CII Economy Matters, August-September 2014

Cairns (Australia) hosted the Group of Twenty (G20) Finance Ministers and Central Bank Gov-ernors
Meeting on the weekend of 20 and 21 September 2014 and reportedly made progress
on policy initiatives to target 2 per cent additional global growth and make the world econ-omy
larger by US$2 trillion over four years. Propping up investment was critical to boosting
demand and lifting growth, the Group pointed out. However, G20 officials expressed con-cerns
that prevailing low interest rates could lead to a potential increase in financial-market
risk. The Group vowed to continue to implement their fiscal strategies flexibly to take into
account near-term economic conditions, so as to support economic growth and job creation,
while putting debt as a share of GDP on a sustainable path.
On the domestic front, the incoming economic data is pointing towards the sentiment that
domestic economic activity appears to be reviving. GDP figures for 1QFY15 rose to 9-quarter
high supported by higher domestic demand. Further, the Index of Industrial Production (IIP)
has shown signs of recovery in the first four months of the current fiscal though the latest
data print for July 2014 has been disappointing. Encouragingly, inflation, which has been a
cause of worry for the last several years, has moderated. Both WPI and CPI inflation declined
for the period of April-August, 2014, with WPI dropping more sharply than CPI. The recent
drop in inflation just ahead of the Reserve Bank’s scheduled policy meet on September 30th,
2014 has raised expectations of a rate cut.
As per CII’s latest study titled ‘Investment Requirements in India: 2014-15 to 2018-19’, CII ex-pects
infrastructure investment to go up from around Rs 24 lakh crore (USD 500 billion) in XI
plan period to Rs. 64.3 lakh crore (USD 1071 billion) during 2014/15- 2018/19 period. The figure
is comparable to the Planning Commission’s estimate of around USD 1.0 trillion during the
12th plan period. Investment in infrastructure is estimated to average 7.7 per cent of GDP
over the next five years, up from 7.2 per cent recorded during the XI plan period. The CII study
suggests that around 40 per cent of the total investment in infrastructure should come from
private sector, which is lower than 48 per cent prescribed by the Planning Commission for the
12th plan period. The private sector continues to face multifarious challenges in infrastruc-ture
and even PPP has failed to produce desired results, making the task of raising nearly half
of investment from private sector, as envisaged in the 12th plan document, quite difficult in
the present milieu. In this context, we cover this crucial aspect of financing infrastructure in
this month’s ‘Focus of the Month’.
1
FOREWORD
AUGUST - SEPTEMBER 2014
Chandrajit Banerjee
Director General, CII

5
EXECUTIVE SUMMARY
Global Trends
Cairns (Australia) hosted the Group of Twenty (G20) Fi-nance
Ministers and Central Bank Governors Meeting on
the weekend of 20 and 21 September 2014 and reportedly
made progress on policy initiatives to target 2 per cent addi-tional
global growth and make the world economy larger by
US$2 trillion over four years. Structural reforms will be im-portant
in this regard. The group pointed out that they had
developed a set of new concrete measures that will facilitate
growth, increase and foster better quality investment, lift
employment and participation, enhance trade and promote
competition. However, G20 officials expressed concerns
that prevailing low interest rates could lead to a potential
increase in financial-market risk. Elsewhere, the East or West
conundrum has left Ukraine in turmoil. During the course of
the unrest, US, followed by EU, Canada, Norway, Switzer-land,
Australia and Japan, began to sanction Russia, which
has reciprocated with sanctions of its own. The political un-rest
has caused turbulence in financial markets, particularly
Russian and European stock markets.
Domestic Trends
The incoming economic data is pointing towards the senti-ment
that domestic economic activity appears to be reviv-ing.
GDP figures for 1QFY15 rose to 9-quarter high of 5.7 per
cent supported by higher domestic demand. Further, the
Index of Industrial Production (IIP) in first four months of
the current fiscal registered a growth of 3.3 per cent, com-pared
to contraction of 0.1 per cent in the same period last
year. However, inflation has been a cause of worry for the
last several years, forcing a tight monetary policy even as
economic growth has continued to remain abysmally low.
