Union Budget 2014-15 Implications Across Key Sectors

JUNE -JULY 20141
FOREWORD
Global activity has broadly strengthened and is expected to improve further in 2014-15, with
much of the impetus coming from the developed economies. However, the policymakers in
these economies need to avoid a premature withdrawal of monetary accommodation. US
economy is recovering, albeit a slow pace, consequently the Federal Reserve has vowed to
keep interest rates low in order to aid the growth recovery process. European Central Bank
(ECB) injected monetary stimulus in June 2014 in order to prevent the economy from fall-
ing into deflation trap as sustained low inflation is not conducive for recovery of economic
growth. Japan’s economy is doing well, with the first quarter GDP rising sharply aided by
robust growth in domestic demand. Abenomics seems to be doing the trick for the Japanese
economy.
On the domestic front, deficient monsoons are fast emerging as significant macroeconomic
risk. As per the latest data, cumulative rainfall deficiency (till 20th July, 2014) stands at 31 per
cent below the LPA. Unless, there is significant recovery in monsoons in the coming weeks,
we are at a risk of staring at yet another drought, the fourth in the past decade. In some posi-
tive news for the economy, industrial output rose for the second month in a row in May 2014.
We expect further rebound in industrial production as the reforms oriented and forward
looking budget is expected to boost business confidence, going forward. On the back of
the recent measures announced by the government to increase supply of fruits & vegetables
in the market, both CPI and WPI inflation moderated in June 2014. However, with the danger
of El Nino looming large over the economy this year, a rise in food inflation in the latter part
of the year cannot be ruled out.
Coming to the most important development of the month of July 2014, in the Union Budget
2014-15, the new government activated a number of directional changes that would stabilize
the economy, boost investments, and encourage savings with a view to reviving GDP growth
to 7-8 per cent in the near term. Specifically, the budget stood out for its pragmatic and bold
approach for initiating measures aimed at reinvigorating the economy. The vision articulated
in the budget showed that the government meant business. In this issue of Focus of the
Month, sectoral experts discuss the implications of the Union Budget 2014-15 on their respec-
tive sectors.
Chandrajit Banerjee
Director General, CII

EXECUTIVE SUMMARY
ECONOMY MATTERS 4
Global Trends
Global economies experienced subdued growth for yet
another year in 2013, unable to meet even the modest pro-
jections made by many institutional forecasters. Underper-
formance in the world economy was observed across almost
all regions and major economic groups. Most developed
economies continued struggling in an uphill battle against
the lingering effects of the financial crisis, grappling in par-
ticular with the challenges of taking appropriate fiscal and
monetary policy actions. Some signs of improvements have
shown up more recently: the Euro Zone has finally come out
of a protracted recession. As per IMF’s recent Global Eco-
nomic Outlook, growth outlook across advanced economies
has improved significantly to 2.2 per cent in 2014 as com-
pared to 1.3 per cent growth in 2013. This is confirmed by the
latest GDP releases across the major economies. Real GDP in
US increased to 1.5 per cent on a y-o-y basis in the first quar-
ter of 2014 as compared to 1.3 per cent in the corresponding
quarter of previous fiscal. In the Euro Area, the GDP growth
rate expanded to 0.9 per cent on a y-o-y basis in the first
quarter of the current year as compared to contraction to
the tune of 1.1 per cent in seen in the first quarter of 2012.
Domestic Trends
Though the occurrence of normal monsoon is pivotal
in supporting the growth rate of the farm sector every
year, but this fiscal it assumes greater importance in the
context of the macroeconomic challenges facing the
economy. As per the latest data, rainfall deficiency for
the period from 1 June to 20 July 2014 stood at 31 per
cent below LPA as compared to 16 per cent above LPA
during the same period last year, even after the gap
shrank in the week of 10-17th July, 2014 due to improve-
ment in rainfall in some areas of central and northwest
India. Unless there is a significant recovery in monsoons
in the next few weeks, we would be staring at yet an-
other drought, the fourth in the past decade. In some
positive news for the economy, continuing its good per-
formance of April 2014, industrial production growth
rose sharply to 4.7 per cent in May 2014, indicating sig-
nals of turnaround of the beleaguered sector. Both CPI
and WPI based inflation cooled off in June 2014 on the
back of deceleration in food prices and lower base ef-
fect of last year.
Sector in Focus: Warehousing
Industry
Warehousing forms a crucial link in the overall logistics
value chain. It accounts for close to 5 per cent of the
Indian logistics market (excluding inventory carrying
costs, which amount to another ~30 per cent). Ware-
housing in India has been evolving rapidly from being
traditional “godowns” — a mere four-wall-and-shed
with sub optimal size, inadequate ventilation and light-
ing, lack of racking systems, poor hygiene conditions
and lack of inventory management or evolved solutions
such as warehouse management systems into modern
setups with storage and handling points where raw ma-
terial, intermediate and manufactured goods are col-
lected, assorted, stored and distributed to the point of
consumption/sale. The size of the Indian warehousing
industry (across commodities and modes) is pegged at
about Rs 560 billion (excluding inventory carrying costs,
which amount to another Rs 4,340 billion). The industry
is growing at over 10 per cent annually. In this month’s
Sector in Focus, we review this important sector.
Focus of the Month: Union
Budget 2014-15
The Union Budget 2014-15, the maiden budget of the newly
elected government, was announced at a time when the
macro-economic milieu continues to be domestically and
globally challenging. As a result, the year 2013-14, was pri-
marily marked by slowdown in GDP growth and persistent
inflationary pressures. The Union Budget 2014-15 stood out
for the pragmatic and bold approach adopted by the Finance
Minister to lift growth, reignite investment, boost savings
and provide a fillip to employment generation. A bold and re-
formist budget, it rightly focused on the priority areas which
would boost business confidence by providing an impetus
to growth. The vision articulated in the Budget showed
that the government meant business. In the current issue’s
Focus of the Month, sectoral experts discuss the implica-
tions of the Union Budget 2014-15 on their respective sec-
tors.

5 JUNE -JULY 2014
Budget at a Glance 2014-15

ECONOMY MATTERS 6
GLOBAL TRENDS
Gauging the Economic Performance of Major
Developed Economies
Global economies experienced subdued growth for
yet another year in 2013, unable to meet even the
modest projections made by many institutional fore-
casters. Underperformance in the world economy was
observed across almost all regions and major economic
groups. Most developed economies continued strug-
gling in an uphill battle against the lingering effects of
the financial crisis, grappling in particular with the chal-
lenges of taking appropriate fiscal and monetary policy
actions. Some signs of improvements have shown up
more recently: the Euro Zone has finally come out of
a protracted recession, with gross domestic product
(GDP) for the region as a whole returning to growth in
2013; a few large emerging economies, including China,
seem to have backstopped a further slowdown and are
poised to strengthen, going forward.
As per IMF’s recent Global Economic Outlook, growth
outlook across advanced economies has improved sig-
nificantly to 2.2 per cent in 2014 as compared to 1.3 per
cent growth in 2013. It is further expected to improve
to 2.3 per cent in 2015. The uptick in 2014 is primarily
due to Euro Area which is expected to return to posi-
tive growth rate of 1.2 per cent in 2014 from last two
years of contraction in growth. US is the second larg-
est contributor (after China) to the somewhat stronger
outlook for 2014, where growth is expected to increase
sharply from 1.9 per cent in 2013 to 2.8 per cent in 2014.
We discuss the economic performance of the major de-
veloped economies in the subsequent paragraphs. We
are also including China in this discussion, though it is
not a developed economy yet, as the economic pros-
pects of China are closely intertwined with the perfor-
mance of the developed economies.
a. United States (US)
Real GDP in US moderated to 1.5 per cent on a y-o-y basis
in the first quarter of 2014 as compared to 2.6 per cent
in the previous quarter. On seasonally-adjusted q-o-q
basis, GDP contracted by 2.9 per cent in the first quarter
as compared to growth of 1.1 per cent recorded in the
same quarter last year. As far as different components
of growth are concerned, on a y-o-y basis, positive con-
tributions to growth were made by personal consump-
tion expenditure, whose growth improved marginally
to 2 per cent against a 1.9 per cent in the first quarter of
2013. A severe fall was seen in the growth of residential
fixed investment to 2.7 per cent in the first quarter of

7
GLOBAL TRENDS
JUNE -JULY 2014
2014 against 12.9 per cent in the comparing period last
year. However, an upturn was seen in growth of non-
Coming to inflation, in May 2014, CPI based inflation in
US rose marginally to 2.1 per cent as compared to 2.0
per cent in the previous month. However, core inflation
(excluding energy and food prices) increased to 2.0 per
cent in May 2014, the highest figure since February 2013.
Food inflation too accelerated to 2.5 per cent in the re-
porting month, its largest 12-month increase since June
2012. The recent upward pressure visible on CPI infla-
tion has led to the market talks of possibility of a less
dovish Federal Reserve.
However, Federal Reserve (Fed) is expected to con-
tinue its accommodative stance for 2014-2015. In ac-
cordance with the forward monetary policy guidance
of the Fed, it is assumed that in the forecasting period
of 2014-2015, the federal funds interest rate will remain
within the range of 0.0 to 0.25 per cent until mid-2015,
followed by a gradual increase starting in the third quar-
ter of 2015. The adjustment of long-term assets on the
Fed balance sheet has already started last year in De-
cember 2013. In its meeting held on June 19th 2014, Fed
reduced its asset purchase program from US$45 billion/
residential fixed investment to 3.5 per cent, against 2.4
per cent recorded last year.
month to US$35 billion/month. Component wise, Fed
would trim its purchases of long-term Treasury bonds
to US$20 billion/month (from US$25 billion previously)
and mortgage-backed securities (MBS) to US$15 billion/
month (from US$20 billion). QE3 is expected to be ter-
minated in fourth quarter of 2014.
b. Euro Area
In the Euro Area, the GDP growth rate expanded to 0.9
per cent on a y-o-y basis in the first quarter of the cur-
rent year as compared to 0.5 per cent in the previous
quarter and contraction to the tune of 1.1 per cent in
seen in the same quarter of 2012. Amongst the various
sectors of GDP, the growth of household final consump-
tion expenditure and government final consumption
expenditure increased to 0.4 per cent and 0.2 per cent
respectively in the reporting quarter, as compared to
contraction to the tune of 1.2 per cent and 0.6 per cent
respectively recorded in the same quarter last year.
Growth in gross fixed capital formation improved to 1.9
per cent in the reporting quarter, as against a decline of
5.5 per cent in the same period last year.

