Economy Matters - Nov-Dec 2014

1
FOREWORD
NOVEMBER-DECEMBER 2014
Slowing growth in Japan and Euro Area has increased the uncertainties in global growth,
going forward. Support from a favourable external environment is something which India
will hope for in 2015. Japan’s economy unexpectedly fell into recession in the third quarter of
2014, as housing and business investment declined following a tax hike, dragging the country
into a recession and further clouding the outlook for the global economy. The only positive
results were received on the inflation front as the country emerged out of a decade-and-a-
half long period of deflation. Similarly, the GDP growth figures in the Euro Area too hovered
in the negative region during the second and third quarters of 2014, mainly on account of
weak investment and exports. Although this partly reflected temporary factors, the recovery
has been slowed by the crisis legacies and low potential growth. With the US economy per-
forming well, the dollar has been strengthening sharply against most currencies.
Domestically, index of industrial production (IIP) moved into the positive territory in Novem-
ber 2014, signalling improvement in growth momentum. We hope that going forward, the
incipient signs of revival would transform into a firm recovery especially as there is some
progress in investment intentions and business confidence is on the ascendant. Inflation
continued its downward trajectory, with WPI based inflation dipping to 64-month low in No-
vember 2014. CPI inflation too continued to decelerate, helped by falling crude oil prices.
Going forward, the continuing slowdown in global commodity prices as well as the govern-
ment’s resolve to rein in the fiscal deficit would prevent prices from moving upwards. This
should induce the RBI to rethink its cautious monetary stance and urgently move towards a
growth propelling monetary policy. The RBI should not wait till the next monetary policy an-
nouncement and reduce interest rate substantially, as industrial production is in the red and
investment and consumption demand are yet to show visible signs of a pick-up. On the fiscal
front, the situation remains precarious, with the fiscal deficit reaching 98.9 per cent of the
annual budget estimates in the first eight months of the year. Government is hoping that the
revenue coming from the spectrum auctions along with the recent softening witnessed in
crude oil prices would help it to reach the fiscal deficit target for the year.
In the year 2014, India bounced back from the edge of a macroeconomic crisis character-
ised by double digit inflation, a high and rising current account deficit (CAD), and a falling
rupee. Towards the end of the year, the landscape vastly changed. Macro-economic stability
returned, reforms were being undertaken, and above all, a new stable Government came
into power. Although it is still too early to detect signs of robust recovery, emerging trends
indicate that the growth deceleration has bottomed out. Looking ahead, 2015 would hold
host of promises and challenges for the economy. Support from favourable external environ-
ment will be crucial in this regard.
Chandrajit Banerjee
Director General, CII

5
EXECUTIVE SUMMARY
Global Trends
Japan slipped into recession as the quarter-on-quarter
growth figures took a dive into the negative territory in the
April-June and July-September 2014 quarters. High public
debt inheritance and low potential growth accreted to the
larger-than-expected decline in domestic demand follow-
ing the increase in the consumption tax. The only positive
results were received on the inflation front as the country
emerged out of a decade-and-a-half long deflation period.
Similarly, the GDP growth figures in the Euro Area hovered
in the negative region during the second and third quarters
of 2014, mainly on account of weak investment and exports.
Although this partly reflected temporary factors, the recov-
ery has been slowed by the crisis legacies and low potential
growth. The recovery uneven across member nations and
unemployment and disinflation persists. The only respite
was provided by the resilient financial markets. The global
economy witnessed some steadiness as output rallied in the
US. This recovery and advantageous financing conditions
supported the growth in developing East Asia and Pacific,
wherein, net exports were a pivotal contribution. However,
rebuilding fiscal space and elevated debt service remain ma-
jor concerns in the region.
Domestic Trends
Economy is passing through choppy waters currently. Differ-
ent economic indicators released in December 2014 painted
a rather mixed picture of the economy. On one hand, ba-
rometer of industrial performance in the country, index of
industrial production (IIP) came in at a dismal -4.2 per cent in
October 2014 as compared to 2.8 per cent posted in Septem-
ber 2014. However it improved to 3.8 per cent in November
2014. On the other, WPI based inflation dipped to 64-month
low of 0 per cent in November 2014 from 1.8 per cent in Oc-
tober 2014. CPI inflation too decelerated to 4.4 per cent in
November 2014, far below the 11.2 per cent recorded in No-
vember 2013. It however, accelerated in December 2014, as
per the latest data print. On the external front, the balance
of payments (BoP) data released for second quarter of the
current fiscal (2QFY15 henceforth) showed some weaken-
ing of the external sector fundamentals. India’s current ac-
count deficit (CAD) increased to US$10.1 billion (2.1 per cent
of GDP) in 2QFY15 from US$7.8 billion (1.7 per cent of GDP)
in the preceding quarter and US$5.2 billion (1.2 per cent of
GDP) in Q2 of 2013-14. The increase in CAD was primarily on
account of higher trade deficit contributed by both a decel-
eration in export growth and increase in imports.
Sector in Focus: Enabling ‘Make in In-
dia’ Through Effective Tax Reforms
India stands out as a country with immense potential and
opportunity given the current global environment. It is once
again creating an interest and excitement in the global arena
as hopes build for its reforms agenda to be carried forward.
Industry expects tax reforms to be at a priority position in
this agenda. Around the world, the discussions on tax policy
have become centric to checking tax base erosion and en-
hancing transparency in terms of exchange of information.
India’s tax policy is no exception and is changing in response
to the global developments. However, India needs to strike
the right balance between checking tax avoidance and mak-
ing the tax environment more facilitative compared to other
jurisdictions competing for investments. The Government
has already embarked on the journey to deliver a litigation-
free and a certain tax environment. With the various action
items on the OECD BEPS Action plan gathering momentum,
it is also seen that the policy responses are varying across
the globe. The Government should engage with the indus-
try actively on all the BEPS Action items to develop a coor-
dinated response. Implementation of Goods & Services Tex
(GST) remains another important policy measure which the
Government would seek to implement in the next fiscal. In
this month’s Sector in Focus, we present excerpts from the
recently released report titled “Enabling ‘Make in India’
Through Effective Tax Reforms”. It was released by CII and
Ernst & Young (E&Y) jointly in December 2014.
Focus of the Month: Indian Economy –
Recent Trends and Challenges
In July 2013, India was teetering on the edge of macroeco-
nomic crisis with double digit inflation, a high and rising cur-
rent account deficit (CAD), and a falling rupee as investor
sentiment turned sour in the aftermath of the Fed’s taper
decision to signal the end of its quantitative easing. Nearly
18 months on, the landscape has vastly changed. Macro-eco-
nomic stability has returned, reforms are being undertaken,
the external environment has moved in India’s favour, and
above all, a new Government has come into power with a
relatively unencumbered political mandate for decisive eco-
nomic change, a mandate that markets have enthusiastically
embraced. Although it is still too early to detect signs of
robust recovery, emerging trends indicate that the growth
deceleration has bottomed out, manifested in the relative
improvement in growth in the latest 2 quarters. However,
risks still remain on the horizon. Investment is yet to pick
up significantly. But on the upside, inflation has come down
dramatically, the monsoons failed to extract as much of a
toll on growth as expected, and India received a large sup-
ply side shock in the form of reduced commodity prices
that amounted to about 1.5 per cent of GDP. According to
the government estimates, 2014-15 could end with growth
around 5.5 per cent. Looking ahead, 2015-16 would hold host
of promises and challenges for the economy. Support from
favourable external environment will be crucial in this re-
gard.

ECONOMY MATTERS 6
GLOBAL TRENDS
Trouble in Paradise: Japan and Euro Area
E
ven as the global economy inches towards steadi-
ness, flagging growth continue to plague Japan
and Euro Area. While Japan is growing, high pub-
lic debt inheritance and very low potential growth cre-
ate major macroeconomic and fiscal challenges. The
decline in domestic demand in the country, following
the increase in the consumption tax, was larger than
expected. Similarly, in the Euro Area, growth came to
a halt in the second quarter, mainly on account of weak
investment and exports. Although this partly reflects
temporary factors, the recovery has been slowed by the
crisis legacies and low potential growth. Uncertainty
about the persistence of the growth slowdown in the
region remains.
Resolve amid Gloom in Japan
In Japan, the pattern of growth in the first half of the
year was affected by the April consumption tax hike,
from a rate of 5 per cent to 8 per cent, which boosted
activity in the first quarter at the expense of the second.
Japan experienced a strong growth outturn to the tune
of 1.1 per cent in the first quarter of 2014 compared to
the first quarter in the previous year. This largely reflect-
ed a stronger than expected rise in consumption ahead
of the hike. This was, however, offset by a sharper than
envisaged slowdown in the second and third quarters,
wherein the growth figure stood at 0.8 per cent, year on
year, as the consumption contracted in both the quar-
ters. Another key factor behind the plunge in growth
was a decline in business investment. Further, exports
also showed signs of bottoming out after remaining dis-
appointingly weak despite a sharply weaker yen. Resi-
dential investment was another soft spot.