Encouragingly, WPI inflation for the period of April-August,
2014, moderated to 5.3 per cent as compared to 5.5 per cent
in the same period last year. Retail inflation as measured
by CPI too eased to 8.0 per cent in April-August 2014 from
9.5 per cent in the same period last year. On the external
front, cumulative value of exports for the first five months
of the current fiscal (Apr-Aug) were valued at US$134.8 bil-lion
as against US$125.6 billion a year ago, registering a y-o-
y growth of 7.3 per cent. Imports during the same period
stood lower at US$190.9 billion from US$196.2 billion in com-parable
time period, thus registering a degrowth to the tune
of 2.7 per cent.
Taxation: GST in India- Its Current
State of Play
Eight long years have passed after the announcement about
the introduction of the Goods and Services Act (GST) in In-dia.
The delay has made the sceptics and cynics to lose hope.
But Arun Jaitley, the Union Finance Minister in his first Budg-et
Speech has promised to introduce GST at the earliest. GST
is a broad based tax levied at multiple stages of production
and distribution of goods and services, with taxes on inputs
credited against taxes on output. It is a destination based
consumption tax. Implementation of GST will help in build-ing
up an integrated national market, cut down the corrup-tion,
and further reduce the cost of doing business. It will
also boost up investments and contribute in increase of
GDP. Given its multiple benefits, now is the time for all the
stake holders to join their hands and work together in usher-ing
in the GST. Once the structure of GST is finalised, a pe-riod
of two years should be good enough for completing the
preparations with respect to both tax men and tax payers.
Sector in Focus: Food Processing
The Food processing sector is the key link between Agricul-ture
and Manufacturing. In a developing economy like India,
it contributes as much as 9 to 10 per cent of agriculture and
manufacturing GDP. The growth of food processing sector
would need to be a significant component of the second
green revolution, considering its possible role in achieving
increased agricultural production by ensuring better remu-neration
for farmers. The food processing sector makes it
possible by not only ensuring better market access to farm-ers
but also by reducing high level of wastages. A developed
food processing industry will reduce wastages, ensure value
addition, generate additional employment opportunities as
well as export earnings and thus lead to better socio-eco-nomic
condition of millions of farm families. Given its signifi-cant
contribution to the national economy, we cover the key
trends, challenges faced and government policies to stimu-late
growth of the sector in this month’s Sector in Focus.
Focus of the Month: Improving In-vestment
in Infrastructure
As per CII’s latest report titled “Investment Requirements
in India”, infrastructure investments are estimated to stand
at Rs 64 lakh crore (US$1.07 trillion) in the next five years at
current market price and Rs. 29 lakh crore (US$483 billion)
at 2004-05 prices. Total investment in infrastructure was 7.21
per cent of GDP during the XI Plan period. The Planning Com-mission
has set a target of raising this to a level of 8.18 per
cent of GDP in the XII Plan. With overall investment in the
economy doing far below expectations in the XII Plan period
so far, achieving the plan investment target in infrastructure
is going to be difficult. The report foreassumes that invest-ment
in infrastructure will increase gradually from 6.9 per
cent of GDP in 2011-12 to 8 per cent by 2018-19. Accordingly,
it will average only 7.67 per cent over the next five years. In
view of the importance of this topic in the current milieu,
we have invited experts in the field of infrastructure to voice
their opinions on its various aspects.

GLOBAL TRENDS
Nearing Growth Goal: G20
Cairns (Australia) hosted the Group of Twenty
(G20) Finance Ministers and Central Bank Gover-nors
Meeting on the weekend of 20 and 21 Sep-tember
2014 and reportedly made progress on policy
initiatives to target 2 per cent additional global growth
and make the world economy larger by US$2 trillion
over four years. Structural reforms will be important in
this regard. The group pointed out that they had devel-oped
a set of new concrete measures that will facilitate
growth, increase and foster better quality investment,
lift employment and participation, enhance trade and
promote competition. However, G20 officials expressed
concerns that prevailing low interest rates could lead to
a potential increase in financial-market risk. The meet-ing
was a precursor to the G20 Leaders’ Summit, which
will be held in Brisbane on 15 and 16 November 2014.