ECONOMY MATTERS 8
GLOBAL TRENDS
The growth trends among individual countries in the
Euro Area were varied (see below table). Among mem-
ber states for which data are available for the first
quarter of 2014, Hungary (3.2 per cent), Poland (3.5 per
In Euro Area, CPI inflation moderated to 0.5 per cent in
May 2014 from 0.7 per cent in April. The largest upward
impact to inflation came from tobacco, restaurants &
cafés, and electricity, while vegetables, telecommunica-
tions and fruit had the biggest downward impact.
The European Central Bank (ECB) is assumed not to cut
its policy interest rates further, but to keep policy rates
at the current levels through the end of 2015, followed
cent), Romania (3.8 per cent) and the United Kingdom
(3.1 per cent) recorded the highest growth on a year-
on-year basis. Estonia (-1.5 per cent), Cyprus (-4.1 per
cent) and Finland (-0.8 per cent) registered the largest
decreases.
by a gradual path of increases. The outright monetary
transaction programme will remain in place and refi-
nancing operations will continue to meet the needs of
the banking sector. Additionally, ECB unveiled a number
of monetary easing measures ranging from lower policy
rates to targeted Long Term Refinance Operations (TL-
TROs) to extension of fixed-rate full-allotment tender
procedures without any time limit in its meeting held in
first week of June 2014.

9
GLOBAL TRENDS
JUNE -JULY 2014
c. Japan
In the Asian continent, Japan saw its GDP growth accel-
erated to 3 per cent on a y-o-y basis in the first quarter
of 2014 as per Cabinet Office, Japan, as compared with
growth of 2.5 per cent in the previous quarter and 0.1
per cent in the same period last year. The upswing in
GDP was aided by robust growth in domestic demand
The CPI based annual inflation accelerated to 3.7 per
cent in May 2014 from 3.4 per cent in April, as the ef-
fects of a sales tax increase continued to push consum-
er prices up. Further upward push to CPI inflation was
provided by increase in prices of fuel, light and water
charges and furniture and household utensils.
The Bank of Japan (BoJ) is assumed to continue its
Quantitative and Qualitative Monetary Easing Pro-
gramme as it was originally designed until the end of
2014. To be sure, BoJ has set a goal of an annual increase
in the monetary base of between 60 trillion yen and 70
trillion yen ($690 billion) in order to ensure that inflation
picks up to its 2 per cent target. The policy rate for BoJ
is also assumed to stay within the range of 0.0 to 0.1 per
cent through the end of 2015, to accommodate the sec-
drivers. Growth of public investment strengthened to
11.4 per cent as compared to contraction to the tune
of 0.7 per cent during the same quarter of last year.
Growth in private consumption increased to 3.7 per
cent as compared to 1.5 per cent last year as households
tried to beat the increase in the sales tax in April 2014
and brought purchases forward. In contrast, govern-
ment consumption saw a decline to the tune of 0.9 per
cent as compared with 1.4 per cent last year.
ond hike of the consumption tax rate that is assumed to
be implemented in October 2015.
d. China
China’s economic growth improved to 7.5 per cent in
the second quarter of 2014, from 7.4 per cent recorded
in the previous quarter. The improvement in growth
comes as the government undertook a series of meas-
ures to support growth, which were collectively dubbed
as “mini-stimulus”. The government in April 2014 had
pledged to increase spending on railways, affordable
housing and extend tax sops to small firms. Data sug-
gest that the improvement in economic activity was
widespread, with growth improving in both secondary
and in the tertiary sector (which includes infrastruc-
ture).

ECONOMY MATTERS 10
GLOBAL TRENDS
Other Global Developments During the Month
• US non-farm payrolls (NFP) increased by 288K in June, better than market consensus of ~215K increase. The
readings for both April and May jobs growth were revised upward by total 29K. Thus, NFP increased by an aver-
age of 272K in Q2’2014, faster than Q1 average of 190K.
• As per the household survey, the unemployment rate fell to 6.1 per cent in June, defying market expectation of
a flat reading at May’s level of 6.3 per cent. However, the recent decline in the unemployment rate is partially
attributable to the persistent fall in the labour force participation rate (LFPR). The LFPR remained flat at a 35-
year low of 62.8 per cent in June.
• In line with market expectation, the Fed reduced its asset purchase program from US$45 billion/month to
US$35 billion/month in its meeting held last month. Component wise, Fed would trim its purchases of long-
term Treasury bonds to US$20 billion/month (from US$25 billion previously) and mortgage-backed securities
(MBS) to US$15 billion/month (from US$20 billion). QE3 is expected to be terminated in Q4 of 2014.
• Federal Reserve members have also revised down their projections for 2014 GDP growth given contraction in
the first quarter. The Fed expects the economy to grow at a lower pace of 2.1 per cent to 2.3 per cent in 2014
(previous expectation: 2.8 per cent to 3.0 per cent). However, it expects unemployment rate to reduce to 6.0-
6.1 per cent range in 2014 as against its previous projections of 6.1-6.3 per cent range.
• Bank of England (BoE) maintained status quo with official policy rate at 0.5 per cent and Asset Purchase Facility
(APF) at GBP 375 billion in its meeting held on July 10, 2014. BoE implemented some macro-prudential measures
to address housing market risks last month, which are unlikely to have a substantial impact in the near term.
• IMF Chief Lagarde has hinted that the Fund’s 2014 global growth forecast of 3.6 per cent might be revised
down slightly lower. She said that global economic activity should strengthen in second half of 2014 and ac-
celerate in 2015, although momentum could be weaker than expected.
• Consumer price index (CPI) in the UK grew at higher-than-expected rate of 1.9 per cent on y-o-y basis in June
2014 vis-à-vis 64-month lowest level of 1.5 per cent in the previous month. Interestingly, barring miscellaneous
goods & services, all components of CPI moved up in June 2014. The major drivers of higher-than-expected
inflation were ’clothing & footwear‘, which accounted for almost half of the increase in June’s inflation (added
18 basis points (bps)), ’food & non-alcoholic beverages‘and ’transport ‘(added 7 bps each).
Coming to inflation, CPI based inflation rate rose to
2.5 per cent in May 2014, up from April’s 1.8 per cent
increase. This was the highest figure in the last four
months. The politically sensitive food inflation acceler-
ated sharply to 4.1 per cent in May 2014 from the previ-
ous month’s 2.3 per cent rise. In May 2014, the biggest
increases were reported for prices of services (2.7 per
cent), clothing (2.5 per cent), housing (2.3 per cent) and
recreation, education & culture (2.1 per cent). For 2014,
the government has set inflation target of around 3.5
per cent.
Monetary policy has eased somewhat after remaining
prudent for most of 2013 and the first quarter of 2014.
Latest data showed that money supply (M2) growth
increased in the April-June period (in year-over-year
growth terms) along with a rise in bank lending. Never-
theless, monetary policy is not expected to be substan-
tially eased any further as the PBoC continues to remain
concerned over risks emanating from shadow banking.
In fact, regulators announced slightly tighter norms for
interbank lending in the middle of the second quarter.
Conclusion
Global activity has broadly strengthened and is expect-
ed to improve further in 2014–15, according to the April
2014 WEO, with much of the impetus for growth com-
ing from advanced economies. Although downside risks
have diminished overall, lower-than-expected infla-
tion poses risks for advanced economies. Additionally,
there is increased financial volatility in emerging market
economies, and increases in the cost of capital will likely
dampen investment and weigh on growth. Advanced
economy policymakers need to avoid a premature
withdrawal of monetary accommodation. Emerging
market economy policymakers must adopt measures to
changing fundamentals, facilitate external adjustment,
further monetary policy tightening, and carry out struc-
tural reforms.

11
DOMESTIC TRENDS
Deficient Monsoons: Another
Macroeconomic Risk?
JUNE -JULY 2014
Though the occurrence of normal monsoon is pivot-
al in supporting the growth rate of the farm sector
every year, but this fiscal it assumes greater importance
in the context of the macroeconomic challenges facing
the economy. The economy, at present, is grappling
with high inflation rates emanating from the surging
food prices and normal monsoons would provide the
much needed relief by easing the domestic supply-side
pressures. As rainfall is the main source of irrigation
for 55 per cent of arable land, sub-normal rainfall (to
the tune of 31 per cent below LPA from 01 June-20 July
2014) received so far has increased the risk of fuelling
food inflation further except in wheat and rice where
we already have buffer stocks. As is evident from the
below chart, years in which there was a higher deviation
of monsoons from long period average (LPA), higher
food inflation was recorded. However, food inflation
was low during the drought in 2002-03 as there were
huge buffer stocks of food grains, much above the rec-
ommended levels. In contrast, food inflation was high
last year despite normal monsoons due to structural
factors plaguing the sector.

ECONOMY MATTERS 12
DOMESTIC TRENDS
The forecast for the South-West (SW) monsoon, which
occurs between the months of June and September,
was revised from 95 per cent of LPA announced ear-
lier in April 2014 to 93 per cent by the Meteorological
Department in June 2014 mainly on account of the El
Nino factor. El Nino is an abnormal warming of the wa-
ter in the Equatorial Pacific Ocean that can weaken the
South-western monsoon winds and, thus, significantly
reduce rainfall in the North-west and Central regions.
This means that the rainfall this year will be below nor-
mal this year. The IMD classifies rainfall between 90-96
per cent of the LPA as below normal and between 96-
104 per cent as normal. Rainfall anywhere below 90 per
cent of the LPA is considered deficient. The slow pro-
gress of the SW monsoon so far has jeopardized the
prospects of a normal Kharif crop this season.
As per the latest data, rainfall deficiency for the period
from 1 June to 20 July 2014 stood at 31 per cent below
LPA as compared to 16 per cent above LPA during the
same period last year, even after the gap shrank in the
week of 10-17 July 2014 due to improvement in rainfall in
some areas of central and northwest India. Still, central
India has the maximum deficiency gap of all the major
regions of the country. Out of the 36 meteorological
sub-divisions, rainfall was deficient/scanty in 25, and
normal in 11 sub-divisions. The map shown below shows
the spatial distribution of rainfall across the country.