7
GLOBAL TRENDS
While Japan slipped into recession as the quarter-on-
quarter growth figures took a dive into the negative
territory in the April-June and July-September periods,
the government claims that it does not signal serious
trouble. People shifted the timing of consumption
goods purchase from the second quarter to the first in
anticipation of the tax hike, so the true negative growth
has been observed only for a quarter. Further, the nega-
tive growth disappears upon exclusion of the change in
inventory.
Even though the growth figures took an undesirable
turn, positive results were received on the inflation
front. Aggressive monetary policy easing, the first arrow
of Abenomics helped lift inflation and inflation expecta-
tions and the country emerged out of a decade-and-a-
half long deflation period in 2014. Actual and expected
inflation progressed toward the 2 per cent target dur-
ing the year. Though, excluding the effects on the price
level of the increase in the consumption tax rate in the
second quarter of 2014, headline inflation ran below the
Bank of Japan’s inflation target.
The policies have been an initial success, brightening
household and corporate sentiment by boosting stock
prices and weakening the Yen. Despite the two straight
quarters of contraction, the size of Japan’s economy is
still 1.4 per cent bigger than before Abe seized power
in late 2012. Plummeting growth figures factored in the
decision to delay a second tax hike to 10 per cent by
18 months until April 2017, easing concerns about the
outlook for consumer spending, which makes up 60 per
cent of GDP.
But the recession has also shown that Abe’s stimulus
policies have not been enough to strengthen the under-
lying economy even after two years in office, as com-
panies remain hesitant of boosting wages and capital
spending. The government’s announcement of devel-
oping a deadline bound plan to achieve a fiscal surplus
may lead to a credible plan to reach fiscal sustainability.
Further, a strategy based on the third arrow of Abe-
nomics, that of growth strategy, enacted in June 2014
offers 10 focus areas for economic reforms.
Euro Area Stuck in a Quagmire
The GDP growth figures in the Euro Area hovered in the
negative region during the second and third quarters of
2014, contracting by 0.3 per cent and 1.2 per cent, re-
spectively, related to comparable quarters of the previ-
ous year. The recovery, thus, remains weak, uncertain
and further, uneven across member nations. While
Greece witnessed positive developments, contraction
in growth persisted in Italy. Growth in Spain resumed,
supported by external demand as well as higher domes-
tic demand reflecting improved financial conditions and
rising confidence. German manufacturing and services
expanded at the slowest pace in 16 months, signaling
that growth in Europe’s largest economy is poised to re-
main sluggish. French manufacturing continued shrink-
ing as demand fell, casting doubt on the solidity of the
country’s economic rebound seen in the third quarter.
The unemployment rates far exceeded their equilibrium
value in most countries, and Euro-Area-wide inflation
remained too low, pointing to pervasive weakness in
domestic demand and reflecting large output gaps for

ECONOMY MATTERS 8
GLOBAL TRENDS
most Euro Area countries. The only positive news was
seen from the financial markets, which remained gen-
erally resilient even amidst a fragile recovery. Further
current account balances have improved, but with per-
sistent surpluses in creditor economies.
On the monetary policy front, measures were taken
by the European Central Bank to tackle low inflation,
boost liquidity and address fragmentation, in the form
of lower policy rates, the announcement of cheap term
funding for banks and a program of private asset pur-
chases. However, a downward drift in inflation expec-
tations warrant further actions, including purchases of
sovereign assets. Although, reducing fragmentation in
stressed economies and ensuring that inflation rises
back toward the price stability objective requires action
beyond monetary policy. The review of banks’ asset
quality that is currently underway is critical to reestab-
lishing confidence in banks and improving intermedia-
tion, according to the International Monetary Fund.
Looking beyond the demand constraints, structural
measures are required to increase very low potential
growth rates. On the fiscal policy front, the pace of
fiscal consolidation slowed down and the overall fis-
cal stance for 2015 is projected by the IMF to be only
slightly contractionary, in order to sustain a balance be-
tween demand support and debt reduction. Germany,
having completed its fiscal consolidation, is expected
to finance much-needed public investment in infra-
structure. Large negative growth surprises in Euro Area
countries are not projected to trigger additional consol-
idation efforts, which would be self-defeating.
The eighteen-nation economy is projected to witness a
weak recovery, supported by a reduction in fiscal drag,
accommodative monetary policy, and improving lend-
ing conditions, with a sharp compression in spreads for
stressed economies and record-low long-term interest
rates in core countries. Further, inflation is projected to
increase gradually to 0.9 per cent on an annual basis in
2015 and 1.2 per cent in 2016, as the recovery strength-
ens and output gaps slowly decrease. While an unprec-
edented stimulus by the European Central Bank is antic-
ipated to take effect in coming months, weak growth in
Germany and France and rising tensions in Ukraine are
likely to threaten the Euro Area’s modest revival.

9
GLOBAL TRENDS
Opportunities Ahead
Japan and the Euro Area stand at a crossroads, facing a
difficult balance between energy security, environmen-
tal concerns, and economic efficiency goals. Highly ac-
commodative policy stances are anticipated in both the
economies. Rebuilding policy space and implementing
structural reforms for sustainable and stronger growth
are likely to remain key policy priorities. Fiscal consolida-
tion is a priority in Japan, where debt levels are relative-
ly higher. Further, labor market reforms are desirable in
In Japan, the sharp economic contraction in the second
quarter induced by the consumption tax increase is ex-
pected to be short lived, with a moderate pace of re-
covery returning thereafter. The country is projected to
witness an average growth of about 0.8 per cent during
2015, according to the World Economic Outlook by IMF
both Japan and Euro Area. In particular, increasing the
labor supply is of the essence, given unfavorable demo-
graphic trends, but it is also important to reduce labor
market duality, enhance risk capital provision to boost
investment, and raise productivity through agricultural
and services sector deregulation. The task of boosting
growth is also critical in light of the challenges posed by
high public debt and the need for sizable fiscal consoli-
dation, for which a concrete medium-term plan beyond
2015 is urgently needed.
during October, 2014. Further, the IMF projected the
growth in the Euro Area to average about 1.3 per cent
in 2015. Prospects are uneven across countries. While
Spain received an upward revision compared to an ear-
lier outlook in April, the projections for Italy, Germany
and France were revised downward.
Recent Developments
The global economy witnessed slight recovery with an
expansion of activity in high-income economies, accord-
ing to East Asia Pacific Economic Update by the World
Bank during October 2014. In this article, we highlight
the key findings of this update. As per the update, in
the US, output rallied on the back of accommodative
monetary policy, easing fiscal consolidation, and rising
employment, investment growth, and confidence. The
Euro Area, however, continued to be plagued by weak
domestic demand and credit growth along with sub-
dued investment prospects. In Japan, monetary policy
accommodation and reform commitments provided on-
going support. The global recovery and advantageous
financing conditions supported the growth in develop-
ing East Asia and Pacific. Capital flows to developing
countries have been on an upward trend since March.
Growth picked up in China, on the back of investment
stimulus, and in each of the ASEAN-5 countries, benefit-
ted by rising exports and diminished unrest in Thailand.
Among the region’s smaller economies, Cambodia and
Myanmar performed well, while growth weakened in
Mongolia and the Lao PDR.
Indonesia, Philippines and Vietnam witnessed a slow-
down in investment due to falling commodity export
prices, increases in the cost of capital and weak real
estate sector, the update highligted. Private consump-
tion remained resilient, supported by election-related
spending in Indonesia, robust labor markets in Malay-
sia and buoyant remittances in Philippines. Institutional
weaknesses, in particular government effectiveness and
regulatory environment, remain a significant underlying
constraint on investment. Net exports emerged as a
East Asia and Pacific: Outlook and Opportunities

ECONOMY MATTERS 10
GLOBAL TRENDS
pivotal factor in contribution to GDP growth across the
region. In the Philippines, Malaysia and Vietnam, export
growth accelerated, propelled by a cyclical turnaround
in high-tech electrical and electronics manufactures.
China continued to gain global market share, including
in exports of office, data processing and telecommuni-
cations equipment and electrical machinery. Indonesia
and Thailand saw an import compression.
Abundant global liquidity renewed foreign portfolio in-
vestment into the region, which revived in the second
quarter, following the “taper tantrum” of May–Sep-
tember 2013 and its “echo” in December 2013–January
2014. Indonesia and Vietnam saw particularly large capi-
tal inflows. While the former benefitted from an appre-
ciation of real exchange rate, the latter was supported
by low wage costs, proximity to China’s supply chains
and gains in macroeconomic stability. In contrast, Thai-
land saw portfolio outflows, continuing last year’s neg-
ative trend.
Efforts aimed at rebuilding fiscal space were not sus-
tained. Stagnant commodity prices impaired revenue
growth in Indonesia. Elevated subsidy costs, particular-
ly for energy, constrained spending on priority areas in
Indonesia, Malaysia and Thailand. Overall, fiscal deficits
narrowed over time on the back of rising net exports.
Mongolia and Indonesia remained important excep-
tions due to a broader lack of macroeconomic adjust-
ment to declining commodity export prices. Inflation,
in general, remained within the target range, leading
many central banks including Indonesia, Vietnam and
Thailand, to keep monetary policy on hold. However, in-
flationary pressures have risen in the Philippines, Mon-
golia and Malaysia, which tightened monetary policy in
2014.
Commodity prices remained broadly stable during 2014.
Geopolitical concerns in Ukraine and Iraq triggered only
modest and temporary increases in oil prices during the
second quarter. Prices eased subsequently on favora-
ble news about oil production in Iraq, Libya and the US,
along with weak demand data for China and Europe.
Credit growth was dampened by monetary tightening in
Indonesia in 2013, and in Malaysia and the Philippines in
2014. Credit growth was constrained by macro-pruden-
tial measures directed at the housing market through-
out Indonesia, Malaysia, the Philippines, and Thailand
and additionally, by political and structural problems in
Thailand and Vietnam. Mongolia was an exception with
a highly expansionary monetary policy fueling rapid
credit growth.
Growth Outlook
As per the update, global growth is expected to rise
modestly to 2.6 per cent in 2014, and an average 3.3 per
cent in 2015–17. Growth in the US is projected at about 2
per cent in 2014, rising to 3 per cent in 2015. In both the
Euro Area and Japan, growth is projected at about 1 per
cent in 2014, rising slowly thereafter.