Delegates reviewed the current global economic situa-tion
to discuss policies in preparation for the Leaders
Summit. Minister of State (Independent Charge) for
Ministry of Commerce & Industry, as well as a Minister
ECONOMY MATTERS 6
of State for Finance and Corporate Affairs Ms. Nirmala
Sitharaman represented India at the meeting.
In its issued Communiqué, the Group pointed out, that
investment was critical to boosting demand and lifting
growth. They agreed to a Global Infrastructure Initiative
to increase quality investment, particularly in infrastruc-ture.
The Initiative will seek to implement the multi-year
infrastructure agenda, including through developing
a knowledge sharing platform, addressing data gaps
and developing a consolidated database of infrastruc-ture
projects, connected to national databases, to help
match potential investors with projects. The Initiative
will also include key measures in growth strategies to
improve investment climates, which were central to
their efforts to attract private sector participation. Fur-ther,
the Group said that they were strongly commit-ted
to a global response to cross-border tax avoidance
and evasion so that the tax system supports growth-enhancing
fiscal strategies and economic resilience.
They welcomed the significant progress achieved to-wards
the completion of our two-year G20/OECD Base
Erosion and Profit Shifting (BEPS) Action Plan and were
committed to finalising all action items in 2015. The
group endorsed the finalised Global Common Report-

Crude entropy in Energy Scenario
7
GLOBAL TRENDS
ing Standard for automatic exchange of tax information
on a reciprocal basis which will provide a step-change in
the ability to tackle and deter cross-border tax evasion.
This will be done by beginning to exchange information
automatically between each other and with other coun-tries
by 2017 or end-2018, subject to the completion of
necessary legislative procedures.
The Group vowed to continue to implement their fiscal
strategies flexibly to take into account near-term eco-nomic
conditions, so as to support economic growth
and job creation, while putting debt as a share of GDP
on a sustainable path. They agreed to consider changes
in the composition and quality of government expendi-ture
and tax to enhance the contribution of their fiscal
strategies to growth. On the monetary policy front, it
was pointed out, that, easy interest rates regime in ad-vanced
economies continue to support the economic
recovery, and should address, in a timely manner, defla-tionary
pressures where needed, consistent with cen-tral
banks’ mandates. The Group was looking to achieve
broad-based and robust growth which will facilitate the
eventual normalisation of monetary policy in advanced
economies.
Brent crude, the international benchmark, fell below
US$100 for the first time in 16 months in August 2014.
It has dropped more than 15 per cent since June 2014
this year as economies from Europe to Asia show signs
of slowing while oil output climbs. West Texas Interme-diate
(WTI) is also under pressure. Energy shares have
The Paris-based International Energy Agency (IEA) in
its report published in August 2014, cut its projection
for demand growth in 2014 because of weaker perfor-mance
in China and Europe, forecasting that worldwide
consumption will expand by 900,000 barrels a day to
slumped by 3.8 per cent within first two weeks of Sep-tember
2014. The price weakness in the face of geopo-litical
issues in the Middle East and Russia is evidence of
lackluster overall demand. The crude collapse is sending
a rather ominous warning to the world. There is a decel-eration
of growth going in overseas as well as in emerg-ing
markets, which will continue into 2015.
average 92.6 million. Global demand is expected to
increase by 1.3 per cent, to 93.8 million next year. The
agency also lowered estimates for the amount of crude
that the OPEC will need to produce by 200,000 barrels a
day for this year and 300,000 a day in the next.

ECONOMY MATTERS 8
GLOBAL TRENDS
Saudi Arabia, OPEC’s biggest member, cut production
by 330,000 barrels a day to 9.68 million in August 2014,
according to the IEA. The nation exported 6.95 million
barrels a day in June 2014. While conflicts in Iraq and
Libya show no sign of abating, their effect on global oil
market balances and prices remains muted amid weak-ening
oil demand growth and abundant supply. The
US production continues to surge, and OPEC output
remains above the group’s official 30 million barrels a
day supply target. In US, the domestic crude production
has risen to the highest level in 28 years, shrinking oil
imports.