13
DOMESTIC TRENDS
JUNE -JULY 2014
Source: IMD
Unless there is a significant recovery in monsoons in the next few weeks, we would be staring at yet another drought, the fourth in the
past decade. A poor monsoon season, besides stoking inflation, would also have adverse impacts on exports and overall demand in the
economy.
Spatial Distribution of Rainfall

ECONOMY MATTERS 14
DOMESTIC TRENDS
Continuing its good performance of April 2014, indus-
trial production growth rose sharply to 4.7 per cent in
May 2014, indicating signals of turnaround of the belea-
guered industrial sector. The performance of consumer
goods sector stood out as it moved into the positive ter-
ritory after seven consecutive months of contraction.
To be sure, a weak base of last year also lent a helping
hand to the industrial output growth in May 2014. This
becomes amply clear from the fact that the sequential
momentum as indicated by the movement in the sea-
sonally-adjusted month-on-month series showed that
industrial output growth declined in May 2014 (from
1.9 per cent in April 2014 to -0.7 per cent in May 2014).
However, the April-May IIP growth average of 4 per
cent is encouraging and the momentum is likely to con-
On the sectoral front, output of the manufacturing sec-
tor, which constitutes over 75 per cent of the index, in-
creased sharply to 4.8 per cent in May 2014 as compared
to 2.5 per cent in the previous month, partly due to a
weak base of last year. In terms of industries, sixteen
(16) 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 May 2014 as com-
pared to the corresponding month of the previous year.
The industry group ‘Furniture; manufacturing n.e.c.’
showed the highest positive growth of 60.0 per cent,
tinue for the rest of the year and may even accelerate
towards the end of the fiscal on the back of significant
decisions announced in the budget to boost manufac-
turing sector.
Core sector output, which has a weight of 37.90 per
cent in the Index of Industrial Production (IIP), grew at
a diminished pace of 2.3 per cent in May 2014 as com-
pared to a healthy 4.2 per cent increase in April 2014.
Coal production increased 5.5 per cent, while the elec-
tricity generation increased 6.3 per cent in May 2014
over May 2013. The production of fertilizer increased
17.6 per cent, while that of steel declined to 2.0 per cent
in May 2014. The output of crude oil, natural gas and pe-
troleum refinery also declined in the reporting month.
followed by 37.1 per cent in ‘Tobacco products’ and 33.7
per cent in ‘Electrical machinery & apparatus n.e.c.’.
On the other hand, the industry group ‘Radio, TV and
communication equipment & apparatus’ showed the
highest negative growth of (-) 40.3 per cent, followed
by (-) 28.6 per cent in ‘Office, accounting & computing
machinery’ and (-) 7.4 per cent in ‘Motor vehicles, trail-
ers & semi-trailers. Mining sector, which had turned the
corner in the last couple of months, grew by 2.7 per cent
in May 2014 as compared to 2.6 per cent growth in the
previous month. Electricity sector output growth mod-
Pace of Industrial Output Accelerates for the Second
Consecutive Month

15
DOMESTIC TRENDS
JUNE -JULY 2014
WPI based inflation cooled off to four month low of 5.4
per cent in June 2014 as compared to 6.0 per cent in
the previous month on the back of deceleration in food
prices. Total food inflation (primary and manufacturing)
moderated to 6.2 per cent in the June 2014 as compared
to 7.0 per cent in the previous month. Retail inflation
(CPI) also dropped sharply in June 2014, falling to a re-
cord low of 7.3 per cent from 8.3 per cent in the previ-
ous month. Lower food inflation was the main driving
force behind reduction in CPI inflation. CPI food infla-
erated to 6.3 per cent in the reporting month as com-
pared to a healthy 11.9 per cent in the previous month.
The use-based sectors displayed broad based recovery
with all sub-sectors posting positive growth since Octo-
ber 2012. Volatile capital goods segment output moder-
ated to 4.5 per cent in May 2014 as compared to robust
double-digit rate of 14.3 per cent in April 2014. Interme-
diate goods, which registered steady growth for most
part of last fiscal, continued its good performance in
May 2014 too, growing by 2.7 per cent, albeit a modera-
tion from the previous month. Basic goods growth too
moderated to 6.3 per cent in May 2014 from 7.3 per cent
in the previous month. In contrast, consumer goods
growth moved into the positive territory after languish-
ing in the negative territory for the last seven months.
Consumer goods output grew by 3.7 per cent in the re-
porting month as compared to an average contraction
to the tune of 4.4 per cent in the last seven months.
The improvement in the sector was underpinned by the
positive growth recorded in consumer durables sector
after a gap of seventeen months. This improvement is
reflected in the uptick in passenger vehicles sales as
well. Consumer non-durables growth too moved into
the positive territory in May 2014, although its future
trajectory would also be determined by how rural in-
come is affected by the uncertainty in monsoons.
Inflation Moderates in June 2014
Outlook
The rise in IIP for the second month in a row in May 2014 provides a glimmer of hope that the economic recovery
could be on the anvil. CII anticipates a further rebound in industrial production as the reforms oriented and forward
looking budget would boost business confidence. CII hopes that the government would implement and follow-up
on the policy announcements made in the Union Budget 2014-15.

ECONOMY MATTERS 16
DOMESTIC TRENDS
tion fell to 28-month low of 7.9 per cent in June 2014,
mainly on account of lower base effect of last year. Core
CPI also continued to moderate. To be sure, the sharp-
er-than-anticipated moderation in CPI inflation is much
below the RBI’s glide path. However, RBI is expected to
remain vigilant regarding the impact of weak monsoons
Primary inflation decelerated to 6.8 per cent in June
2014 from 8.6 per cent in the previous month. This was
mainly attributable to moderation of inflationary pres-
sures in both its food and non-food components. Prima-
ry food inflation decelerated to 8.1 per cent in June 2014
from 9.5 per cent in the previous month. However, how
far this moderation in food prices is able to sustain is a
matter of debate as the prospects of El Nino weather
event derailing the monsoons this year has grown high-
er. Primary non-food inflation too decreased to 3.5 per
cent in June 2014 as against 4.9 per cent in the previous
month. Interestingly, inflation in minerals which had
jumped to twenty-month high of 8.8 per cent in May
2014 came down sharply to 4.4 per cent in June 2014.
Fuel inflation decelerated to 9.0 per cent in June 2014 as
compared to 10.5 per cent in the previous month. Infla-
tion in high-speed diesel moved down to 13.6 per cent
in June 2014 from 14.2 per cent in the previous month.
Inflation in petrol also moderated to 9.0 per cent in the
reporting month from record-high of 12.3 per cent in the
previous month. Going forward, there is an impending
threat of further increase in fuel prices, if the govern-
ment accepts recommendations of the Saumitra Chaud-
huri Committee on Auto Fuel Vision & Policy 2025, which
on inflation as it has not started to show in the official
data. Much of the moderation in both WPI and CPI infla-
tion was attributable to lower food prices which in turn
were a result of the slew of measures such as imposing
a minimum export price on certain essential vegetables
etc., announced to tame inflation.
has recommended that the petrol and diesel prices be
hiked by 75 paise a litre each to upgrade fuel standards
in the economy. Additionally, the recent upward fuel
price revisions along with the budgeting of a decline
in oil subsides in the current fiscal (which tantamount
to frequent increase in fuel prices as the government
would bring the domestic oil prices in line with the mar-
ket ones) also pose upside risk to fuel inflation, going
forward.
Manufacturing inflation increased marginally to 3.6 per
cent in June 2014 as compared to 3.5 per cent in the
previous month. Worryingly, non-food manufacturing
or core inflation, which is widely regarded as the proxy
for demand-side pressures in the economy, inched up
to 3.9 per cent during the month as compared to 3.8 per
cent in May 2014 on the back of continued price hikes by
manufacturers particularly in metals, chemicals and tex-
tiles sectors, on the back of rising input costs coupled
with pressured profit margins. 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. Manufac-
turing food inflation showed a marginal uptick during
the month.

17
DOMESTIC TRENDS
JUNE -JULY 2014
As per the latest LAF data, the average liquidity defi-
ciency stood at 105 billion in June 2014 as compared to
Rs 69 billion in May 2014. Continuation of inflows from
the overseas market, pick-up in the government spend-
ing and low credit demand has aided the easing of the
systemic liquidity during May-June 2014. The country’s
forex reserves increased to US$315.8 billion by 27 June
2014 from US$309.9 billion as on 25 April 2014. To be
sure, non-food credit grew at a sluggish pace of 13.5 per
cent in June 2014 as compared to over 14.4 per cent in
March 2014.
The easing of the liquidity condition is reflected in a
fall in banks’ reliance on the Reserve Bank’ various re-
finance facilities. Banks’ aggregate daily borrowings
under the liquidity adjustment facility (including term
repos), marginal standing facility and standing liquidity
facility averaged Rs 1169.5 billion during the June 2014
quarter as compared to Rs 2011.6 billion in March 2014.
Interest rates in the inter-bank call money market sof-
tened to 7.86 per cent during the June quarter from
around 8.5 per cent in the latter half of March 2014.
Liquidity Conditions Ease in May-June 2014
Outlook
The moderation in both WPI and CPI inflation in June 2014 on the back of lower food prices is a great relief for the
policymakers. Core CPI inflation has also continued to decelerate. However, with the danger of El Nino looming
large over the economy this year, a rise in food inflation in the latter part of the year cannot be ruled out. With the
RBI recently re-emphasising its intent to lower CPI inflation to 8 per cent by January 2015 and to 6 per cent by Janu-
ary 2016, RBI is expected to remain in a wait-and-watch mode for few more quarters.

ECONOMY MATTERS 18
DOMESTIC TRENDS
In view of the comfortable liquidity condition, the RBI
conducted 4-days term reverse repos on 2 June 2014
and 3 July 2014 respectively. It intended to suck out li-
quidity worth Rs.150 billion and Rs.200 billion, respec-
tively, from the system via the term reverse repos.
These, however, did not entice strong response from
banks as they parked Rs 20.3 billion with the RBI in the
term reverse repo auction conducted in June. They
parked even lesser Rs 2 billion in the auction conducted
on 3 July.
With the Union Budget 2014-15 pegging the net market
borrowings only marginally higher by 1.6 per cent in
2014-15 over 2013-14, the pressure on liquidity is not ex-
pected to be any higher than evidenced in the last fiscal.
The Economic Survey 2013-14 was tabled in the parlia-
ment by Finance Minister Shri Arun Jaitley on July 9th,
2014. The survey delineates the economic vision of the
government and provides macro economic backdrop
for the long-term policy agenda. The key highlights of
the survey are as follows:
Growth
• Economy is likely to grow in the range of 5.4 – 5.9
per cent in 2014-15
• Reforms are needed for long term-growth pros-
pects in three key areas: low and stable inflation
regime, tax and expenditure reform and regulatory
framework.
Inflation
The strategy to control inflation has to take into ac-
count the following factors:
• Deregulation of diesel prices, power–sector re-
forms, and generally the move from administered
to market-determined prices will release sup-
pressed inflation in the short run.
• MGNREGS needs revamp to link to productive asset
creation as it has led to labour shortage in agri sec-
tor and has also resulted in a wage price spiral.
• MSP should be linked to cost of production. FCI
should procure stocks more efficiently from the
market and manage risks through the futures mar-
ket.
• The State Agricultural Produce Marketing Commit-
tees (APMC) Acts have created monopolies and dis-
tributional inefficiencies.
• Reforms are required to create alternative trading
platforms in the private sector where it is possible
to reduce intermediation. Meanwhile, fruits and
vegetables should be taken out of the purview of
the APMC Acts immediately.
Inflation Outlook: Going forward, inflation is expected
to inch downwards, paving the way for monetary eas-
ing. However, risks to the outlook are from a possible
sub-normal monsoon, possible rise in international
crude oil prices and exchange rate volatility.
Fiscal Issues
The fiscal policy for 2013-14 was calibrated with two-fold
objectives; first, to aid growth revival; and second, to
Economic Survey 2014-15