11
GLOBAL TRENDS
The update highlights that a boost in demand for ex-
ports from developing East Asia and Pacific is antici-
pated with the gradual strengthening of activity in
high-income economies. This will sustain growth in the
region, which is expected to moderate gradually from
7.2 per cent in 2013 to 6.9 per cent in 2014–15. In the
region excluding China, growth will bottom out at 4.8
per cent in 2014, reflecting the slowdown in Indonesia
and Thailand, before an expected recovery to 5.3 per
cent in 2015–16. Developing East Asia and Pacific will re-
main the fastest-growing developing region. In China,
growth will gradually moderate to 7.4 per cent in 2014
and 7.1 per cent in 2016, reflecting intensified policy ef-
forts to address financial vulnerabilities and structural
constraints, and place the economy on a more sustaina-
Risk Scenario
A slower than expected recovery in the global demand,
with a negative impact on regional exports and growth,
presents major risk. The near-term outlook for high-
income economies is subject to downside risks particu-
larly in the Euro Area and Japan. Cambodia, Malaysia,
ble growth path. Measures to contain local government
debt, curb shadow banking and tackle excess capacity,
high energy demand, and high pollution will reduce in-
vestment and manufacturing output.
The capacity to benefit from the global recovery will
vary significantly across countries, reflecting structural
constraints to investment and export competitiveness,
and weak export prices for commodity producers. Cam-
bodia, Malaysia, Vietnam are well positioned to increase
their exports, reflecting their deepening integration
into global and regional value chains. But in Indonesia,
export performance will remain fragile, as its commodi-
ty export prices continue stagnating and infrastructural
bottlenecks hamper efforts at diversification.
Vietnam, and Thailand appear greatly exposed, given
their greater openness. Monetary policy is expected to
diverge across high-income economies, with a tighten-
ing in the UK and the US in the first half of 2015, and
continued accommodation in the Euro Area and Japan.
Overall, global financial conditions are anticipated to
tighten. The normalization process is expected to be

ECONOMY MATTERS 12
GLOBAL TRENDS
complex, since monetary policy in high income econo-
mies has remained expansionary over an extended
period of time. The unwinding of large central bank
interventions could be accompanied by abrupt market
reactions, increased volatility and overshooting of inter-
est rates. The divergence in monetary policy raises the
risk of disorderly exchange rate and interest rate move-
ments.
In many countries, debt service ratios are now at his-
torically elevated levels, owing to the sharp accumula-
tion of debt since the global financial crisis. In particular,
the risk of debt service problems may be significant for
households and corporates, although not governments,
should interest rates rise. Abrupt changes in market ex-
pectations could also lead to a sharper-than-expected
reduction in capital inflows, exposing some countries to
considerable pressures.
The risks posed by potential commodity price increases
appear relatively small at this time, barring a sharp slow-
down in China. Nevertheless, the impact of any such
increases would vary sharply across countries. Energy
price increases would have a relatively strong negative
impact on Cambodia, Lao PDR, and Thailand (petroleum
importers), and a relatively strong positive impact on
Indonesia and Mongolia (coal exporters). Increases in
food prices would most benefit Vietnam, Lao PDR, and
Thailand (significant exporters of rice and other food-
stuffs).
The Way Forward
While the global environment remains uncertain, there
are opportunities to enact critical reforms. The short-
term priority in several countries is to address the vul-
nerabilities created by loose financial conditions and
fiscal stimulus. In Indonesia, Malaysia, the Philippines,
and Thailand, measures to boost revenues and reduce
poorly targeted subsidies will create space for produc-
tivity-enhancing investments and reestablish fiscal buff-
ers. Among smaller economies, Lao PDR and Mongolia
need to reduce the fiscal deficit and tighten monetary
policy to ensure debt sustainability and macroeconomic
stability. Vietnam needs to broaden its revenue base
and strengthen its banking system. In China, the au-
thorities need to strike a balance between containing
the growing risks from rising leverage and meeting the
indicative growth targets.
Over the longer term, the focus in most countries must
be on implementing the structural reforms needed to
enhance their export competitiveness. Such reforms
will position them to benefit from the global recovery,
as well as from China’s continued move up the value
chain to less labor-intensive exports. Key reform areas
include infrastructure investment, logistics, and the lib-
eralization of services and FDI, including in the context
of regional integration.
Other Key Global Developments During the Month
• Russia’s central bank raised its key interest rates by 6.5 percentage points to 17 per cent from 10.5 per cent in
order to halt its currency (Rouble’s) freefall on December 16, 2014. The move was the largest single increase
since 1998, when Russian rates soared past 100 per cent and the government defaulted on debt. Russian cur-
rency Ruble is down by nearly 70 per cent against the US Dollar on a year-to-date (YTD) basis, having lost over
20 per cent over in November 2014 alone. A number of factors such as fall in oil prices, waning investor confi-
dence and high inflation have been weighing on the Ruble. The sudden sell-off last week has brought to light
Russia’s weak macroeconomic fundamentals. Russia is facing economic headwinds, brought about by geopo-
litical tensions and sanctions imposed by the West. The economy has slowed significantly this year to slightly
below 1 per cent growth. Going ahead, consumption spending is likely to remain depressed as weak wage
growth, high inflation and Ruble (RUB) depreciation continue to erode purchasing power. The outlook for
private investment also appears bleak amid poor investor sentiment. Meanwhile, inflation remains elevated.
While the currency has stabilised for now, there are certain risks that could trigger worsening of the scenario.
First, there remains the risk of further sanctions from the West, as tensions between Russia and West seem
to be far from over. Then, there could be a feedback effect of falling domestic asset prices, possible funding
stress and a withdrawal of credit lines. Therefore, the domestic banking system has become the most impor-
tant place to watch for signs of mounting stress.

13
GLOBAL TRENDS
• The US Federal Reserve took the second step towards normalizing its monetary policy stance by altering the
forward guidance from “keeping the interest rate low for considerable time” to “patient in beginning the
policy normalization. The first step was the end of the asset purchase program in October earlier this year.
The Fed also released its macro-economic projections for the next few years. The growth projection has been
revised to 2.4 per cent from 2.1 per cent released previously in 2014 while maintaining the long term growth
forecast at 2.2-2.3 per cent. Unemployment rate projections were slightly lowered during the next few years.
However, the Fed looked more dovish on inflation. In light of the recent fall in commodity prices, Fed projec-
tions reflects inflation averaging 1.4 per cent and 1.6 per cent respectively in 2014 and 2015 as against 1.7 per
cent and 2.0 per cent reported previously.
• The Swiss National Bank (SNB), in an unscheduled statement released on December 18, 2014 put in place
negative interest rate of -0.25 per cent on sight deposits (cash balances) held at SNB. The benchmark 3-month
Swiss Franc (CHF) Libor target range was expanded to (-)0.75-0.25 per cent from 0.0-0.25 per cent. The new
guidelines will apply to all accounts held by commercial banks while excluding those held by the Government.
The negative interest rate will be charged only on that portion of the account balance that exceeds a certain
threshold (set atleast at CHF 10 million). The main reason behind introducing negative interest rates was that
there has been an increasing appreciation pressure on the Swiss Franc on the back of rising safe haven de-
mand, fuelled by global concerns. The move to implement negative interest rates comes in light of preventing
the Franc from strengthening further. By imposing a tax on sight deposits, SNB probably intends to discour-
age foreign exchange inflows.
• The Japanese government on December 27, 2014 approved an emergency economic stimulus package worth
about 3.5 trillion yen (about US$29.06 billion) to drive regional economies hit by higher prices due to sales tax
hike and the Yen’s fast retreat. The stimulus package is aimed at providing subsidies designed to offset rising
fuel costs and help local governments carry out necessary measures to invigorate their communities at their
discretion. Under the package, 9.96 billion dollars will be used to support consumers and companies, about
4.98 billion dollars for revitalization of local communities and some 14.11 billion dollars for disaster prevention
and reconstruction. An extra budget for the fiscal 2014, intended to fund the package, is slated for cabinet
approval on January 9, 2015 and the government will try to finance the supplementary budget from the fiscal
2013 budget and tax revenue in the current fiscal year.
• A survey of Chinese manufacturers has found that their activity contracted in December 2014 in a new sign
that the world’s second-largest economy is slowing despite government efforts to shore up growth. HSBC ‘s
monthly purchasing managers’ index (PMI) fell to 49.6 on a 100-point scale on which numbers below 50 show
activity contracting. It was down from November’s break-even 50 reading and the first contraction since May.
Beijing is trying to steer the economy to slower, more sustainable growth based on domestic consumption
instead of exports and investment. But after growth fell to a five-year low of 7.3 percent in the third quarter
of 2014, Chinese Central Bank cut interest rates unexpectedly in November 2014 in an apparent effort to stop
the decline.
• US real gross domestic product (GDP) grew 5.0 per cent at an annual rate in the third quarter of 2014—the
strongest single quarter since 2003—according to the third estimate from the Bureau of Economic Analysis.
On annual y-o-y basis, GDP growth was revised to 2.7 per cent from 2.3 per cent forecasted previously. While
quarterly growth reports are volatile, and some of the growth in Q3 reflected transitory factors, the recent
robust growth data indicate a solid underlying trend of recovery. Indeed, the strong growth recorded in each
of the last two quarters suggests that the economy has bounced back strongly from the first-quarter decline
in GDP, which largely reflected transitory factors like unusually severe winter weather and a sharp slowdown
in inventory investment. Consumer spending, business investment, and net exports all remained positive in
this quarter.

ECONOMY MATTERS 14
DOMESTIC TRENDS
Industry Hopes for a Pro-Growth Budget: CII
President
Q1: The Narendra Modi government has been in power
for six months now. Do you think it has lived up to its
expectations?
I think so, definitely. For the first time, a government
has come to power on the theme of growth, develop-
ment and governance. Modi has come to power with
the experience of running the state of Gujarat success-
fully. Now he is trying to do it in the centre. We do feel
the government hit the ground running and we agree
with this philosophy that you don’t have to wait for the
budget to make changes. So many changes have been
brought about outside the budget, whether diesel price
decontrol, lot of FDI (foreign direct investment) issues,
labour-related issues. So, we are very happy the way the
government has moved to get the economy kick-start-
ed and I can tell you this is the industry view.
Q2: If the sentiment is so positive, why have things
have not moved on the ground? Why have investments
not picked up? Why did we see industrial growth con-
tract at its worst in three years in October?
For a country like India, you can’t bring changes over-
night. Like, say, the infrastructure projects that were
pending, now when you start giving them a push, the
approval processes which earlier took years, now I
believe projects are actually at the stage of taking off
through the approvals of various ministries. It takes
time, it can’t happen overnight. And then there are so
many issues which are state-related. So, both the cen-
tre and states have to work in tandem. But one or two
things that can be done more now which will help dra-
matically in terms of kick-starting the economy is creat-
ing the demand-side growth. And that’s where interest
rates plays a very major role. As a representative of the
industry, I can say with both inflation and fiscal deficit
under control, we would appreciate if RBI (Reserve
Bank of India) goes ahead and cuts interest rates by at
least one percentage point. That impacts the common
man, the EMIs (equated monthly instalments) come
down, and consumption picks up.