Conflict in Iraq, the second-biggest OPEC producer, has
largely spared the southern region of the country, home
to about three-quarters of its crude output. The nation
pumped 3 million barrels a day in July this year. Infra-structure
bottlenecks are believed to be more troubling
for Iraq’s overall supply growth than the humanitarian
disaster in the north. In Libya, production climbed to
656,000 barrels a day, according to the state-run Na-tional
Oil Corp. The region is in chaos but production
continues to rise. Here too, deteriorating security situ-ation
isn’t believed to be able to unsettle prices while
blockaded crude export terminals may matter more to
the market as a downside risk.
The Euro Zone has been singled out for particular atten-tion,
with the IEA saying that the macroeconomic ma-laise
experienced across much of Europe has been un-favorable
to the global demand. Euro zone economies
are getting close to deflation. Falling European prices
trigger a deflationary spiral that causes further reduc-tions
in economic activity over the entire world.
The US and the EU sanctions against Russia are having
little effect on the oil market. Nigeria is an important oil
producer, but its constant state of conflict, corruption
and theft has left its contribution to the world’s oil sup-ply
largely discounted. Conflicts in other countries like
Mali and Sudan have little interest for the world and
do not interrupt oil flows right now. Only unrest in the
Arabic world seems to grab the attention of the market.
Saudi Arabia has already crippled Egypt’s voice in Mid-dle
Eastern politics through the turmoil created by the
Muslim Brotherhood.
For Iran, a lower oil price not only harms its economy, al-ready
hit by sanctions but also put pressure on its diplo-matic
relations with the West with regards to its nuclear
program. With oil prices falling, the immediate econom-ic
incentive of getting Iranian barrels smoothly back
to the world market is diminished, allowing Western
powers more flexibility to drive a harder deal. Islamic
State, which has captured a number of oilfields in Syria
and Iraq, will be hurt by lower oil prices as it is forced
to discount further the black market sales that help
fund the militant group. For Saudi Arabia, the world’s
largest crude exporter, lower prices may create some
short-term budgetary pain, but it is willing to absorb the
impact as it does greater damage to regional rivals such
as Iran. Saudi Arabia has said for years that it will supply
the world with the oil it needs.
The drop in oil prices to their lowest in two years has
caught many observers off guard, coming against a
backdrop of the worst violence in Iraq this decade,
heightened tensions between the West and Russia, and
sanctions against Iran. But as rising supplies of North
American crude and tepid demand have pushed prices
below US$100 a barrel, the move underlies how the
shale oil revolution is creating a political and economic
advantage for Washington and its Western allies. Russia
and Iran are heavily reliant on oil sales and face budget
shortages at current price levels, weakening their po-sition
when negotiating over Ukrainian sovereignty or
the Iranian nuclear deal.
Higher oil production from the United States as well as
Canada is providing a buffer against the threat of recip-rocal
supply curbs from Russia or further disruptions to
supplies from the Middle East. Daily oil production in
the United States has risen sharply since the financial
crisis. In 2010 the country still imported half of the crude
it consumed, but the U.S. Energy Information Adminis-tration
forecasts that will fall to little more than 20 per
cent next year. Even as the United States has largely
maintained its ban on exporting crude, it has left a lot
of barrels from West Africa and the Middle East look-ing
for new homes. While U.S. energy company profits
might take a hit from lower prices, consumers will ben-efit
more from spending less at the pump.

Ukraine: An Emergency of Explosives
9
GLOBAL TRENDS
After the “Orange Revolution” in 2004, the lack of
economic growth, currency devaluation, and an in-ability
to secure funding from public markets compelled
the Ukraine President, Viktor Yanukovych, to establish
closer relations with the EU and Russia. In November
2013, he initially considered an Association Agreement
with the EU which would provide Ukraine with funds
contingent to several reforms but would require sev-erance
of economic ties with Russia. He ultimately re-fused
to sign it considering it too austere and detrimen-tal
to Ukraine, particularly the big budget cuts and a 40
per cent increase in gas bills. However, he signed a trea-ty
with Russia instead. While Russia would buy US$15
billion in Ukrainian bonds, and discount gas prices to
Ukraine by one-third, the opposition leaders were sus-picious
of the true cost to Ukraine for Russian support.