19
DOMESTIC TRENDS
JUNE -JULY 2014
reach the fiscal deficit level targeted for 2013-14.
• The survey emphasizes the need for a new FRBM
Act “with teeth”; fiscal consolidation remains im-
perative for the economy.
• Fiscal consolidation can be achieved through ra-
tionalization of subsidies and raising tax-GDP ratio,
among other measures. On the subsidy front, there
is need to review nutrient based fertilizer subsidy.
• The introduction of the goods and services tax
(GST) will have a significant impact on the resource
raising potential of state governments and will im-
prove tax buoyancy.
• Direct Taxes Code (DTC) required to replace exist-
ing income tax laws; will reduce compliance costs
and boost tax collections.
• Fiscal consolidation achieved by cutting expendi-
ture (majorly plan/capital expenditure) is unsustain-
able.
Financial Intermediation
• RBI has indentified five sectors -- infrastructure,
iron and steel, textiles, aviation and mining as the
stressed sectors.
• The New Pension System (NPS), now National Pen-
sion System, introduced for the new recruits who
join government service on or after January 2004,
represents a major reform of Indian pension ar-
rangements and the passage of the PFRDA Act
and the Financial Sector Legislative Reforms Com-
mission (FSLRC) report were major milestones in
FY2014.
• Infrastructure financing would require a mature
and capable bond market.
Balance of Payments & International Trade
Current account deficit is expected to be 2.1 per cent
of GDP (US$ 45 billion) in FY15 as compared to 1.7 per
cent FY14.
Key challenges for export potential:
• While there has been market diversification and
compositional changes in India’s export basket, not
much of demand-based product diversification has
taken place. In the top 100 imports of the world at
four-digit HS level in 2013, India has only five items
with a share of 5 per cent and above.
• Export infrastructure, particularly ports-related in-
frastructure, which affects trade, needs immediate
attention.
• Some FTAs/RTAs of India have led to an inverted
duty structure like situation which discourages do-
mestic value addition.
• A clear signal needs to be given for Indian SEZs as
fresh investments are slowing down in recent years
and the greenfield SEZs have not really been suc-
cessful.
Agriculture and Food Management
• State APMC laws are a major hurdle to moderniza-
tion of the food economy. They have artificially cre-
ated cartels of buyers who possess market power.
APMCs remain a non-level playing field. In addition,
some state governments have introduced barriers
to trade within the country through taxation and
technical requirements.
• Alongside the removal of conventional interven-
tions in the food economy, there is a need to place
a priority upon the three national-level public goods
in the field of food: production of knowledge, finan-
cial regulation of futures trading, and information
interventions that address the market failure in
warehousing.
• Creation of a national agri market: For establishing
such a market, some reforms are needed:
- Examine the APMC Act, EC Act, Land Tenancy
Act, and any such legally created restrictive
structures
- Rigorously pursue alternate marketing initia-
tives
- Examine inclusion of agri related taxes under
the GST
- Establish stable trade policy based on tariff in-
terventions instead of non-tariff barriers
Industrial Performance
• In order to boost manufacturing sector, the gov-
ernment has already announced setting up of six-
teen national investment and manufacturing zones
(NIMZs). Of these, eight are along the Delhi Mum-
bai

ECONOMY MATTERS 20
DOMESTIC TRENDS
• Industrial Corridor (DMIC).In view of the ongoing
industrial slowdown, the policy focus now needs to
target key growth drivers in the short-term.
• Industrial policy needs to focus on labour-intensive
and resource-based manufacturing in informal sec-
tor to rejuvenate small businesses.
• In the medium-term, challenge for the Indian manu-
facturing is to move from lower tech to higher tech
sectors, from lower value-added to higher value
added sectors and from lower productivity to high-
er productivity sectors.
Measures to boost business environment
• Create electronic repository for rules and regula-
tions applicable to businesses. Existing regulatory
landscape needs to be reviewed.
• The existing separation of land into commercial and
residential plots is detrimental to setting up MSMEs
and needs to be reviewed.
• A lot of land is held by developmental authorities,
PSUs, and large firms which are unutilized. The gov-
ernment could institute a policy to free up this land,
which can be used for industrial estates, common
facilities, incubators, etc.
• Indian legislation governing business needs to be
thoroughly revamped. Laws should be streamlined,
especially in the areas of taxation, labour, environ-
ment, and safety.
Services Sector Performance
• India ranked 12th in terms of services GDP in 2012
among the world’s top 15 countries in terms of GDP
(at current prices).
• World class tourism infrastructure needs to be cre-
ated. MGNREGA can be used for creating perma-
nent assets like tourism infrastructure.
• Indian ports do not have the necessary draft. As a
result, third-generation ships are not able to enter
the harbour and goods have to be offloaded out-
side in smaller ships, adding to costs. Immediate
focus should be on building world class ports and
lowering port charges.
• FDI and privatization in the railways likely to be the
next round of necessary reforms. There is an exist-
ing proposal, which envisages allowing FDI in all
areas of the rail sector except railway operations.
Even in railway operations, FDI is proposed in PPP
projects, for suburban corridors, high speed train
systems, and dedicated freight lines.
Social Sector Performance
• According to HDR 2013, India has slipped down in
HDI with its overall global ranking at 136 (out of the
186 countries) as against 134 (out of 187 countries)
as per HDR 2012. It is still in the medium human de-
velopment category.
• The poverty ratio (based on the MPCE of Rs 816 for
rural areas and Rs 1000 for urban areas in 2011-12 at
all India level), has declined from 37.2 per cent in
2004-05 to 21.9 per cent in 2011-12.
• In absolute terms, the number of poor declined
from 407.1 million in 2004-05 to 269.3 million in 2011-
12 with an average annual decline of 2.2 percentage
points during 2004-05 to 2011-12.
Infrastructure Development
• The performance of the coal sector in the first two
years of the Twelfth Plan has been subdued with
domestic production at 556 MT in 2012-13 and 566
MT in 2013-14.
• Plan to add 88,537 MW power capacity over next 5
yrs.
• A total length of 21,787 km of national highways has
been completed till March 2014 under various phas-
es of the NHDP. In spite of several constraints due
to the economic downturn, the NHAI constructed
2844 km length in 2012-13, its highest ever annual
achievement. During 2013-14 a total of 1901 km of
road construction was completed.
Summing Up
The Economic Survey 2013-14 laid stress on areas such
as low inflation, quality of fiscal consolidation, capex
recovery and revamping regulatory framework. In or-
der to address each of these areas, the Union Budget
2014-15 laid out elaborate measures which have been
discussed later in Focus of the Month.

21
DOMESTIC TRENDS
JUNE -JULY 2014
The Railway Budget was announced on July 8th
, 2014
by the honorable Railway Minister Shri D.V. Sadananda
Gowda on the floor of the Parliament. The key high-
lights of the Railway Budget are as follows:
Budgetary Estimates & their Funding
- Given the Railways Minister has already hiked the
passenger fares and freight rates by 14.2 per cent
and 6.8 per cent respectively in June 2014, there
were no hikes in passenger and freight rates.
- The annual plan outlay has been budgeted at a re-
cord high of Rs 654.5 billion for FY2015, an increase
of 10.3 per cent on y-o-y basis over the previous year
and 1.8 per cent over the interim budget presented
in February-2014.
- Financing of the record plan outlay is expected to
be achieved through increased reliance on internal
resources. In the Budget speech, the Railway Min-
ister also stated the need for alternative sources of
funding given the rising expenditure requirements.
- To solve the problem of funding, honourable min-
ister indicated that several Public Private Partner-
ships (PPP) projects are in the pipeline, in addition
to FDI being planned in railway projects, except in
operations.
- Further, Railway PSU resources to be leveraged by
bringing in the investible surplus funds in infrastruc-
ture projects of Railways.
- The gross traffic receipts is budgeted to grow by
14 per cent on y-o-y basis to Rs 1602 billion, broadly
in line with 13 per cent growth registered during
FY2014.
New Initiatives
- Introduction of a Diamond Quadrilateral network
of high speed trains connecting major metros (160-
200 km/hr). The 1st Bullet train would be introduced
in Mumbai-Ahmedabad sector.
- To facilitate connectivity to upcoming ports (like
Sagar Mala project). There are plans to sanction Rs
400 billion worth of rail projects to connect ports.
Further, connectivity to new ports to be increased
via private participation.
- Construction of critical coal connectivity lines to be
facilitated (in areas like Jharsuguda). Improved coal
connectivity to add 100 mn tons in annual freight.
- Dedicated Freight Corridor (DFC) project imple-
mentation: Eastern and Western DFCs to be closely
monitored.
- Plan to hike speed of trains to 160-200 km/hr in 9
sectors.
- Revamping Railway Reservation System into Next
Generation e-Ticketing System.
- Online booking to support 7,200 tickets per minute;
to allow 1.2 lakh users log in simultaneously.
- Setting up of Project Management Groups consist-
ing of professionals and State Government Officials
at Railway Board and Zonal level for coordinating
and expediting project management with respec-
tive State Governments.
- Paperless offices in Indian Railways in 5 years.
- Provision of foot-over bridges, escalators, lifts, etc.
at all major stations including through PPP route.
Summing Up
The first railway budget of the new government clearly
showed its intent for structural reforms. The budget
provided measures to improve efficiency in the near
term, while at the same time laying out the long-term
vision for development.
Railway Budget 2014-15: A New Beginning

ECONOMY MATTERS 22
DOMESTIC TRENDS
Indicating a sharp improvement in investors’ senti-
ments amidst heightened expectations that the new
government means business along with some improve-
ment in basic macro indicators, the CII Business Confi-
dence Index (CII-BCI) for April-June 2014 quarter moved
up to 53.7 from 49.9 in the previous quarter. A score
above 50 indicates positive confidence while a score
above 75 would indicate strong positive confidence. On
the contrary, a score of less than 50 indicates a weak
confidence index.
Domestic economic uncertainty, low GDP growth and
high inflation were cited to be the top most concerns
of the respondents, highlighting the need for stepping
Most (46 per cent) of the respondents expect GDP
growth to settle in the range of 5.0-5.5 per cent in 2013-
14, while only 16 per cent expect it to lie between 5.5-6.0
per cent. To be sure, economic growth slowed down to
4.7 per cent in 2013-14, the second consecutive year of
sub-5 per cent annual GDP growth. Expectation of high-
er economic growth in the current year is rooted in opti-
mism about the overall demand situation. As high as 56
per cent of the respondents expect their sales and new
order to increase in the first quarter of 2014-15, which
is much higher than the previous quarter wherein only
around 35 per cent respondents expected a rise in sales.
Similarly, majority of the respondents expect their in-
vestment, domestic as well as international, to go up
up efforts in the direction of improving business senti-
ments and removing supply bottlenecks.
The 87th Business Outlook Survey is based on the re-
sponses from over 150 industry members. Majority of
the respondents (50 per cent) belong to large-scale sec-
tor, while medium scale companies comprise another
13 per cent. Around 31 per cent and 7 per cent respec-
tively are from small-scale and micro firms. Further,
54 per cent of the respondents were from the manu-
facturing sector while 45 per cent were from services.
The respondents in the survey were asked to provide a
view on the performance of their firm, sector and the
economy based on their perceptions for the previous
and current quarter.
during the current quarter.
As regards to inflation, majority of the respondent
firms (53 per cent) expect WPI based inflation to lie in
the range of 5.5-6.5 per cent for the current fiscal. This
would be in continuation of the moderation seen in in-
flation from 7.4 per cent in 2012-13 to 6.0 per cent in 2013-
14. However, we need to maintain a cautious approach
with regard to inflationary expectations given the up-
ward risks to inflation from enhanced possibility of an
El Niño, disrupting the monsoon in 2014. Though on the
flip side, inflation may be capped as the lagged impact
of previous rate hikes seeps through and a strong base
effect from last year lowers headline inflation.
CII Business Confidence Index Moves Up