15
DOMESTIC TRENDS
Q3: But do you think a 1 percentage point cut in inter-
est rates is a panacea that will kick-start the economy?
No; it’s a combination of factors. But inflation is under 5
per cent, fiscal deficit is within the planned 4.1 per cent
of GDP (gross domestic product). So, these are within
the parameters of what was identified as the required
level for boosting the economy. One of the ways that it
can be done is through a cut in interest rates.
Q4: On the land acquisition Act, the government has
made it clear that its effort will be only to ease some
of the restrictions in acquiring land, but the high com-
pensation packages will not be tinkered with. Are you
happy with that kind of a stand?
Absolutely. Let’s be practical. The government in the
past came out with a particular set of parameters to
evaluate the values. In a democracy, it is not easy to
change values like that. The important point is time. The
earlier process laid down a time frame of 56 months to
acquire the land. Now, in five years, the whole project
changes. So, the current government’s approach to
bring it down to two years—and as I understand they
are also looking at exemptions in certain areas for ac-
quiring it faster—I think it is the right way to go.
Q5: The next budget will be presented in February.
Many analysts say this will be the most crucial budget
for this government as there are no state elections
imminent. What are the expectations of the industry
from this budget? Are you looking at some tax incen-
tives to boost manufacturing?
CII has given quite a few proposals on how to simplify
and ease tax processes. We believe it is very important
to bring in transparency, more ease in implementation
of taxes and taxes should be used for boosting invest-
ments. Unfortunately, we get caught in the issue of
big-bang reforms. I don’t know what big bang means.
So, I am not looking for any big-bang approach in the
budget. What I want to see is whether the budget is in
the same direction that the government is setting even
now—that is, for increasing economic growth and cre-
ating jobs. These are the two key elements which are re-
quired for the country. And they have the programmes
of ease of doing business and many other parameters,
they have the plan of goods and services tax, I think
some of these things can make a difference in terms of
the pace of economic growth growing much faster. We
are not looking at exemptions. We have asked for some
of the remaining inverted duty structure to be removed
in this budget.
Q6: India has signed a number of free-trade agree-
ments (FTAs). Have they benefited the industry? India
is also negotiating a mega-regional agreement in THE
Regional Competitive Economic Partnership. Are you
in its favour?
FTAs are a given in the world today. We have to work
within that. In some of the areas where there is a differ-
ence in the taxation system between the two countries
involved, if there are anomalies, they should be looked
at and studied so that it is a fair play. But we are in fa-
vour of larger regional agreements because that will
create larger common markets and that will ultimately
help. Indian companies also need to move harder to
take advantage of the FTAs and collaborate and work
with countries around. We feel with our economy pick-
ing up, with more ease of doing business, with GST
(goods and services tax) affecting transaction costs, we
will be as competitive as anyone else.
This Interview appeared in Mint dated 15th
December 2014. The online version can be accessed from the following link:
http://www.livemint.com/Industry/bKHUh8Y3GqabtNXP4512HJ/We-are-not-looking-for-any.html

ECONOMY MATTERS 16
DOMESTIC TRENDS
Signalling improvement in growth momentum, index of
industrial production (IIP) moved to the positive terri-
tory in November 2014. It posted growth to the tune of
3.8 per cent in November 2014 as compared to -4.2 per
cent posted in October 2014. The significant weakness
in October reading was primarily on account of lesser
number of working days amid festival season. Broadly,
the disaggregated data suggests improvement, though
there remain pockets of concern. Negative output in
The eight core industries grew by 6.7 per cent in No-
vember 2014 after rising to 6.3 per cent in October 2014.
The main drivers of growth include coal, cement and
electricity, which recorded double-digit growth. Output
of the coal industry grew by 14.5 per cent in November
2014 while that of the electricity sector grew by 10.2 per
cent. Cement production grew by 11.3 per cent, this be-
ing its highest growth in the last four months. Output
of the steel sector grew at a slower pace of 1.3 per cent
consumer goods still remains a matter of worry. On a
cumulative basis, industrial output grew by 2.2 per cent
in the first eight months (April-November) of the cur-
rent fiscal as compared to 0.1 per cent in the same pe-
riod last year. The sequential momentum as indicated
by the movement in the seasonally-adjusted month-on-
month series too showed that industrial output growth
improved in November 2014 (from -6.7 per cent in Octo-
ber 2014 to 6.1 per cent in November 2014).
in November 2014. Output of refinery products grew by
8.1 per cent during the month. This is its highest level
in the last 20 months. Output of the crude oil, natural
gas and fertiliser industry was seen falling in November
2014. Output of the fertiliser sector fell by 2.8 per cent.
This is the sixth consecutive month of a decline in pro-
duction. Output of the natural gas sector declined by
2.9 per cent while that of the crude oil sector fell by 0.1
per cent.
November IIP Signals Improving Growth Momentum

17
DOMESTIC TRENDS
On the sectoral front, output of the manufacturing
sector, grew by 3.0 per cent in November 2014 as com-
pared to contraction to the tune of 7.4 per cent in the
previous month. 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 November 2014 as com-
pared to the corresponding month of the previous year.
The industry group ‘Wearing apparel; dressing and dye-
ing of fur’ showed the highest positive growth of 19.8
per cent, followed by 17.5 per cent in ‘Motor vehicles,
trailers & semi-trailers’ and 12.8% in ‘Fabricated metal
products, except machinery & equipment’. On the oth-
er hand, the industry group ‘Radio, TV and communica-
tion equipment & apparatus’ showed the highest nega-
tive growth of (-) 60.0 per cent, followed by (-) 26.3 per
cent in ‘Office, accounting & computing machinery’ and
(-) 17.4 per cent in ‘Tobacco products’.
Electricity output rose decelerated marginally to 10.0
per cent in November 2014 as compared to 13.3 per cent
in October 2014. Mining output too grew at a slower
pace of 3.4 per cent in the reporting month as com-
pared to 4.9 per cent in the previous month. Going for-
ward, we expect the electricity production growth to
slow down further due to shortfall in coal supply. In ad-
dition, the Supreme Court ruling on cancellation of coal
blocks allocations to 214 mines could see mining sector
growth decelerating further in the months to come.
From the use-based perspective, during the month,
consumer goods’ output continued to contract, fall-
ing by 2.2 per cent in November 2014, most of it led by
the consumer durables sector where output fell 14.5
per cent, while consumer non-durables output grew by
6.0 per cent. Acute rainfall deficiency during the initial
phase of the monsoon season (about 30 per cent av-
erage during June to August) has likely to have dented
farm incomes and hence demand for consumer dura-
bles. Capital goods sector output grew by 6.5 per cent
after contracting in the previous month.
Outlook
Industry is buoyed by the improvement in IIP recorded in November 2014. We hope that going forward, the incipi-
ent signs of revival would transform into a firm recovery especially as there is some progress in investment inten-
tions and business confidence is on the ascendant. To steer the economy towards an accelerated growth path,
demand creation has to be a priority. In this regard, the manufacturing sector must be given a major impetus.

ECONOMY MATTERS 18
DOMESTIC TRENDS
WPI based inflation dipped to 64-month low of 0 per
cent in November 2014 from 1.8 per cent in October
2014, mainly due to inflation for primary articles and
fuel products slipping to sub-zero level during the
month. Inflation reading in November 2014 was the
lowest since (-) 0.3 per cent in July 2009. WPI inflation
has been in rapid decline over the past few months, in-
fluenced significantly by the fall in oil prices, of course,
but also reinforced by trends in food prices. Of the 676
commodities, the inflation rate for about 233 commodi-
ties, which carry 33 per cent weight in the WPI, rose in
November 2014 compared with the October 2014 infla-
tion rate. About 303 commodities, holding 55 per cent
weight in the WPI, witnessed a decline in the inflation
rate in November 2014. However, inflation for 140 com-
Primary inflation declined to 1.0 per cent in November
2014 from 1.4 per cent in October 2014. Part of the mod-
eration was driven by a high base of last year. Primary
food inflation too eased to 0.6 per cent from 2.7 per
cent in the previous month. Notably, food inflation has
come down sharply in the last couple of months, thanks
to proactive steps taken by the government such as
release of food grain stocks, low increase in minimum
support prices etc. Amongst food articles, inflation for
vegetables, fruits, milk, food grains, spices, oilseeds,
sugarcane etc, eased, contributing to the overall de-
cline in inflation in November 2014. Primary non-food
modities, carrying 12 per cent weight in WPI, remained
unchanged in November 2014. WPI inflation during this
fiscal has been downward bound. While it did rise in May
2014 to 6.2 per cent, it has since been slowing down.
CPI inflation too decelerated to 4.4 per cent in Novem-
ber 2014, far below the 11.2 per cent recorded in No-
vember 2013. While the dramatic decline in crude oil
prices clearly played a role, both directly and indirectly,
through its impact on input costs, the real story was
that of food prices. However, CPI edged up to 5.0 per
cent in December 2014. Core CPI inflation dropped fur-
ther to 5.2 per cent in December 2014 from 5.8 per cent
in November 2014. This is the lowest core inflation re-
corded since the beginning of the new CPI series.
inflation continued to remain in the red for the second
consecutive month as it slipped further to -3.7 per cent
in November 2014 from -1.4 per cent in the previous
month. Amongst non-food articles, inflation in minerals
was the main driving force behind the moderation.
Fuel inflation too contracted sharply by 4.9 per cent
in November 2014, as compared to 0.4 per cent in the
previous month. Fuel prices came off sharply tracking
a fall in global Brent crude prices, which is now trading
at a two-year low. Inflation in petrol declined further to
10.0 per cent from -7.0 per cent in October 2014. In an
Inflation Remains on Track

19
DOMESTIC TRENDS
interesting development, in October 2014, government
de-regulated the price of diesel and announced a new
price for domestically-produced natural gas. The price
of diesel, like petrol, would now stand linked to the mar-
ket without any government intervention, with retail
rates reflecting price changes in the global market. The
immediate impact on diesel will be a reduction in prices
by Rs 3.37 a litre.
Manufacturing inflation eased further to 2.0 per cent in
November 2014 as compared to 2.4 per cent in the pre-
vious month. Encouragingly, non-food manufacturing
or core inflation, which is widely regarded as the proxy
for demand-side pressures in the economy, continued
its downward trajectory as it moderated to 2.2 per cent
during the month as compared to 2.5 per cent in Octo-
ber 2014. In the coming months, we expect core WPI to
hover around 3.0-3.5 per cent, RBI’s comfort level for
this inflation measure. Manufacturing food inflation too
decelerated during the month.
Outlook
CII welcomes the steep fall in headline inflation, which has dropped to zero per cent in November 2014 owing to
a broad-based decline in all sub-indices, which is significantly better than market expectations. What is also note-
worthy is that both food and fuel prices entered the negative terrain during the month. This data comes close on
the heels of a drop in retail inflation to a low of 4.38 per cent in November, thereby reaffirming the moderation of
the inflation print which in turn would have a beneficial impact on inflationary expectations. Going forward, the
continuing slowdown in global commodity prices as well as the government’s resolve to rein in the fiscal deficit
would prevent prices from moving upwards. This should induce the RBI to rethink its cautious monetary stance
and urgently move towards a growth propelling monetary policy. The RBI should not wait till the next monetary
policy announcement and reduce interest rate substantially, as industrial production is in the red and investment
and consumption demand are yet to show visible signs of a pick-up.

