrepreneurs
have carved a niche for themselves in the Global textile
map thereby contributing to the economic growth of
the Country. The unique factors which has helped to en-trench
Knitwear Industry in Tiruppur Cluster are
• Micro, Small and Medium industries have got syn-ergized
in the manufacturing process which is very
unique for this cluster. Since this cluster caters
mainly to the western markets which is so dynamic
in nature where in change is the constant factor,
to accommodate this companies should be flexible
and be ready to swift adaptability to incorporate
the required changes in the manufacturing process
and in the embellishments area. Without this flex-ible
nature it would be very difficult to cater to the
markets on time.
• Unity in diversity, that means competitors would
mutually exchange the expertise without any sec-ond
thought; the standing testimony for this unity
is NIFT-TEA which is an institution promoted by 185
entrepreneurs together. The main objective of this
Institute is to support the growth of this Industry.
Moreover this is the only Institute across the coun-try
which provides courses exclusively relevant to
knitwear and is evolving itself as the repository of
knitwear knowledge source.
With all these efforts yet the knitwear / apparel industry
in India caters to less than 3 per cent of the global de-mand
for textile products. Off late the apparel exports
from China and other competing countries are getting
less competitive because of several internal factors. This
presents a unique opportunity for Indian apparel indus-try,
specifically clusters like Tiruppur, to effect manifold
growth in volume of exports from the country.

Economy Matters - July-August 2014

Economy Matters - July-August 2014

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Economy Matters - July-August 2014