Unrest and violence ensued as an organized political
movement known as ‘Euromaidan’ demanded closer
ties with the EU and ousting of Yanukovych, even as the
Prime Minister, Mykola Azarov, discredited pro-EU poll
numbers claiming that Ukraine had never been invited
to join EU, but only to sign the Association Agreement.
The movement was successful. However, pro-Russia
demonstrations, described as ‘Russian Spring’ by the
Russian media, began in the Crimean peninsula, a region
that has historically been subject to a territorial dispute
between Ukraine and the Russia. Russia then annexed
Crimea following an internationally criticized disputed
status referendum and military intervention. The coun-ter-
offensive by Ukrainian government resulted in the
ongoing War in the Donbass region of Ukraine. The
newly appointed interim government of Ukraine signed
the aforementioned Association Agreement with the
EU and committed to adopt reforms in its judiciary and
political system, as well as in its financial and economic
policies, including a raise in domestic gas-supply price to
the global price. The EU Commission entered into a full
free-trade agreement with Ukraine in March 2014.
The current situation does not look good for Ukraine.
The political uncertainty has raised demand for foreign
currency, causing additional reserve losses and increas-ing
the risk of disorderly currency movement. Interest
rates have risen sharply as the National Bank seeks to
tighten its national currency, Hryvnia’s liquidity. The
Hryvnia fell to a five-year low against the US dollar in
February 2014. In the same month, Standard & Poor’s
cut Ukraine’s credit rating to CCC; adding that it risked
default without “significantly favorable changes”.
While the world watches the escalating crisis in Ukraine,
investors and world leaders are considering how the
instability could roil the global economy. The political
turmoil is rooted in the country’s strategic economic
position. It is an important conduit between Russia and
major European markets, as well as a significant export-er
of grain. But in the post-Soviet era, it’s a weakened

ECONOMY MATTERS 10
GLOBAL TRENDS
economy. Now, the government is in need of an eco-nomic
rescue - and torn between whether Russia or the
Western economies (including EU) is the savior it needs.
During the course of the unrest, US, followed by EU,
Canada, Norway, Switzerland, Australia and Japan, be-gan
to put sanctions on Russia. EU suspended talks on
economic and visa related matters. Japan announced
suspension of talks relating to military, space, invest-ment,
and visa requirements. The G7 bloc (G8 minus
Russia) issued a joint statement condemning Russia
and announced cancellation of the 40th G8 summit
which was to be held in in June 2014 at Sochi, Russia.
NATO condemned Russia’s military escalation in Crimea
and the Council of Europe expressed full support for
Ukraine. In response to the escalating War in Donbass,
the US has extended its transactions ban to Russian en-ergy
firms and banks. EU introduced another round of
sanctions on all majority government-owned Russian
banks and energy and defense industries along with
asset freezes. In August 2014, Ukraine introduced sanc-tions
against Russia.
Three days after the first sanctions against Russia, in
March 2014, the Russian Foreign Ministry published a
list of reciprocal sanctions. In August 2014, Russia man-dated
an embargo for one year on imports of most ag-ricultural
products from US, EU, Norway, Canada and
Australia, prior to which food imports from EU, the US
and Canada were worth around €11.8 billion, €972 mil-lion
and €385 million, respectively. Sanctions relating to
the transport manufacturing sector are also being con-sidered.
The political unrest has caused turbulence in financial
markets. In the beginning of March 2014, in response
to approval of a military intervention in Ukraine by the
Duma, the Russian Parliament, European markets which
depend on Russian gas supply also fell sharply. The FTSE
100 (UKX) fell by 1.6 per cent and the German DAX was
down 3 per cent. The Russian stock market declined by
12.5 per cent, whilst the Russian Ruble hit all-time lows
against the US dollar and Euro. The Russian central
bank hiked interest rates and intervened in the foreign
exchange markets to the tune of US$12 billion to try to
stabilize its currency. Prices for wheat and grain rose,
with Ukraine being a major exporter of both crops.