ECONOMY MATTERS 20
DOMESTIC TRENDS
The Balance of Payments (BoP) data released for sec-
ond quarter of the current fiscal (2QFY15 henceforth)
showed some weakening of the external sector funda-
mentals. India’s current account deficit (CAD) increased
to US$10.1 billion (2.1 per cent of GDP) in 2QFY15 from
US$7.8 billion (1.7 per cent of GDP) in the preceding
quarter and US$5.2 billion (1.2 per cent of GDP) in Q2 of
2013-14. The increase in CAD was primarily on account of
higher trade deficit contributed by both a deceleration
in export growth and increase in imports. On BoP basis,
merchandise export growth decelerated to 4.9 per cent
The optimism surrounding India and the benign global
financial market condition helped garner significant
amount of capital flows into the economy. India re-
ceived foreign investment of US$17.8 billion in 2QFY15
as against US$1.5 billion in same quarter last year, of
which portfolio inflows were US$9.8 billion and FDI in-
in 2QFY15 from 11.9 per cent in 2QFY14. On BoP basis,
merchandise imports increased by 8.1 per cent in the
second quarter as against a decline of 4.8 per cent in
Q2 of 2013-14, largely due to a sharp rise in gold imports.
The recently announced removal of restrictions on gold
imports led to the increase in the import bill during the
quarter. In the invisibles component, services exports
grew by 3.4 per cent, while transfers were relatively
flat at 1.5 per cent growth. Meanwhile, net outflows on
the primary income increased slightly to US$6.9 billion
in 2QFY15 as against US$6.3 billion in the same quarter
last year.
flows US$8.0 billion. The reliance on portfolio flows to
fund the current account deficit has reduced consider-
ably. Benign CAD and strong capital inflows resulted
in net accretion of US$6.9 billion to India’s foreign ex-
change reserves during 2QFY15, as against a drawdown
of US$10.4 billion in 2QFY14.
Current Account Deficit Increases in 2QFY15

21
DOMESTIC TRENDS
Other Important Developments During the Month
• Government passes ordinance to ease land acquisition: The Union Cabinet, chaired by the Prime Minister Shri
Narendra Modi, approved certain amendments in the Right to Fair Compensation and Transparency in Land Ac-
quisition, Rehabilitation and Resettlement Act, 2013 by introducing an ordinance on December 29th, 2014. The
Act came into effect from 01.01.2014 but it has been reported that many difficulties were being faced in its im-
plementation. In order to remove them, certain amendments have been made in the Act to further strengthen
the provisions to protect the interests of the ‘affected families’. In addition, procedural difficulties in the acqui-
sition of lands required for important national projects required to be mitigated. States, Ministries and stake-
holders had been reporting many difficulties in the implementation of this Act. Several suggestions came up in
interactions with State Revenue Ministers and key implementing Ministries. Proposed amendments meet the
twin objectives of farmer welfare; along with expeditiously meeting the strategic and developmental needs of
the country.
The existing Act vide Section 105 (read with Schedule IV) has kept 13 most frequently used Acts for Land Acqui-
sition for the Central Government Projects out of the purview. These acts are applicable for national highways,
metro rail, atomic energy projects, electricity related other projects etc. Thus a large percentage of famers and
affected families were denied the compensation and R&R measures prescribed under the Act. The present
amendments bring all those exempted 13 Acts under the purview of this Act for the purpose of compensation
as well as rehabilitation and resettlement. Therefore, the amendment benefits the farmers and the affected
families.
The second important aspect of the amendment is to make developmental and security related works much
faster without compromising on the benefits/compensation to be given to the farmers. In the process of pro-
longed procedure for land acquisition, neither the farmer is able to get benefit nor is the project completed in
time for the benefit of society at large. Therefore the present changes allow a fast track process for defence
and defence production, rural infrastructure including electrification, housing for poor including affordable
housing, industrial corridors and infrastructure projects including projects taken up under Public Private Part-
nership mode where ownership of the land continues to be vested with the government. These projects are
essential for bringing in better economic opportunities for the people living in these areas and would also help
in improving quality of life.
CII Reaction: CII has always advocated the need for a simple and transparent Land acquisition framework,
which is also commercially affordable for industry. CII whole heartedly welcomes the fact that the government
has incorporated our suggestion to exempt projects in certain important sectors like defence, rural electrifica-
tion, rural housing and industrial corridors from the mandatory 80 per cent consent from affected families.
Further, exemption of these projects from social impact assessment is also a welcome and crucial initiative.
Industry has also suggested that PPP projects should be exempted from mandatory consent requirement as
the land ownership in such cases rests with the Government.
• Economy to grow by 5.5 per cent in FY14 according to the Mid-Year Economic Review: Economy is expected
to grow by 5.5 per cent in the current fiscal as compared to 4.7 per cent recorded in the previous year on the
back of improving macro-economic situation as per the Finance Ministry’s Mid-Year economic review 2014-15
document which was tabled in the Parliament on December 19, 2014. This in agreement with our forecast of
growth in the range of 5.5-6.0 per cent during the current year. Encouragingly, in the medium-term, the review,
expects the trend rate of growth of about 7-8 per cent. CII is buoyed by the fact that the review makes a men-
tion of introducing of GST at the earliest, which in our view will prop up the GDP by 1.5-2.0 percentage points
and help in achieving the medium-term growth projection.

ECONOMY MATTERS 22
DOMESTIC TRENDS
The improvement in growth and the consequent turnaround in investor sentiment have been spurred by slew
of critical policy decisions taken by the incumbent government after being voted to power with a resounding
mandate in July this year. However, the review document duly points out that the risks have not abated fully.
Investment is yet to pick up significantly, revenue collections remain subdued, and external environment re-
mains volatile. Notably, the review also reiterates CII stand that current interest rate stance, if continued, is
tight compared to the recent history and is hurting growth prospects. There are ample reasons to believe that
the current downward momentum in inflation is likely to sustain in view of the sharp moderation in commodity
prices, depressed demand conditions, deceleration in rural wage growth etc. Consequently, it is the opportune
time for RBI to reverse its monetary policy stance earlier-than-expected.
Highlighting the threat from fiscal excesses, the review mentions the challenges especially related to weak rev-
enue growth, which will increase difficulties of achieving the fiscal deficit target of 4.1 per cent of GDP for the
year. However, we are happy to note that the despite the difficult odds, government remains committed to
meeting the fiscal deficit targets for the year. On the external front, for the year as a whole, review expects cur-
rent account deficit to remain close to 2 per cent of GDP. In sum, in order to revive demand, the review states
that it is critical that the pace of new investment is speeded up various sectors of the economy, especially in
infrastructure. We are hopeful that stalled projects measuring Rs 18 lakh crore (about 13 per cent of GDP) will
rapidly start receiving clearances with the active intervention of the Project Monitoring Group under the proac-
tive leadership of the Prime Minister. Additionally, impetus should also be given to reviving public investments
as a complement to private investment, going forward.
• Constitutional Amendment Bill for GST introduced in Lok Sabha: The Union Cabinet approved on 17th De-
cember, 2014 the proposal for introduction of a Bill in the Parliament for amending the Constitution of India
to facilitate the introduction of Goods and Services Tax (GST) in the country. The Union Finance Minister Shri
Arun Jaitley introduced the said Bill in the Lok Sabha on December 19, 2014. The proposed amendments in the
Constitution will confer powers both to the Parliament and State legislatures to make laws for levying GST
on the supply of goods and services in the same transaction. GST will simplify and harmonise the indirect tax
regime in the country. GST will broaden the tax base, and result in better tax compliance due to a robust IT
infrastructure. Due to the seamless transfer of input tax credit from one state to another in the chain of value
addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders.
It is thus, expected that introduction of GST will foster a common and seamless Indian market and contribute
significantly to the growth of the economy.
• Over 50 per cent Farmers in Debt: As per NSSO report titled, Situation Assessment Survey of Agricultural
Households in India based on a countrywide survey of nearly 35,000 households by NSSO (70th
round) for
which data was collected on the agricultural year spanning July 2012 to June 2013, showed that nearly 52 per
cent of agricultural households in India are indebted and levels of debt are as high as 93 per cent in Andhra
Pradesh and 89 per cent in Telangana. On sources of credit, the survey revealed high levels of dependence
on non-institutional channels. Nearly 40 percent of all loans came from informal sources with 26 per cent ad-
vanced by moneylenders.
Further, the survey showed that rural India had an estimated 90.2 million agricultural households— about 57.8
per cent of the total estimated rural households in the country. An agricultural household was defined in the
survey as a household receiving value of produce of more than Rs.3,000 from agriculture with at least one
member self-employed in farming. Average monthly income per agricultural household during the agricultural
year July 2012- June 2013 was estimated at Rs.6,426. Net receipt from farm business (cultivation and farming
of animals) accounted for 60 per cent of the average monthly income per agricultural household, the survey