23
DOMESTIC TRENDS
JUNE -JULY 2014
As far the twin deficits of fiscal and current account are
concerned, the largest 44 per cent of the respondents
expect fiscal deficit to lie in the range 4.5-5.0 per cent
of GDP in 2014-15, which is higher than the budgeted 4.1
per cent for the year. Given that the fiscal deficit for pre-
vious year stood at 4.6 per cent of GDP, this indicates
limited expectation of rationalization in the deficit in
the current year. Similarly, 32 per cent of the respond-
The pick-up in BCI for the current quarter comes as a
silver lining for the economy. However, it should also
be approached with a bit of cautious optimism as the
downside risks to growth have still not abated from the
ents expect current account deficit in the range of 2.5-
3.0 per cent of GDP in 2014-15. It is pertinent to note that
India’s current account deficit (CAD) narrowed sharply
to 1.7 per cent of GDP in 2013-14 from 4.7 per cent of
GDP in 2012-13. The CAD in the current year may move
up in the backdrop of faster increase in imports as the
economic activities pick up.
horizon. Moreover, it will remain to be seen; how far
the new government is able to deliver on its promises,
especially the ones outlined in the recent Union Budget
2014-15.

ECONOMY MATTERS 24
SECTOR IN FOCUS
Warehousing Industry
Warehousing forms a crucial link in the overall lo-
gistics value chain. It accounts for close to 5 per
cent of the Indian logistics market (excluding inventory
carrying costs, which amount to another ~30 per cent).
Warehousing in India has been evolving rapidly from be-
ing traditional “godowns” — a mere four-wall-and-shed
with sub optimal size, inadequate ventilation and light-
ing, lack of racking systems, poor hygiene conditions
and lack of inventory management or evolved solutions
such as warehouse management systems into modern
setups with storage and handling points where raw ma-
terial, intermediate and manufactured goods are col-
lected, assorted, stored and distributed to the point of
consumption/sale.
The size of the Indian warehousing industry (across
commodities and modes) is pegged at about Rs 560 bil-
lion (excluding inventory carrying costs, which amount
to another Rs 4,340 billion). The industry is growing at
over 10 per cent annually. Multiple business models ex-
ist within the warehousing industry.
Additionally, given the importance of the sector to the
economy, Union Budget 2014-15 announced the follow-
ing steps to improve its outcomes:
- Allocation of Rs 5,000 crore provided for the Ware-
house Infrastructure Fund.
- Transformation plan to invigorate the warehousing
sector and significantly improve post-harvest lend-
ing to farmer.
- Service tax exempted on loading, unloading, stor-
age, warehousing and transportation of cotton,
whether ginned or baled.
The key segments of warehousing industry can be rep-
resented as:
• Industrial/Retail warehousing: accounts for 55 per
cent of the total market
• Agri warehousing: 15 per cent share
• Cold stores: 16 per cent share
• Inland Container Depots (ICDs)/Container Freight
Stations (CFSs): 14 per cent share

25
SECTOR IN FOCUS
JUNE -JULY 2014
The following section reviews the warehousing sector
based largely on the Report “Indian Warehousing In-
dustry: An Overview” prepared by the Confederation of
Indian Industry (CII) and Ernst & Young. The report ex-
plores and assesses the growth drivers, challenges and
outlook for these key segments.
(A). Industrial/Retail Warehousing
Industrial/Retail warehousing has a market size of Rs
310 billion in FY13, and it has been growing at a CAGR of
10–12 per cent over the last few years. Demand for in-
Growth Drivers
Although currently at a nascent stage, modern ware-
housing in India is growing at a rapid pace. In addition,
it is estimated to grow at a CAGR of 25–30 per cent for
the next 5 years, driven by:
1). Growing GDP: Growth in GDP and changing demo-
graphics are creating higher primary and secondary
demand. Indian GDP has grown significantly over
the last decade. Despite the downturn, it continues
to grow at a significant rate. Growing GDP, increas-
ing population and improved purchasing power
parity are creating new demand for warehouse
space.
2). Growing external trade: Rising exports (13 per cent
CAGR between FY08 and FY13) and imports (14 per
cent CAGR between FY08 and FY13) are supporting
warehousing growth.
3). Rising share of organized retail: This form of retail
dustrial warehousing space is estimated to have grown
from around 420 million sq. ft. in FY11 to 475 million sq.
ft. in FY13, at a CAGR of 6 per cent. Retail, food, engi-
neering goods, chemicals, electronic and telecom, phar-
maceutical and automobiles are the major industrial
consumers of warehousing in India. Among these, engi-
neering goods, and the IT, electronics and telecommu-
nication sectors (which have been growing at a CAGR
of 8–9 per cent during 2010–13) are expected to lead
warehousing demand. The other sectors are growing at
5–7 per cent.
constitutes 8 per cent of the total retail market, and
it is growing at a CAGR of 25–30 per cent annually.
As a result, it is expected to gain a higher share in
the growing pie of the retail market in India. In-
creasing organized retail activity is pushing demand
for modern warehousing.
4). GST implementation: The Government plans to
phase out Central Sales Tax (CST) and introduce
GST. The move would help the logistics industry in
re-arrangement of its operations and would enable
manufacturers to store and distribute goods across
the country without any state boundaries. This
will enable higher growth and consolidation in the
warehousing industry.
Challenges
Despite its strategic importance in the Indian economy,
scale of opportunities offered and its immense poten-

ECONOMY MATTERS 26
SECTOR IN FOCUS
tial for growth, the Indian warehousing sector is faced
with several challenges including the lack of sufficient
physical infrastructure. The time lag between devising
and implementing strategies, due to the lack of inter-
national warehousing standards, is another concern.
High fragmentation and the dominance of unorganized
players due to various applicable taxes at the state and
central level are other issues plaguing the warehousing
space. Indian players face challenges and bottlenecks
at various stages of their operation life cycle. Some of
these challenges are strategic, while others are opera-
tional and need to be managed on an ongoing basis. In
such a scenario, the sustainable growth of the ware-
housing sector depends on how effectively industry
players and the government can work together to ad-
dress challenges in the long-term.
Outlook
The global warehousing and storage industry has wit-
nessed significant growth during the last five years. It
is expected to offer good growth opportunities to in-
dustry players over the next five years also. The Indian
warehousing industry is set to grow at a CAGR of 8–10
per cent and modern warehousing at 25–30 per cent
Growth Drivers
Growing annual agriculture production is creating on-
going demand for more storage space to reduce wast-
age. Agri exports from India are increasing by 20–25
per cent annually and have emerged as the one of the
largest exporters of fruit and vegetables, propelling
growth in high-quality demand for warehousing. Re-
cently, private sector participation in agri warehousing
has increased, making this segment more competitive.
Private players are focusing on improving the quality of
agri warehouses with the use of technologies and are
challenging public sector players. Besides, the Govern-
ment is determined to improve agri warehousing infra-
structure to reduce agricultural wastage. It has already
issues various policies to drive growth in agri warehous-
ing; some of these are:
over the next 5 years due to various factors including the
anticipated increase in global demand, growth in organ-
ized retail and increasing manufacturing activities, pres-
ence of extremely affordable and desirable e-commerce
options and growth in international trade.
(B). Agri Warehousing
Agriculture supply chain in India suffers from inefficien-
cies in the supply chain, leading to heavy losses of com-
modities throughout the country due to lack of proper
storage and transportation facilities. Poor front-end in-
frastructure, such as storage facilities, improper ware-
housing facilities, redundant food processing technol-
ogy and farmers’ inaccessibility to value-added services,
results in wastage of 40 per cent of the fruits and veg-
etables.
Agri warehousing accounts for 15 per cent of the ware-
housing market in India in FY13. It has been growing at a
10–12 per cent rate over the last 3 years. Agri warehous-
ing capacity in India is 110–120 million metric ton (MT),
and it has been growing at a CAGR of 8–10 per cent
over the last 5 years. In addition, the Government has
announced 35 million MT additional capacity under the
Twelfth Five-year Plan.

27
SECTOR IN FOCUS
JUNE -JULY 2014
1). The Warehousing (Development & Regulation) Act,
which aims to standardize warehousing operations,
makes warehouse receipts (WRs) negotiable and
establish accreditation agencies for warehouse reg-
istration.
2). Agri-warehousing activity covered under Priority
Sector Lending by RBI.
3). Tax incentives offered such as tax relief under 80(I)
(B) and investment linked deduction under section
35AD.
Challenges
Even with the significant development of storage ca-
pacity sanctioned under NABARD and NCDC schemes,
20–30 per cent of the total food grain harvest is esti-
mated to go waste due to inadequate storage capac-
ity, regional imbalance in warehouses, lack of adequate
scientific storage and inefficient logistic management in
the country. Each grain bag is handled at least six times
before it is finally opened for processing, which leads
to higher storage and transportation charges, as well as
increases the wastage of food grain during transit and
handling.
Furthermore, the storage capacity available with state
agencies is primarily used for keeping central stock of
food grains for buffer stock, public distribution systems
and other Government schemes. This consequently
leaves marginal capacity for other players to store their
produce. Food grain (mainly wheat and rice) is the
main commodity stored, while the other major crops
storable in godowns include oilseed, spices and cot-
ton. Although the government has started focusing on
building storage capacity through various schemes, the
emphasis is still largely on the storage of wheat and
rice, which are considered as staple food in the country.
Outlook
Overall agri warehousing capacity is increasing by
8–10 per cent annually; however, 20–30 per cent of
the total food grain harvest is wasted due to the lack
of availability of storage capacity, regional imbalance
in warehouses, lack of adequate scientific storage and
inefficient logistic management in the country. Building
additional storage capacity and upgrade of the existing
state-owned warehouses would be crucial for Indian
agri warehousing growth. Also, the major storage ca-
pacity of government agencies is occupied by wheat
and rice, which leads to acute shortage of storage ca-
pacity for other food grains and agri commodities. The
Government needs to step up focus on the storage of
commodities other than rice and wheat. The entry of
private players has changed the face of agri warehous-
ing in India. These players are providing value-added
services, along with the traditional warehousing space
(C). Cold Stores
Cold stores are essential used for the storage and dis-
tribution of perishable goods such as fruits and vegeta-
bles, chocolates, dairy products; frozen foods such as
meat and ice cream, and temperature-sensitive pharma-
ceutical products. Cold stores account for 16 per cent
of the total warehousing industry and it estimated to
worth a Rs 90 billion industry. The cold storage industry
is expected to grow at 15 per cent per annum on a sus-
tained basis over the next 5 years, with the organized
market growing at a faster pace of 20 per cent.
In addition to cold storage, trucking and value-added
services are being provided by cold store players. All
these service offerings are cumulatively known as cold
chain. The Indian cold chain market is highly fragment-
ed among more than 3,500 companies in the whole val-
ue system. Organized players contribute only 8–10 per
cent of the cold chain industry market.
Growth Drivers
Organized cold store is growing at a very high rate due
to various factors. Growth in organized retail is one of
the key factors driving the growth of the organized cold
chain segment. The share of the organized market in re-
tail, which is at 10 per cent in FY13, is expected to grow
to 30 per cent, with food being the least penetrated seg-
ments and poised for high growth. Similarly, the Indian
food processing Industry, which is at a nascent stage, is
expected to grow at more than 17 per cent. With most
of the processed categories requiring cold chain ser-
vices, demand is expected to increase at a higher rate.
Besides, the Quick Service Restaurants (QSR) segment