Amongst all EU nations, Germany has the most to lose as
it is Russia’s largest trade partner in Europe. It is expect-ed
to enter a contraction in the second half of the year
over its economic standoff with Russia, with its main
stock index having already fallen 11 per cent in the first
week of August 2014 from its peak in June 2014. While
the sanctions have had little direct impact on the Ger-man
economy, the stock market has been hammered
by investor unease over a potential trade war with Rus-sia.
Russian politicians are considering further sanctions
of their own, including closing off the country’s airspace
to European and American airlines, which would erode
US$30,000 from the already paper thin profits made on
each flight between Europe and Asia. Shares in the Ger-man
airline and the defense contractor have also fallen.
Eurozone economic growth is expected to have almost
certainly contracted, with the block having reported a
weak 0.2 per cent quarter-on-quarter gain in the first
three months of the current year.

11
GLOBAL TRENDS
Russia supplies about a quarter of Europe’s gas, with
just over half of that flowing through Ukraine. The abili-ty
for Russia to cut those gas supplies provides potential
leverage as Western states threaten to impose econom-ic
sanctions over its actions in Ukraine. There is history
here too; during disputes in both 2006 and 2009, Rus-sia
cut off gas supplies to Ukraine. However, energy ex-perts
have talked down the prospect of a repeat. From
the viewpoint of Russia, part of its value-proposition is
that it’s a reliable supplier. Meanwhile, the US is moving
to reduce Ukraine’s dependence on Russian gas.
Ukraine’s instability comes at a difficult time for emerg-ing
markets worldwide, which are seeing growth slow
as the Federal Reserve eases its economic stimulus.
The situation in Ukraine could lead investors to reas-sess
the risks of other emerging markets slowing eco-nomic
growth. Troubles in Ukraine will also hurt Russian
banks, which have lent heavily to Ukraine. The Russian
Ruble is down about 10 per cent since the start of 2014.
Ukraine offers economic growth at Europe’s doorsteps.
A predictable and rule-based Ukraine will expand Eu-ropean
market by an extra 45 million consumers with
rich resources and great human capital, London-based
Chatham House reported. This is particularly true of the
energy market, where gas transit and export of electric-ity
from Ukraine is of strategic importance for EU.

DOMESTIC TRENDS
A Welcome Shift in Discourse
In its first 100 days, the new government has spoken with intent, perspective and a sense
of purpose
A hundred days is a short time for a government, but
when it assumes charge it is expected to present a
strong indication of its policy intent in this period. Since
the Indian economy has been growing at sub-5 per cent
for two years, rapid progress on reforms was critical.
Prime Minister Narendra Modi and his government have
delivered on all counts. The government has affirmed
policy direction, initiated action on multiple fronts, and
enabled the economy to shift track to a faster growth
trajectory within this short time. Investor spirits are
surging and a new investment cycle is now underway.
Economic growth and investment rejuvenation are on
top of the priority list. The Finance Minister in his Budg-et
speech sought to alleviate the concerns of investors
ECONOMY MATTERS 12
by assuring them of a stable and predictable tax regime,
and stressed the imperative of adhering to a tight fiscal
deficit target.
The Budget additionally lowered the investment allow-ance
to Rs 25 crore and set up a Rs 10,000 crore fund for
start-ups. The Finance Minister has also driven the agen-da
for GST through several meetings of the empowered
State finance ministers group to resolve pending issues.
Top Billing
Infrastructure is high on the agenda. Modi has travelled
to different States to flag off infrastructure projects and
has strongly voiced the Government’s commitment to
building new facilities. Industrial corridors integrated
with smart cities are on the anvil. The smart city concept
can be revolutionary for a rapidly urbanising nation such
as India. Power, roads and highways, ports and airports
would be taken up and the public-private partnership
model would be revisited through 3P India, an institu-tion
to come up soon. The Government has facilitated
rapid movement of ongoing projects and addressed
hurdles in mining and environmental clearances.