23
DOMESTIC TRENDS
noted. Income from wages and salary accounted for nearly 32 per cent of the average monthly income. About
44 per cent of the estimated agricultural households in the country had an employment guarantee scheme or
MGNREGA job card. However, only 38 per cent in the lowest land class (less than 0.01 ha) had job cards. “The
reported lower rate of possession of MGNREGA job cards in lowest size class is noteworthy in the context of
higher dependency of these households on wage/salaried employment,” the survey noted.
Worryingly, the survey revealed low levels of awareness among households of government procurement op-
erations—at minimum support prices (MSP)—and even lower level of sale of these crops to procurement
agencies. Except for sugarcane, less than half of the households, which were aware about MSP, sold off their
crop to agencies. Most farm households were unaware of crop insurance schemes, the survey said. Addition-
ally, farmers continued to remain far removed from new technologies and guidance from state run research
institutes, the survey data shows. Over 59 per cent of the farm households received no assistance from either
government or private extension services.
• Industrial Employment Declines in 2012-13 as per ASI: Data from the Annual Survey of Industries (ASI) for the
year 2012-13, released on 29th December 2014, revealed that the number of employees in industrial activities
actually declined by 3.5 per cent in 2012-13 to 12.8 million from 13.3 million in 2011-12. While employment de-
clined, wages grew at a muted pace. Wages to workers grew at the rate of 11.1 per cent in 2012-13 compared to
16.6 per cent in the previous year. The survey, which comes with a lag of two years, showed profits of firms sur-
veyed declined by 4.7 per cent to Rs 4.3 lakh crore from Rs 4.5 lakh crore in 2011-12. ASI is more comprehensive
than the index of industrial production (IIP), as it encompasses small and medium industries as well, covering
all units that employ at least 10 workers and use power or 20 workers but do not use power.
• RBI released its Financial Stability Report on December 29, 2014. The key highlights were as follows: (1) On
the domestic front, macroeconomic risks have abated in recent months on the back of improvement in growth
outlook and external sector conditions, fall in inflation and political stability. (2) However, growth in banking
business and activity in primary capital markets remain subdued due to poor investor sentiment. (3) Stress
tests suggest that the asset quality of banks may improve in the near future under expected positive develop-
ments in the macroeconomic conditions. However, under unfavourable macroeconomic developments, the
asset quality may worsen from current levels.
• Fiscal Deficit inches closer to 100 per cent of budgeted estimates: India’s gross fiscal deficit (GFD) reached 98.9
per cent of the annual budget estimates in November 2014. The deficit during April-November 2014 amounted
to Rs 5.3 trillion. At the same time last year, the deficit had amounted to 93.9 per cent of the budgeted target
for 2013-14. Government expenditure rose by 5.2 per cent to Rs 10.2 trillion during April-November 2014, as
compared to its year-ago level. While, net tax revenue collections of the government rose by a mere 4.3 per
cent to just about Rs 4 trillion during April-November 2014. The government did not make much progress on
the disinvestment front by November 2014. Its disinvestment receipts amounted a meagre Rs.2.2 billion during
April-November 2014, as against an annual target of Rs 634.3 billion..
• Government establishes NITI Aayog (National Institution for Transforming India) to replace Planning Com-
mission: In accordance with a key announcement made by Prime Minister Narendra Modi on Independence
Day, the Union Government on January 1, 2014 established NITI Aayog (National Institution for Transforming
India), as replacement for the Planning Commission. Dr. Arvind Panagariya has been appointed as the Vice-
Chairman of NITI Aayog. This comes after extensive consultation across the spectrum of stakeholders, includ-
ing state governments, domain experts and relevant institutions. NITI Aayog will seek to provide a critical
directional and strategic input into the development process.

ECONOMY MATTERS 24
SECTOR IN FOCUS
Enabling ‘Make in India’ Through Effective Tax
Reforms
I
ndia stands out as a country with immense potential
and opportunity given the current global environ-
ment. It is once again creating an interest and ex-
citement in the global arena as hopes build for its re-
forms agenda to be carried forward. Industry expects
tax reforms to be at a priority position in this agenda.
Around the world, the discussions on tax policy have
become centric to checking tax base erosion and en-
hancing transparency in terms of exchange of informa-
tion. India’s tax policy is no exception and is changing
in response to the global developments. However, In-
dia needs to strike the right balance between checking
tax avoidance and making the tax environment more
facilitative compared to other jurisdictions competing
for investments. More than low rates of tax or tax in-
centives, the investors look for a responsive tax admin-
istration that provides certainty and consistency in tax
treatment.
The Government has already embarked on the journey
to deliver a litigation-free and a certain tax environ-
ment. It has taken positive steps to correct some of the
policy and administrative decisions taken by the tax de-
partment in the last couple of years which resulted in
immense uncertainty and angst among the taxpayers.
The Budget 2014 also announced measures to improve
the existing disputes minimisation and resolution mech-
anisms.
The focus now needs to be on an effective implementa-
tion of these measures and building trust between the
tax administrators and taxpayers. A facilitative tax en-
vironment is crucial to creating a more positive image
for India as an investment destination and to make the
Prime Minister’s mission for ‘Make in India’ a success.
With the various action items on the OECD BEPS Action
plan gathering momentum, it is also seen that the policy
responses are varying across the globe. The Govern-
ment should engage with the industry actively on all the
BEPS Action items to develop a coordinated response.
The risk of unilateral policy, legislative or enforcement
response could compound the pre-existing backlog of
tax litigation and further damage the investment cli-
mate.
At present, the most awaited tax reform in India is the
Goods and Services Tax. While the Centre and the States
are still engaged in discussions on the design of the tax

25
SECTOR IN FOCUS
system, the industry hopes for an early consensus for a
comprehensive GST that will put the economy on the
high growth trajectory.
In this article, we present excerpts from the recently re-
leased report titled “Enabling ‘Make in India’ Through
Effective Tax Reforms”. It was released by CII and Ernst
& Young (E&Y) jointly in December 2014. It discusses the
above mentioned issues in great detail.
(A). GST: How Can We Make “Good”
Better?
The Goods and Services Tax (GST) is a significant step
in indirect tax reforms, eagerly awaited by the industry.
The initiatives being taken by the Centre to forge a con-
sensus with the States on various issues surrounding
the Constitutional amendment, required for implemen-
tation of the GST, are commendable. The industry hopes
that the discussions with the States will culminate into a
good and progressive tax system for the country.
All the issues currently under debate, including the
amendments to the Constitution, the design of GST, the
GST rate and the rules for implementation of the GST
are very significant and need a thorough debate and
consideration before they are finalised and implement-
ed. Without a good design and structure, the GST will
not be the “positive sum game” for stakeholders as it
was envisaged to be. Furthermore, it will not be able to
achieve its fundamental objectives, such as simplifica-
tion of the tax system, improvement in tax compliance,
enhancement in industrial productivity and competi-
tiveness and a 1.5–2.0 per cent increase in the economic
growth of the country. To the contrary, a partial or a
“compromised” GST will bring more pain for the indus-
try and will not be in the best interests of the country.
Let’s discuss some important issues coming under the
realm of implementation of GST.
A1. Treatment of Petroleum and Alcohol
under GST
The States continue to oppose the inclusion of petro-
leum products (petroleum crude, high speed diesel,
motor spirit, natural gas and aviation turbine fuel) and
alcohol for human consumption in the GST purview.
The proposal to exempt any product is against the inter-
ests of the industry and the economy. The suppliers of
exempted goods and services are not eligible to claim a
credit for the tax on inputs. Non-recovery of input taxes
results in substantial tax cascading, adding to the cost
of production and distribution. Moreover, the burden
of blocked input taxes falls entirely on domestic manu-
facturers — foreign manufacturers acquire their inputs
abroad, free from Indian taxes. The substantial burden
of cascading taxes increases the cost of doing business,
discourages investment in the sector, and creates a bias
in favour of imports. This will be contrary to the basic
objective of GST of minimizing tax cascading.
Petroleum Sector
The petroleum sector includes oil exploration and pro-
duction, refining, transportation and pipelines, distribu-
tion and marketing. At all these stages, substantial in-
puts of goods and services are acquired, for instance,
survey and exploration of mineral oil or gas service,
cargo handling service, transportation of goods by road
service etc. All such inputs will be taxable under the
GST, but the tax paid would be non-recoverable if the
petroleum products are excluded from GST. According
to estimates, the quantum of blocked input credit for
the petroleum sector could be as high as INR 300 billion
per annum, depending on the quantum of investment
in the sector in a given year. Keeping the petroleum
sector out of the GST regime is likely to raise many con-
sequential issues for the industry and the government.
New layers of complexities will also arise, followed by
increased litigation, relating to apportionment of cred-
its for inputs used in common for taxable and excluded
items.
Differential treatment of petroleum and other prod-
ucts may render the IGST model for taxation of inter-
state sales unworkable or inordinately complex in this
sector. The taxation of inter-state supplies of services
provided to the excluded sector would also involve sig-
nificant complexities to determine the place of supply.
For instance, services such as advertising acquired by
petroleum companies have no unique place of supply
or consumption. It will be a challenge to decide which
State would collect tax on them.
The decision to exclude the petroleum sector from GST
is apparently based on the concern that its inclusion will
lead to revenue losses for States. The revenue objec-
tive of the States, however, could be readily achieved
through a supplementary excise or sales tax on petro-
leum products, as is the practice in many international

ECONOMY MATTERS 26
SECTOR IN FOCUS
jurisdictions. Even now, with the exception of a few
States such as Assam and Tamil Nadu, almost all States
levy VAT on petroleum. The VAT applied by these States
is at an increased rate, which is akin to a supplementary
rate over and above the standard rate.
Therefore, the fear of the States about revenue loss is
really unfounded. The revenue would be determined
by the level of tax rates and not by the structure of the
GST. The supplementary tax can be levied by the Cen-
tre as well as the States and allow them full flexibility
to raise additional revenues from petroleum products,
while freeing up the petroleum sector from the distort-
ing effects of tax cascading through denial of credits for
the GST on products and distribution inputs of the sec-
tor.
Alcohol
Like any other industry the alcohol industry, if excluded
from GST, will face similar challenges and problems as
mentioned above.
Under the current Constitution, the power to levy ex-
cise on alcohol is exclusively with the States. Cenvat
does not apply to the production/manufacture of alco-
hol. Therefore, no credit is allowed for the Cenvat and
the Service Tax paid on inputs used in the production
and distribution of alcohol. At the State level, the alco-
hol industry is subject to sales tax or VAT (as well as ex-
cise and other levies), but generally no credit is given
for taxes paid by the industry on its inputs. Therefore,
there is significant amount of tax cascading resulting
in increased costs for the industry. The alcohol sector
faces additional complexities due to the significant di-
versity and variation in the taxes across States.
The exclusion of alcohol from GST will perpetuate these
complexities, and pose serious collateral problems for
other allied sectors too. The hotels, restaurants and
other outlets serving alcohol, which sell both GST and
non-GST items will be the worst affected in terms of
administrative complexities. Administrative issues will
also arise for both the industry and the government in
terms of assessment and compliance, which will add to
the compliance costs and disputes.
On the other hand, the inclusion of alcohol sector in the
ambit of GST is likely to give more revenues to State
governments as they will continue to have the power
to levy supplementary excises and other levies over and
above the GST on alcohol. The jurisdictional control of
the States over this sector will not be undermined in any
way.
If GST applies to alcohol, it will significantly reduce tax
evasion and give more revenues to States due to im-
proved enforcement and compliance. Since the Centre
will also be involved in the administration of GST there
will be an opportunity for the States to have an auto-
matic mechanism to cross-verify the sales declared for
the GST with those declared for the income tax. The
improved intelligence and monitoring under the GST
would minimize any leakages and positively impact gov-
ernment revenues. Seamless coordination between Cen-
tre and State administrations will provide audit trail and
plug revenue leakages.
States continue to have concerns about the loss of fiscal
autonomy if alcohol were included in the GST. Under the
current Constitution, the States have exclusive powers
to legislate in respect of matters relating to the “pro-
duction, manufacture, possession, transport, purchase
and sale of intoxicating liquors”. They also have the ex-
clusive power to levy excise duties on the manufacture/
production of alcoholic liquors for human consumption
and countervailing duties at the same or reduced rates
on similar goods manufactured or produced elsewhere
in India.
If alcohol is included under GST, the States will retain the
exclusive power to levy excise duties. Therefore, to pro-
tect their revenues, the States could levy supplementary
excises and other levies over and above the GST on the
alcohol products. This is also the practice in most inter-
national jurisdictions where the alcohol industry is cov-
ered under the GST at par with other sectors and sup-
plementary duties are imposed to raise revenues or to
discourage consumption of alcohol.
Revenue Neutral Rate (RNR)
An ideal GST should have a single GST rate, kept at a rea-
sonable level to make it socially and politically accept-
able, minimise classification disputes and to facilitate
voluntary compliance. However, if at all the government
has to apply tax at two rates, the following guidelines
should be kept in mind:
n Goods of the same nature (e.g., all food items)
should be kept in the same rate basket to avoid clas-
sification disputes.