ECONOMY MATTERS 28
SECTOR IN FOCUS
is expected to witness 30 per cent growth over the next
3 years on account of changing consumption habits and
increasing presence of QSRs and restaurants in India.
This will create huge demand for storing perishable
food items.
Challenges
Healthy capacity utilization, ability to provide integrat-
ed solutions to end users, deep understanding of per-
ishable commodities and prudent capex phasing will be
the key features of successful cold chain players. Cold
stores are high fixed cost businesses by nature entailing
heavy initial investments in refrigerator units and land.
Ensuring healthy capacity utilization through customer
linkages in the form of long-term contracts or anchor
customers will help secure a healthy return on invest-
ment. Cold-stored commodities require control of tem-
perature and humidity throughout the value chain. The
lapse of service, either by the storage provider or the
transporter, adversely impacts the quality of perishable
commodity, as well as reduces its value. Hence, inte-
grated players providing end-toend service will be bet-
ter placed to gain customers and market share.
Outlook
Globally, the focus has now shifted from increasing pro-
duction to better cold storages and transportation of
food produce. Cold chains have now become an inte-
gral part of supply chain management for the storage
and transportation of temperature sensitive goods.
The utilization of cold chain logistics includes both cold
storages and refrigerated transportation and is used to
increase the shelf life of food produce. Growth in the or-
ganized retail and the food processing sector drives the
cold chain market in India. Rising demand for cold stor-
ages in the pharmaceutical sector is also driving growth
in the cold chain market.
(D). Container Handling and Storage
The Container traffic at major ports has almost doubled
in the past 5-6 years. According to estimates, the world
container throughput will reach 1 billion TEUs by 2020,
which is almost double of the current container traffic.
The emerging Asian & African Countries are expected to
be the prime movers in achieving this growth. Most of
the shipyards are filled with orders for container ships
of over 10,000 TEUs capacity. These container ships will
form the major part of the world maritime fleet in the
coming years. India is going to be the preferred desti-
nation for a global manufacturing hub. This fact pre-
sents many opportunities for the ports to change their
current operation style and be ready for the foreseen
surge in demand of handling and faster evacuation of
containers. Container Freight Stations (CFS) and Inland
Container Depots (ICDs) form a key part of the logis-
tics industry infrastructure. A CFS/ICD can be defined
as “Common user facility with public authority status
equipped with fixed installations and offering services
for handling and temporary storage of import/export
laden and empty containers carried under customs con-
trol. Trans-shipment of cargo can also take place from
such stations.”
CFS/ICD accounts for 14 per cent of total warehousing
market in India and is estimated at around Rs 75-80 bil-
lion in FY13 in India and has grown with a CAGR of 10-15
per cent over last 3 years. ICD/CFS facilities have been
rising due to increase in port traffic and containerization
level in India. It is expected that CFS/ ICD market will
continue to grow at CAGR of 10-15 per cent over next
few years and estimated to reach Rs 125 billion by FY15.
Growth Drivers
The CFS & ICDs are amongst the most rapidly growing
segments of logistics industry in India. The increasing
container traffic at ports needs the support infrastruc-
ture which can accommodate the traffic volumes of the
containers. Growth in containerized cargo and opening
up of container rail transport boosted CFSs and ICDs.
Containerized cargo traffic is growing at 12-15 per cent
CAGR in India and it has grown dynamically in recent
years across all ports with JNPT topping the list. CFS/
ICD are also working at a one stop point for the shippers
for custom clearance, stuffing/ de-stuffing, packaging,
inspection, consolidation of cargo, etc.
Challenges
Despite the apparent benefits of CFS/ICDs, several bot-
tlenecks persist. Road is still a preferred mode of trans-
port even over long distances, and the trend has been
on an upswing. The share of rail transport has regressed
from close to 28 per cent of cargo movement to merely

29
SECTOR IN FOCUS
JUNE -JULY 2014
22 per cent, creating a challenge for ICD operators in
offering frequent rail services and timely transports, as
opposed to export cargo moving directly to a CFS near
the port facility. Although there are myriad factors at
play and they vary in form and magnitude for each ICD
location, the two key factors encouraging direct road
movement through ports are transit time and costs.
Transit time refers to the frequency of rail services,
which, in turn, is related to traffic/demand. Therefore,
cost benefit and ease of doing business over direct road
transport is paramount.
Outlook
CFSs and ICDs are some of the fastest-growing seg-
ments of the Indian logistics industry. Their growth
will gain pace in line with the increasing need to tackle
the growing complexities of maritime intensive sup-
ply chain. Growing competition from private participa-
tion will also force players to provide new services and
customized logistic solutions. Recent investments in
developing Free Trade Warehousing Zones (FTWZs) by
private players are illustrative of the growth potential
and patent need of supporting infrastructure. However,
to sustain high growth in container storage, few chal-
lenges need to be tackled. The modal shift from road
to rail will play a key role in facilitating a smooth flow of
cargo from distant hinterlands to the port, decongest-
ing ports and National highway in a safe and environ-
mentally sensitive manner.
Outlook
Driven by growth in production and organized retail, warehousing is the major segment contributing to the growth
of the Indian logistics industry. As customers become increasingly demanding, warehousing companies have been
left with no choice but to evolve into efficient and effective supply chain partners for their customers, as against
being passive entities leasing out space. Changing business dynamics and the entry of global 3PLs have led to the
re-modeling of logistics and warehousing services in India. From a mere combination of transportation and storage
services, logistics is fast emerging as a strategic function that involves end-to-end solutions that improve efficien-
cies. The growth of organized industry sectors such as retail, automotive, manufacturing, pharma and agriculture
in India is expected to give rise to more integrated supply chains, requiring better services, processes and storage
facilities. Furthermore, the roll out of GST by the Indian Government will play a major role in the growth of the
logistics industry and its warehousing business.
Dynamic market requirements have made it imperative for Indian warehousing players to overcome challenges, as
well as maintain, improve and sustain competitiveness. Various measures such as skill development, policy initia-
tives and government measures, IT adoption and increased investments in the sector can be effective in increasing
the competitiveness of Indian warehousing players. The challenges and concerns should be addressed with collab-
orative efforts among all stakeholders, including the government and its agencies, policy makers, entrepreneurs,
investors, logistics service providers, manufacturers, farmers and sellers.

ECONOMY MATTERS 30
FOCUS OF THE MONTH
Union Budget 2014-15
The Union Budget 2014-15, the maiden budget of
the newly elected government, was announced at
a time when the macro-economic milieu continues to
be domestically and globally challenging. As a result,
the year 2013-14, was primarily marked by slowdown in
GDP growth and persistent inflationary pressures. At
the same time, declining industrial and manufacturing
production, subdued consumption, stalled investments
and high fiscal deficit indicates that recovery is still
some distance away.
The budget stands out for the pragmatic and bold ap-
proach adopted by the Finance Minister to lift growth,
reignite investment, boost savings and provide a fillip to
employment generation. A bold and reformist budget,
it has rightly focused on the priority areas which would
boost business confidence by providing an impetus to
growth. The vision articulated in the budget shows that
the government means business.
Some of the key highlights of Union Budget 2014-15 are
as follows:
- First budget of the new government lays down
broad policy directions for achieving a sustained
growth of 7-8 per cent or above within the next 3-4
years along with macro-economic stabilization
- The government is committed to achieve fiscal def-
icit targets of 4.1 per cent in FY15, 3.6 per cent in
FY16 and 3 per cent in FY17
- Plans to make food and petroleum subsidies more
targeted
- The composite cap of foreign investment to be
raised to 49 per cent with full Indian management
and control through the FIPB route
- The composite cap in the insurance sector to be in-
creased up to 49 per cent from 26 per cent with full
Indian management and control through the FIPB
route
- Requirement of the built up area and capital condi-
tions for FDI to be reduced from 50,000 square me-
Arun Jaitley, Minister of Finance, Corporate Affairs and Defence interacting with the Members of the CII National Council on Union
Budget 214-15 in New Delhi on 15th
July, 2014. Others in the Picture are (L-R): Sumit Mazumder, President Designate, CII; Shaktikanta
Das, Revenue Secretary, Ministry of Finance; Ajay S. Shriram, President CII; and Chandrajit Banerjee, Director General, CII.