27
SECTOR IN FOCUS
n Competing goods should also be kept in the same
rate basket to avoid any classification disputes.
n Essential goods should attract the lower of the two
rates.
n All goods sold by a general store should attract the
same rate so that traders, particularly small traders,
are not burdened with the compliance complexi-
ties.
n Services should attract the lower of the two rates.
GST Council
The role of the GST Council for a dual GST, as proposed
to be introduced, cannot be over-emphasised. It will be
a forum where the Centre and the States can discuss
and jointly decide upon critical parameters such as GST
rates, exemptions, thresholds and other key param-
eters such as the place of supply rules. A forum of this
nature will be fundamental to achieving harmonisation,
essential for GST implementation.
The role of the GST Council has been contentious and
the Centre and the States have had divergent views
on the issue of the degree of harmonization and the
States’ fiscal autonomy. The States have expressed
concerns about the supremacy of the Council over the
legislature, if its decisions were to be binding on the
States. Therefore, according to the Constitution (A) Bill,
the Council’s powers have been made only recommen-
datory though they will be guided by the need for a har-
monised structure of GST.
While it is expected that the GST Council’s recommen-
dations will be respected and abided by the Centre and
the States, for structural features of the GST such as the
determination of place of supply, the recommendations
of the Council should be binding on all States. This will
be essential to ensure that there is no double taxation
of any supply of goods or services or cascading impact
of any taxes.
A2. Place of Supply Rules
Determination of the place of supply will be fundamen-
tal to determining the State where tax is to be paid and
therefore, deciding on the application of SGST or IGST.
We understand that the Government of India has al-
ready prepared the Draft Place of Supply Rules. Before
finalising the Rules, the industry must be provided an
opportunity to work closely with the government in fur-
ther developing these Rules after considering the intri-
cacies of the businesses.
The rules should not be simply an adaptation of those
that apply at the Centre level. Under the rules pre-
scribed by the Centre, place of supply or point of taxa-
tion is generally defined to be the place where the re-
cipient or customer is located. Where the place of buyer
and seller is the same, SGST could apply. Where the
buyer and the seller are located at different places, IGST
would apply. The main difficulty with these rules is that
while at the national level the place of buyer/supplier
is readily identifiable, this will not be the case at the
State or sub-national level. Many suppliers have a pan-
India presence and operate from many States. Similarly,
many recipients/customers have a pan-India presence.
In such cases, neither the place of supplier nor the place
of buyer is unique. Ad-hoc or arbitrary rules are needed
in such cases to define their location, which in turn im-
pacts whether they are subject to SGST or IGST and if it
is SGST, in which state it would apply.
The following aspects must be considered while finalis-
ing the Place of Supply Rules:
n The Rules should follow the consumption–destina-
tion principle, i.e., the supply of goods or services
should be taxed in the State where it is consumed.
n The destination must be unique among the States.
Place of supply should not impact in any way input
tax credit entitlement of the supplier or the recipi-
ent.
n As far as possible, the rules should apply uniform-
ly to goods and services. Where they differ, clear
guidelines must be provided for treatment of com-
posite supplies consisting of both goods and ser-
vices.
n Where the State tax rates differ, the Rules should
minimise any incentives to divert supplies to low
rate jurisdictions.
n Matters relating to the place of supply may be con-
sidered by the GST Council. However, as observed
in the previous section, the Constitution (A) Bill re-
quires the Council’s powers to be only recommen-
datory.

ECONOMY MATTERS 28
SECTOR IN FOCUS
(B). Global Tax Trends: How is India
Responding?
B1. Tax Base Erosion
BEPS: OECD/G20 Project: Overview and Cur-
rent Status
The 2008 financial crisis had put Government budgets
under strain and MNEs were criticised for failing to pay
their “fair share of tax”. In June 2012, the G20 released
a statement calling for “the need to prevent base ero-
sion and profit shifting (BEPS)”. The OECD responded
to this call by releasing an initial report on BEPS in Feb-
ruary 2013. The initial report contained studies and data
available regarding perceived magnitude of BEPS and
provided an overview of global developments, which
affected corporate tax matters. The report primarily
echoed the view that BEPS concerns were aggravated
because current international tax standards failed to
keep pace with changes in global practices, particularly
in the area of intangibles and the development of e-
Commerce/digital economy.
The initial report was followed up by a comprehensive
15 Action Plan report released in July 2013. The Action
Plan report recommended consensus-based changes
needed to address risk of double non-taxation or cases
of no or low taxation arising primarily due to artificial
separation of activities from the jurisdiction in which the
value was created.
Three Pillars of BEPS
13 out of 15 actions are classified under three pillars viz.
coherence, substance and transparency. Action Plan 1
(Digital Economy) is an industry-specific report likely to
be affected by other actions, while Action Plan 15 fo-
cuses on swiftly implementing the results of the Action
Plan by way of a multilateral instrument. The following
table provides a broad overview of various action plans,
which form part of the 3 pillars:
Action plans under the ”coherence” pillar aim to ensure
that there is consistency and fairness in tax treatment
across jurisdictions to check cases of double non-tax-
ation arising from differing or preferential tax treat-
ments under domestic laws of various countries or due
to differing treaty rules.
Action plans under the ”substance” pillar aim to en-
sure that income is offered for taxation in the jurisdic-
tion in which value creation functions take place. These
emphasize transfer pricing apart from checking treaty
abuse (including treaty shopping). Action plans coming
under the “transparency” pillar encourage exchange of
information and aim to provide certainty and predict-
ability to taxpayers through a dispute-resolution mech-
anism.
Actions So Far
The OECD has differing time lines stretched over 2014
and 2015 under each of the above Action Plans. The re-
sults of these actions are expected to provide countries
the tools they need to ensure that profits are taxed
where economic activities generating profits are per-
formed and where value is created. With respect to 7
out of 15 actions, the reports (aggregating to more than
700 pages) came to be made public in mid-September
2014. Among them are key recommendations for CbCR
and a proposal for a new multilateral instrument de-
signed to provide an innovative approach to achieve
automatic amendment to treaties across the globe to
ensure that recommendations emerging from different
action plans are implemented swiftly.

29
SECTOR IN FOCUS
B2. India’s Response to BEPS
In response to the BEPS questionnaire dated 8 August
2014 issued by the UN, India has also highlighted that
like any other developing economy, BEPS is a concern
for India in view of the fact that Indian economy is also
reliant on corporate tax from MNEs. India has identi-
fied certain major BEPS challenges such as — excessive
payments towards finance and service charges to over-
seas affiliates; inappropriate (mispricing) of business
functions actually conducted in India; ability of a digi-
tal economy player to have significant virtual presence
without paying any source country tax; ability of MNEs
to artificially avoid PE trigger and engage in treaty shop-
ping. As part of its response, India highlighted signifi-
cance of effective EOI among jurisdictions.
While India continues to express strong commitment
on the BEPS initiative, the response states that India
strongly believes that BEPS issues must be addressed
in a manner that result in breaking down all such struc-
tures or practices that promote or protect base erosion
and profit shifting. For example, if the problem is a leak-
ing bucket then steps must be taken to swiftly plug that
leak or replace the bucket instead of debating how to
calibrate the speed of inflow of water into the leaking
bucket.
B3. Global Trends
While OECD actions are likely to be finalised by end of
2015, significant unilateral actions are seen in various
countries, which touch upon many of the aspects iden-
tified in BEPS action plans. To illustrate:
• Many countries have strengthened SAARs to deal
with targeted/ identified anti-avoidance measures
apart from introducing GAAR (e.g. Finland, France
and Norway).
• Certain countries have taken positions to tax inter-
net activities even in the absence of a fixed place
of business (such as, Taiwan and Vietnam) — [e.g.,
proposed introduction of a special tax in the UK to
primarily target technology companies having eco-
nomic activity in the UK].
• With a view to counter hybrid mismatch, significant
action has been seen in the form of comprehensive
anti-hybrid rules (in the UK, Denmark and South Af-
rica), taxing dividends where they are deducted by
the payer (in Germany, Hungary and Poland), limit-
ing the deductibility of an expense where the recipi-
ent is subject to no or low tax (in Austria, France,
Mexico).
• A few countries currently have disclosure rules tar-
geted at aggressive tax planning (e.g., the UK, Can-
ada, Ireland, Israel, South Africa and the US). The
scope of these rules is defined either by reference
to features of the transaction (in Ireland, South Af-
rica, Israel) or by the commercial arrangement with
the advisor/promoter (in Canada) or by both (in the
UK, the US).
B4. India Trends
Globally, India was one of the early proponents of BEPS
concerns. The following legislative provisions or ap-
proach illustrate this:
• Though no specific domestic tax provisions con-
cerning digital economy are present, definition of
royalty/fees for technical services under the domes-
tic law is perceived to be wide enough to capture
many technology/digital economy transactions. As
part of its response to BEPS Action Plan on Digital
Economy, India has reiterated that, in the e-com-
merce era, the current PE concept based on physi-
cal presence may lead to serious disequilibrium in
sharing of tax between country of source and coun-
try of residence.
• India’s tax treaties are characterised by a reduced
threshold for PE definition, inclusion of a provision
on service PE, etc.
• While Indian tax authorities do, in general, follow
the OECD TP Guidelines, the following aspects con-
cerning TP may merit attention:
1. Definition of the term “intangible property”
for TP purposes is wide enough to include
human capital-related IP such as trained and
organized workforce and employment agree-
ments.