31
FOCUS OF THE MONTH
JUNE -JULY 2014
tres to 20,000 square metres and from US$10 mil-
lion to US$5 million respectively for development of
smart cities
- Rural infrastructure to be promoted via PPP
through Shyamaprasad Mukherjee Rurban Mission
for which a grant of Rs 500 Crores has been set
aside. The scheme would serve to strengthen rural
infrastructure and prevent rapid pace of urban mi-
gration
- An institution to provide support to mainstreaming
PPPs called 3P India will be set up with a corpus of
Rs 500 crores
- Banks will be permitted to raise long term funds
for lending to infrastructure sector with minimum
regulatory pre-emption such as CRR, SLR and Prior-
ity Sector Lending (PSL)
- Infrastructure Investment Trusts (INVITS) to be
set up with tax incentives. This would provide long
term affordable finance to the Sector and hopefully
these steps would provide incentive to banks for
lending
- Incentives for Real Estate Investment Trusts (RE-
ITS). Complete pass through for the purpose of
taxation
- Definition of MSME to be reviewed to provide for a
higher capital ceiling
- Find a solution in the course of this year and ap-
prove the legislative scheme, which enables the in-
troduction of GST
- Setting up of Expenditure Management Commis-
sion to look into expenditure reforms
- A decrease in the threshold limit of investment al-
lowance on plant and machinery from Rs 100 crore
to Rs 25 crore will promote investment in plant and
machinery
- Personal Income-tax exemption limit raised by Rs
50,000/- that is, from Rs 2 lakh to Rs 2.5 lakh in the
case of individual taxpayers, below the age of 60
years. Exemption limit raised from Rs 2.5 lakh to Rs
3 lakh in the case of senior citizens
- Investment limit under section 80C of the Income-
tax Act raised from Rs 1 lakh to Rs 1.5 lakh
- Deduction limit on account of interest on loan in re-
spect of self occupied house property raised from
Rs 1.5 lakh to Rs 2 lakh
- In PPF scheme, annual ceiling will be enhanced to
Rs 1.5 lakh p.a. from Rs 1 lakh at present
- Income arising to foreign portfolio investors from
transaction in securities to be treated as capital
gains
- Investment allowance at the rate of 15 per cent to
a manufacturing company that invests more than
Rs 25 crore in any year in new plant and machinery.
The benefit to be available for three years i.e. for
investments upto 31.03.2017
- Introduction of a “Roll Back” provision in the Ad-
vanced Pricing Agreement (APA)scheme so that an
APA entered into for future transactions is also ap-
plicable to international transactions undertaken in
previous four years in specified circumstances
- Introduction of range concept for determination of
arm’s length price in transfer pricing regulations
- To allow use of multiple year data for comparability
analysis under transfer pricing regulations
- To boost domestic manufacture and to address the
issue of inverted duties, basic customs duty (BCD)
reduced on certain items
- To broaden the tax base in Service Tax, sale of space
or time for advertisements in broadcast media, ex-
tended to cover such sales on other segments like
online and mobile advertising
Analysis of Fiscal Trends
Finance Minster, Mr Arun Jaitley laid stress on fiscal pru-
dence in his maiden budget speech, retaining the fiscal
deficit target of 4.1 per cent of GDP for 2014-5, while
aiming to progressively reduce it to 3.6 per cent in 2015-
16 and 3.0 per cent in 2016-17. To be sure, the revised
fiscal deficit for 2013-14 stood at 4.6 per cent of GDP as
compared to 4.8 per cent in 2012-13. To lower the fiscal
deficit to 4.1 per cent of GDP in 2014-15, the government
is betting on revenue and expenditure growth both to

ECONOMY MATTERS 32
FOCUS OF THE MONTH
the tune of 12.9 per cent as compared to the revised es-
timates for 2013-14. Faced with an economy struggling
with low growth rates over the last two years and given
the fact that the government’s revenue collection has
been falling below the budgeted revenue in five of the
past six years including the last fiscal year, the revenue
targets for 2014-15 look ambitious.
Revenue deficit is budgeted to decline to 2.9 per cent
of GDP in the current fiscal as compared to 3.3 per cent
in the previous year. In the Union Budget 2012-13, gov-
ernment had introduced a new fiscal indicator-effective
revenue deficit- which is calculated after excluding the
expenditure on grants for creation of capital assets. The
effective revenue deficit will decline to 1.6 per cent in
2014-15, from 2.0 per cent in the previous year. As per
the medium-term policy statement, revenue deficit will
As far as the revenue receipts are concerned, given only
a marginal improvement of economic growth in the
current fiscal, total receipts are budgeted to increase
by an insignificant 12.9 per cent in 2014-15 as compared
to 12.8 per cent growth in 2013-14, underpinned by 17.7
per cent expansion in tax receipts. Positively, disinvest-
ment receipts are budgeted to grow sharply this year,
turning around the dismal state of affairs prevalent in
moderate to 2.0 per cent in 2015-16 and 1.5 per cent in
2016-17, while effective revenue deficit is budgeted to
be eliminated from 2015-16.
Though the fiscal deficit has been targeted at 4.1 per
cent of GDP in the current fiscal, lower than 4.6 per cent
achieved in the last year, net market borrowings have
been pegged marginally higher by 1.6 per cent in 2014-15
over 2013-14. This is expected to put slight upward pres-
sure on yield for the 10-year benchmark government se-
curity. Additionally, and perhaps more importantly, the
FM has reduced his dependence on market loans for
financing the deficit in 2014-15. As a result, the propor-
tion of funding provided through market borrowings is
expected to be 86.8 per cent in 2014-15 against a sub-
stantially higher share of 95.3 per cent in 2012-13.
the last couple of years. Encouragingly, gross tax re-
ceipts are budgeted to grow by 17.7 per cent in 2014-15
as compared to 11.8 per cent in the previous year. Con-
sequently, gross tax revenue to GDP ratio is expected
to rise to 10.6 per cent for 2014-15 from 10.2 per cent in
the previous year. In contrast, non-tax revenue receipts
are expected to diminish by 10.0 per cent in 2014-15 as
compared to a high growth of 40.7 per cent in 2013-14.

33
FOCUS OF THE MONTH
JUNE -JULY 2014
Summing up, 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 to the revised estimates for 2013-14. In order
to achieve the revenue growth target, tax revenues,
Coming to the expenditure side, according to the budg-
et estimates of 2014-15, total expenditure is budgeted to
grow marginally by 12.9 per cent in 2014-15 as compared
to 12.8 per cent growth in 2013-14. Encouragingly, non-
plan expenditure is budgeted to moderate to 9.4 per
cent in the current year as against 11.9 per cent in the
previous year. Plan expenditure is estimated to increase
by 20.9 per cent as compared to 15.0 per cent over the
which form around 80 per cent of total revenues, need
to prop up. Moreover the nature of expenditure com-
pression needs to be kept in mind as trimming of capital
expenditure will further slow down the economic re-
covery process.
comparable period. Subsidies are one of the most im-
portant components of non-plan revenue expenditure.
In growth terms, subsidies are budgeted to increase by
2.0 per cent in the current year as compared to decline
in the previous year. Interestingly, petroleum subsidy is
expected to decline by 25.8 per cent in 2014-15, while
food subsidy is expected to grow at the highest rate.

ECONOMY MATTERS 34
FOCUS OF THE MONTH
Given the GDP growth slowdown to below 5 per
cent for two consecutive years, industry was ex-
pecting a Union budget targeted at reviving growth and
setting in place the framework for generating jobs on a
large scale. These expectations have largely been met
by the government, which has unveiled a prudent and
progressive budget. Taken together, the overall vision
in the document signifies much more than the sum of
the parts.
Slated to set a strong base for future growth, the budg-
et addresses multiple growth drivers of the economy,
including consumer demand and savings, private, do-
mestic and foreign investments, and infrastructure. The
adherence to the fiscal deficit roadmap of the interim
budget maintains continuity and demonstrates the
significance attached to macroeconomic strength. We
hope that the actual revenue and expenditure will be
closely monitored over the year as the fiscal deficit tar-
get of 4.1 per cent is challenging. The announcements
of an Expenditure Management Commission and revis-
iting subsidies indicate that the government would seri-
ously address fiscal consolidation.
Most important, Union finance minister Arun Jaitley
offered reassuring statements regarding stability and
predictability of taxation while noting the issues of ret-
rospective taxation and transfer pricing. These have
greatly revived investor sentiments and set the stage
for attracting funds into productive sectors.
Directional change in the economy is envisaged through
the high priority accorded to converging manufacturing
and infrastructure as key growth drivers. Entrepreneur-
ship, small enterprises, higher education and skill devel-
opment have received attention, enabling all to contrib-
ute to development.
Manufacturing is widely expected to offer jobs to the
youth as needed. Hence, a welcome move is to strength-
en the sector through industrial corridors, clusters, and
specific steps for different sectors. Special emphasis has
been placed on sectors of strategic significance such as
capital goods, electronics, steel and chemicals through
changes to indirect taxes.
MSMEs would be greatly encouraged by measures such
as lowering of the investment allowance floor to Rs 25
crore, change in definition and easier access to finance
through a fund of Rs 10,000 crore for start-ups, among
others.
Under infrastructure, a comprehensive agenda address-
ing financial access, mainstreaming public private part-
nerships and individual sectors would boost new pro-
jects.
A key accent in the budget is on promoting urbanisa-
tion. Low-cost housing will be encouraged through in-
crease in interest exemption limit. FDI has also been in-
centivised by liberalising its participation in real estate.
Also, urban amenities such as water and sewage have
Much More than the Sum of the Parts

35
FOCUS OF THE MONTH
JUNE -JULY 2014
been addressed. These would work towards establish-
ment of smart cities to absorb the expected urban pop-
ulation of 600 million by 2031.
Recognising that half of the workforce is dependent
on agriculture, the budget aims to productively deploy
MGNREGA funds and undertake strong measures for ir-
rigation and water management along with agricultural
R&D. Farmer markets are being encouraged out of the
APMC Act ambit, while agri-credit has received high at-
tention. Such steps can increase agricultural productiv-
ity, but more should have been done for allied activities.
With strong emphasis on services such as media, en-
tertainment and tourism, as well as financial services, a
comprehensive growth agenda has been initiated. We
look forward to more policy announcements to carry
forward the good work of budget 2014-15.
This article first appeared in Hindustan Times dated 16th
July 2014.

ECONOMY MATTERS 36
FOCUS OF THE MONTH
Budget 2014-15 has come at a time when the Indian
economy faces multiple challenges relating to
growth deceleration, subdued investments, slow job
creation and difficult global conditions.
A fine balancing act was needed to revive investor sen-
timents and set the macroeconomic framework for re-
storing growth impulses. Under these circumstances, it
has succeeded in adhering to fiscal prudence while ad-
dressing multiple economic growth drivers.
In its pre-Budget memorandum to the finance ministry,
the CII had recommended areas for critical intervention
such as fiscal consolidation, promotion of savings, re-
vival of investments and tackling agriculture to mitigate
inflationary pressures. Manufacturing was placed as
high priority in order to generate jobs.
The macroeconomic agenda demands strong fiscal dis-
cipline, and the Finance Minister has adhered to the tar-
get of 4.1 per cent for the fiscal year. This was critical
to avoid further deterioration in savings and investment
rates.
Reviving Spirits
The announcement of an expenditure reforms commis-
sion and overhaul of subsidies implies that rationalising
both sides of the Budget accounts is on the anvil. In ad-
dition, as the private investment rate touched a decadal
low of 23.9 per cent in FY13, it was important to rebuild
the investment pipeline while also encouraging savings.
The Budget unveiled a slew of measures across differ-
ent areas to meet these economic imperatives, thus
strongly reviving investor sentiments and imparting a
fresh fillip to consumer confidence. On the savings side,
the Budget provides for small savings schemes and of-
fers some relief to the tax-payer by raising the threshold
of personal income tax exemption and savings under
sec 80c.
For promoting investments, the Budget has taken up
issues in tax administration, FDI, PPP, long-term financ-
ing, and sectoral initiatives. The intention to avoid retro-
spective taxation and the commitment to a clear, stable
and predictable tax regime would greatly reassure in-
vestors. Opening up the defence and insurance sectors
as well as e-commerce for FDI was also a much-awaited
step. The establishment of a 3P institution to support
public private partnerships could assist new projects.
Long-term financing by encouraging bank loans,
strengthening the bond market and liberalising ADR/
GDR would go a long way to bringing new investments
into infrastructure. The crux for reviving investments
would be to keep the project pipeline flowing smoothly
and continuous monitoring of ongoing projects.
Hope for Farmers
Agriculture has been accorded high priority. A note-
worthy aspect is that supply chain linkages have been
stressed, connecting farm produce to markets. Re-ori-
enting the state APMC Acts to establish private mar-
kets, development of farmers’ markets in towns, and
encouraging farmer producer organisations would of-
Budget Boosts Growth Drivers