ECONOMY MATTERS 30
SECTOR IN FOCUS
2. The Indian TP administration does not agree
with the position that risk can be controlled re-
motely by the parent company and that Indian
entities engaged in core functions, such as car-
rying out R&D activities or providing services
can be risk mitigated entities.
3. According to India, apart from location sav-
ings, profit from location-specific advantages
(referred to as “location rent”) such as skilled
manpower, access to market, large customer
base, superior information and distribution
network should also be allocated between as-
sociated enterprises.
B5. What India Needs to do/Conclud-
ing Thoughts?
The importance of equity, certainty and fairness are es-
sential attributes for an effective and efficient tax sys-
tem and they should be given due consideration in the
making, administration and enforcement of tax laws.
Unfortunately though, in recent years, a perception has
been formed that India is not a very friendly place to do
business. What startled people the most was retrospec-
tive amendment in 2012 to virtually negate SC judge-
ment in the Vodafone case. There is an urgent need to
change this image and the current Government appears
to be committed to act towards this to usher in nonad-
versarial tax regime.
India has set up a Tax Administration Reform Commis-
sion (TARC) comprising senior government officials and
private sector tax professionals under the chairmanship
of Dr. Parthasarathi Shome, with an objective of bring-
ing in credibility among tax payers and streamlining in-
come tax procedures. The first report of the TARC that
was made available to the public in June 2014 expresses
an overwhelming need for fundamental reform in tax
administration and contains various recommendations
to achieve desired tax reforms. The report contains re-
freshingly significant recommendations for a “compre-
hensive” transformation of tax administration founded
on accountability and recognition of the taxpayer as
a “customer”. The recently released guidelines direct
field officers to implement a series of taxpayer-friendly
measures. These guidelines consolidate some earlier in-
structions and are aimed to boost efforts in achieving
the objective of furthering a nonadversarial and cus-
tomer-friendly tax regime.
Moreover, in terms of TP assessment, Indian audits are
perceived to be aggressive and have made various ad-
justments, which were seen to be inconsistent with the
basic tenets of taxation. Introduction of APA and prag-
matic response to the applicants will go a long way in
controlling proliferation of tax litigation in the field of
TP.
While there may be no objection to plugging the weak-
ness created by e-commerce trading and while tax eva-
sion and artifice can be dealt with sternly, discretion
should be exercised in so implementing the law that
there is no disincentive to invest in India. The growth
of business brings many other economic advantages
to the country. It becomes important to sustain the cli-
mate of confidence, clean environment and equitable
approach in matters of tax administration.

31
FOCUS OF THE MONTH
Indian Economy – Recent Trends and Challenges
I
n July 2013, India was teetering on the edge of mac-
roeconomic crisis with double digit inflation, a high
and rising current account deficit (CAD), and a falling
rupee as investor sentiment turned sour in the after-
math of the Fed’s taper decision to signal the end of its
quantitative easing. Nearly 18 months on, the landscape
has vastly changed. Macro-economic stability has re-
turned, reforms are being undertaken, the external en-
vironment has moved in India’s favour, and above all, a
new Government has come into power with a relatively
unencumbered political mandate for decisive economic
change, a mandate that markets have enthusiastically
embraced. Although it is still too early to detect signs
of robust recovery, emerging trends indicate that the
growth deceleration has bottomed out, manifested in
the relative improvement in growth in the latest 2 quar-
ters. However, risks still remain on the horizon. Invest-
ment is yet to pick up significantly. But on the upside,
inflation has come down dramatically, the monsoons
failed to extract as much of a toll on growth as ex-
pected, and India received a large supply side shock in
the form of reduced commodity prices that amounted
to about 1.5 per cent of GDP. According to the govern-
ment estimates, 2014-15 could end with growth around
5.5 per cent. Looking ahead, 2015-16 would hold host
of promises and challenges for the economy. Support
from favourable external environment will be crucial in
this regard.
In this month’s Focus of the Month, we look at the year
gone by and list out the challenges which await us in
2015. In this regard, we cover the recent trends emanat-
ing out of investment and fiscal data, important events
which shaped up 2014 and what the industry is expect-
ing from the forthcoming Union Budget 2015-16

ECONOMY MATTERS 32
FOCUS OF THE MONTH
T
he industry would be keenly looking at the Un-
ion Budget 2015-16 with hope that the govern-
ment would do the needful to delineate a new
economic vision for the country. There are mounting
expectations that the Budget would chart out a bold
reforms plan which would take the economy to the tra-
jectory of 7-8 per cent growth in the near future. Recent
actions and bold measures by the finance minister has
lent credence to this expectation.
In the prevailing scenario, maintaining fiscal prudence
is crucial to rejuvenating growth drivers. Reviving in-
vestment demand, which is a major growth propel-
ler, should be among the top priorities of the Budget.
Gross fixed capital formation in the private sector as a
percent of GDP has been decelerating from almost 25
per cent in 2007-08 to around 23 per cent in 2012-13. CII
recommends that projects are awarded to the private
sector after securing the key sovereign clearances for
PPPs with proper interventions to ease norms in land,
labour and environment. As many approvals derive
from states, a coordinated approach of both centre and
states is essential. It is necessary to clear the backlog of
projects for new investment plans to fructify.
Significant investments for building new capacities can
come from cash rich public sector companies. Their role
becomes important especially at a time of subdued
private sector investment. The public sector could con-
template funding the initial construction cost for cre-
ating infrastructure assets, and once the projects are
completed and start generating cash flows, these can
be given out to the private sector for operation and
maintenance on a revenue sharing basis. This would
also help “crowd in” private investments.
There is need to rev up investments in the real estate
sector. The real estate investment trusts (REITs) and
InvIts have yet to take off because of unviable tax struc-
ture. Dividend distribution tax exemption needs to be
extended to REITs. Moreover, long term capital gains
should be exempted for sponsors of REITs.
The government is putting a lot of emphasis on reviving
the manufacturing sector. With its share of around 15
per cent to GDP, its contribution is extremely small com-
pared to its potential. Countries like China, South Korea
and Taiwan have done better in terms of manufacturing
share of GDP. The renewed attention to manufactur-
ing through the ‘Make in India’ initiative has been long
overdue. CII is certain that this call to action would start
yielding results, sooner than later.
The Budget would be closely watched for its taxa-
tion measures. The introduction of the Constitutional
Amendment Bill on GST in the Lok Sabha marks the
process of ushering in the most crucial tax reform in
the country. GST would spur manufacturing activity by
creating a seamless market and eliminating tax cascad-
ing. Industry is delighted to learn that GST would be
introduced by April 2016.
Industry Will Keenly Look at the Budget for Re-
vival and Growth

33
FOCUS OF THE MONTH
Similarly, issues such as restricting MAT to 10 per cent,
providing MAT and DDT relief to units and developers of
SEZs; making investment allowance eligible for deduc-
tion while calculating MAT are other fiscal measures to
boost manufacturing.
A large part of investor sentiments are determined by
the ease of doing business. The World Bank ranks us at
142 out of 189 countries. Keeping taxation simple, con-
sistent and predictable as well as reducing the scope of
tax litigation deserve priority consideration of the gov-
ernment for attracting investment. We also hope that
GAAR would be deferred by another two years to refur-
bish the business climate.
The Union Budget 2015-16 is riding on the crest of huge
expectations.
This article appeared in Financial Express dated 31st December 2014. The online version can be accessed from the follow-
ing link: http://www.financialexpress.com/article/companies/industry-will-keenly-look-at-the-budget-for-revival-and-
growth/24950/

ECONOMY MATTERS 34
FOCUS OF THE MONTH
A
midst an unpredictable global environment,
opportunities to enact critical reforms have
emerged even though challenges persist. In
India, recent policy measures and the strategic direc-
tion defined by the new government, especially its am-
bitious ‘Make in India’ campaign, hold the promise of
revitalizing growth in the medium and long-term. The
post-election recovery of confidence in India also pro-
vides an opportunity to embark on much-needed struc-
tural reforms. At a time when various indicators are be-
ing keenly securitized to trace some signs of economic
recovery, positive news comes from the figures on new
investment proposals for the second quarter (2QFY15).
New investment proposals peaked to a record high fig-
ure of Rs 257 thousand crores during the second quarter
of 2013-14, the highest in last thirteen quarters, growing
by an astonishing 129 per cent as compared to the sec-
ond quarter previous year. This brought a much needed
respite from measly proposals worth Rs 86 thousand
crores in the first quarter this year, when they had con-
tracted by as much as 51 per cent on a year-on-year ba-
sis. This corroborates the findings of the recent World
Economic Outlook update, which projected a pickup in
investment accounting for a rise in growth in India to
5.6 per cent in 2014 and further to 6.4 per cent in 2015.
Combined with positive signals emerging from other in-
dicators such as improving export prospects, narrowing
current account deficit, reduction in exchange rate vol-
atility and downward trend in inflation, the jump in the
value of new investment proposals in 2QFY15 lends sup-
port to the beginning of improvement in business senti-
ments. There is, however, a case for cautious optimism,
as recovery remains fragile and lopsided. To strengthen
the recovery momentum and spread its coverage to
wider sectors, policy interventions – fiscal, monetary
and others - would continue to play critical role for
several quarters to come. Further, infrastructure bot-
tlenecks in India are not just a medium-term worry but
have been flagged as a constraint even on near-term
growth by the World Bank in its October 2014 update.
CII Analysis
New Investment Proposals Witness Electrifying
Growth

Economy Matters - Nov-Dec 2014

Economy Matters - Nov-Dec 2014

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