37
FOCUS OF THE MONTH
JUNE -JULY 2014
fer more selling avenues to farmers.
The price stabilisation fund of Rs 500 crore contributes
to moderating inflationary pressures. While rejuvena-
tion of warehousing would help post-harvest lending,
storage and cold chain infrastructure could have also
received some benefits. A welcome initiative is on ad-
dressing power supply in rural areas through the Deen
Dayal Upadhyaya Gram Jyoti Yojana.
For industrial growth, the route of corridors, transport
connectivity and smart cities has been finalized, thus
bringing together the objectives of promoting manu-
facturing and urbanisation.
As India increasingly shifts out of rural areas, the man-
ufacturing sector must be geared towards providing
more job opportunities. By integrating this with the ur-
banisation process, productivity of workforce could be
enhanced, thus raising incomes. The proposed National
Industrial Corridor authority should look at long-term
perspective planning, including land use.
It is very welcome that entrepreneurship and the MSME
sector should be high on the Budget priority list. CII had
long recommended that redefinition of MSME was in
order as the previous capital investment limits had been
set in 2006. We look forward to working with the Gov-
ernment on setting realistic thresholds to define micro,
small and medium enterprises.
We had also suggested that the investment allowance
floor at ₹100 crore should be brought down and this has
now been set at ₹25 crore, which would greatly incen-
tivise more investments from smaller companies.
Multitasking
A fund of Rs 10,000 crore is proposed to finance start-
ups, and another fund of Rs 200 crore for innovation
and agri industry was also a much needed initiative.
Now, MSMEs would also find it easier to exit once the
legal bankruptcy framework is instituted.
Budget 2014-15 addresses multiple issues in the power
sector relating to extension of tax holiday for 10 years
for generation, distribution and transmission, and coal
linkages. However, it stops short of revamping coal min-
ing.
The renewable energy sector receives many benefits
including ultra mega solar power projects and customs
duty reductions on some intermediates. The Budget has
also announced strong interventions for skill develop-
ment, particularly in reforming the Apprentice Act. We
hope that these policies would be rolled out without
delay.
As the maiden financial statement of a new Govern-
ment, Budget 2014-15 meets the expectations of indus-
try.
This article first appeared in Hindu Business Line dated 10th
July 2014.

ECONOMY MATTERS 38
FOCUS OF THE MONTH
The new government had been in office all of 45 days,
but the Finance Minister was carrying lofty expecta-
tions to revive growth and introduce fiscal prudence
in his maiden budget. He has set a generally managed
to spread cheer. There are several notable proposals,
which will need greater attention and time in the imme-
diate future.
TheFinanceMinister’scommitmenttomaintainingfiscal
deficit at 4.1 per cent of GDP is ambitious. The Govern-
ment’s approach appears to be to increasing economic
activity which will translate into better tax collections
and help address the deficit. The minister proposes to
constitute an Expenditure Management Commission,
which will look into various aspects of expenditure re-
forms. Government expenditure reform involves three
elements: shifting subsidy programmes away from price
distortions, a change in the focus of government spend-
ing towards provision of public goods and a system of
accountability through a focus on outcomes. With a the
Expenditure Management Commission expected to
give its interim report by this financial year, reform in
this area is likely to take 2-3 years to implement.
Investment clearly is the underlying theme in this budg-
et. Realising that growth rate of the economy is cor-
related with the investment rate, the budget contains
proposals for development of industrial and economic
corridors, with smart cities linked to transport connec-
tivity. The Finance Minister also announced the Govern-
ment’s commitment to revive Special Economic Zones
as also initiatives for development of small and medi-
um enterprises. The proposal to establish a INR 10,000
crore venture capital fund may be the first step to devel-
oping India’s “Sovereign Wealth Fund” for promotion
of entrepreneurship.
It is commendable that given the short period of time in
office, the Hon’ble Finance Minister, Shri Arun Jaitey still
managed to table a significant proposal in the budget
insofar as the real estate and infrastructure sector is
concerned in the form of a specific tax regime for Real
Estate Investment Trusts (REITs) and Infrastructure In-
vestment Trusts (InvITs). Introduction of REITs & InvITs
in India is expected to bring in a fresh source of funding
to the cash strapped sectors, ease pressure on the In-
dian banking system and provide a new financial instru-
ment to the common man. In order to ensure that REITs
/ InvITs kick off in the intended manner a favourable tax
regime was the need of the hour. This was a long-await-
ed demand of the industry and is a positive step.
The income-investment model of such REITs and In-
vITs has distinctive elements such as the trust would
raise capital by way of issue of units to be listed on a
recognized stock exchange as well as by raise debt di-
rectly from resident and non-resident investors; income
bearing assets would be held by the trust by acquiring
controlling in an Indian company from the sponsor;
the income generated would be distributed to the unit
holders.
It was announced that REITs & InvITs will be granted
a pass through status. The budget proposes to amend
Implementing the Budget’s Investor-Friendly
Proposals

39
FOCUS OF THE MONTH
JUNE -JULY 2014
the tax law to put in place a specific taxation regime
for providing the way the income in the hands of such
trusts is to be taxed and the taxability of the income dis-
tributed by such trusts in the hands of the unit holders.
The regulations provide that income tax and dividend
distribution tax would be levied at the company level.
Dividend income of the REIT / InvIT would be exempt
and onward distributions by the REIT/ InvIT would not
be subject to dividend distribution taxes or taxes in the
hands of investors. Interest income of the REIT/ InvIT
would be exempt and allowed as deduction to the com-
pany. Onward distribution of interest income by the
REIT/ InvIT would be taxable in the hands of unit-hold-
ers and subject to tax withholding by the REIT/ InvIT.
Long-term capital gains on sale of shares of company
would be subject to taxes at applicable rates. Any other
income received by the REIT/ InvIT would be taxable
at maximum marginal rate. To incentivize creation of
these vehicles, a deferral has been provided by exempt-
ing the transaction of transfer of shares of the company
(holding assets) to the REITs/ InvITs by sponsors in ex-
change for units of the REIT/ InvIT. The sponsor would
be subject to tax on future sale of such units.
These steps will give a boost to those sectors, opening
up newer avenues for funding, though the proposed
tax rules may need some review as hasty drafting has
left enough room for doubt and misapplication. While
the memorandum provides for the taxation of the units
of the trusts to be taxed as equity shares, the fine-print
of the bill states the period for such units to be regard-
ed as long-term capital assets only on the completion
of 3 years. A tax deferral has been provided when the
sponsor transfers shares of a company to the trust in
exchange for units but minimum alternate tax may con-
tinue to apply thereby nullifying the benefit intended;
also the tax deferral has not been provided where the
asset is directly (instead of shares of company) contrib-
uted to the REIT/InvIT in exchange for units or interest
in a partnership firm (holding the asset) is transferred
to the trust in exchange of units.
Additional clarity is also required on the mechanism for
allocation of trust expenses to unit holders when the
corresponding income passes through; and the cost of
acquisition of shares of company/ assets and the date
of acquisition of such shares of company/ assets in the
hands of the trusts, where the assets are transferred by
the sponsors to the trusts.
Significantly, foreign direct investment and foreign
portfolio investment should be allowed in REITs and In-
vITs upto 100 per cent under the automatic route.This
will facilitate global institutional capital to flow into In-
dia.
The current tax environment owing to the narrow and
inconsistent approach of the tax authorities has creat-
ed a lot of uncertainty in the mind of the investors and
to some extent have a negative impact on the inflow of
money in the economy. In order to provide an impetus
to launching REITs & InvITs in India, it is essential that a
clear, certain and robust tax regime is in place to ensure
we do not end up with tax controversies and litigation.
Interventions during the post-budget consultations
should help iron out these issues, paving the way for
the intended outcome.
India’s complex tax system suffers from problems in
both structures and administration. Expert Committees
in the past have identified problems with the taxation
system, including retrospective amendment of laws,
frequent amendments, especially after the tax admin-
istration is unable to establish a tax claim in courts and
issues with arbitrary tax claims. The commitment to
provide a stable and predictable tax regime is welcome.
After causing consternation in the international busi-
ness community in the 2012-13 budget by way of a ret-
rospective amendment to tax indirect transfers, the
government has now proposed that all fresh cases of
indirect transfer taxation arising will be scrutinized by
a high level committee. Unfortunately, contrary to ex-
pectations, the budget does not contain any proposal
that would provide relief to taxpayers who are already
in litigation on this matter. Taxpayers who are currently
embroiled in litigation would need to continue defend-
ing their positions in litigation which can be expected to
be time consuming and uncertain. One would hope that
the proposal to enlarge the scope of income-tax settle-
ments would provide an alternative non-adversarial fo-
rum for resolving their disputes.

ECONOMY MATTERS 40
FOCUS OF THE MONTH
The Finance Minister has recognized that one immedi-
ate imperative on the agenda of the new government
is the need to find a faster and better way to resolve
tax disputes. The proposals to extend the scope of ad-
vance rulings to cover residents, enlarging the scope
of Income-tax Settlement Commission and enabling
roll back of Advance Pricing Agreements (APAs) would
seek to minimize the scope for disputes and improve
the taxpayer’s experience in dealing with the tax ad-
ministration. India’s APA programme has seen a lot of
interest since its launch in 2012. The absence of roll back
provisions in the Indian APA rules has often been stated
as a concern by many taxpayers. Permitting roll back of
APAs would go a long way in further enhancing the ben-
efits of the Indian APA.
The Minister re-affirmed the commitment to introduce
a GST, even though a time line or a road map to im-
plement the same was not spelt out. Just as the GST
is a transformation of indirect taxes, a comprehensive
reform of the direct taxes is required for a clean and
modern administration. The Direct Taxes Code (DTC)
proposed by the earlier regime was meant to achieve
this objective. The Finance Minister announced that the
government would review the DTC in its present form
and take a view on the matter. The proposal to deny
corporate tax deduction for expenditure incurred by
companies on Corporate Social Responsibility as man-
dated by the Companies Act, 2013 may be a disappoint-
ment for corporate India as would be the effective in-
crease in the rate of dividend distribution tax.
The Minister also emphasised on the need for conver-
gence of Indian accounting standards (AS) with the In-
ternational Financial Reporting Standards. Accordingly,
companies – other than banking and insurance com-
panies – would need to prepare for implementation of
Indian AS by 2016-17. The government also intends to
separately notify tax AS which would apply for compu-
tation of taxable income.
The budget proposals presented by the Finance Minis-
ter would go a long way in addressing concerns which
triggers risk-aversion and had injected considerable un-
certainty in investment activity. The steps announced
are only the beginning of a journey towards a sustained
growth of 7-8 per cent along with macro-economic sta-
bilization.
(Views are Personal)

Union Budget 2014-15 Implications Across Key Sectors

Union Budget 2014-15 Implications Across Key Sectors

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