The Railways has received high attention. Raising pas-

This article appeared in Hindu Business Line dated 27th August 2014. The online version can be accessed from the follow-ing
link: http://www.thehindubusinessline.com/opinion/a-welcome-shift-in-discourse/article6357265.ece
Improved GDP Numbers for 1QFY15 Provide
a Ray of Hope
13
DOMESTIC TRENDS
senger fares was a long-awaited move, while in the
long-term, the vision is for a high-speed rail network
across the country. For the first time, FDI too has been
permitted in various areas of railway infrastructure.
The Prime Minister issued a strong invitation to ‘Make in
India’ and drive the manufacturing sector to a new level
in his Independence Day address. Although the sector
is expected to be the engine for new employment crea-tion,
it has experienced near-stagnant growth for the
last three years. The Budget announced steps such as
correcting the inverted duty structure, continuing ex-cise
duty rebates, and redefining MSME. Raising FDI lim-its
in defence and insurance would encourage overseas
investors to connect with Indian manufacturing.
Also, agriculture has been prioritised with the inten-tion
to infuse productivity and technology into farming.
Farmer producer organisations and farmers’ markets
are being encouraged so that the Agricultural Produce
Market Committee Act operates in the right spirit. Lo-gistics
have been addressed in the Budget with incen-tives
for warehousing and storage. A price stabilisation
fund was announced as well, apart from new agricultur-al
research facilities. This would contribute to address-ing
food inflation through supply side measures.
There are strong indications that economic recovery has
started taking roots. The new GDP numbers released by
CSO on 29th August, 2014 showed that the economy dur-ing
Q1FY15 registered a strong performance at 5.7 per
cent as compared to 4.6 per cent in the previous quarter.
Improvement in the growth was on the card, given that
the business sentiments in the economy had improved
In Response Mode
The Government itself is sought to be reformed by
more efficient, responsive and effective administration
at all levels, including ministries, departments, states
and regulatory bodies. E-governance, use of IT and re-ducing
face-time for more transparent administration
has been stressed.
Finally, the Government has brought issues such as fe-male
foeticide, sanitation and violence against women
on the front-burner. The Swachch Bharat programme
for total sanitation is inspirational and corporates have
quickly responded to the call for building toilets in
schools.
A new multi-skill mission is proposed to enable our
workforce to be globally competitive. Financial inclu-sion
is being accelerated through the Jan Dhan Yojana
which offers incentives such as insurance cover.
Most of all, industry is enthused by the shift in discourse.
The idea is to build a facilitative investment climate, im-prove
ease of doing business, and encourage industry
to seize opportunities. The Confederation of Indian In-dustry
expects that with renewed investor confidence,
GDP could expand at 5.5-6.0 per cent this year, and en-ter
the 7-8 per cent trajectory in two years.
significantly, post the formation of new government at
the centre. CII Business Confidence Index, released in
June 2014, had jumped up to 53.7 for April- June 2014
quarter from 49.9 in the previous quarter. What, how-ever
surprised, many was the quantum of the improve-ment,
which far exceeded the average expectations.

ECONOMY MATTERS 14
DOMESTIC TRENDS
What is also encouraging is to note that the growth is
broad-based, covering the major sectors. Agricultural
sector grew by impressive 3.8 per cent. However, given
the fact that monsoons are deficient this year, some
slowdown in farm sector growth on account of the
kharif crop is expected in Q2 and Q3. Industrial growth
posted a strong recovery (4.2 per cent) in line with the
strength in IIP witnessed over the first quarter. Manu-facturing
registered 3.5 per cent after two consecutive
quarters of negative growth. Further contribution came
from construction sub-sector, which recorded a strong
growth of 4.8 per cent, the highest since March 2012.
The significant improvement in production of cement,
as seen in core industry data, appears to have led the
growth in construction activities. GDP heavy-weight,
services sector, also improved growth to 6.8 per cent
from 6.4 per cent in Q4FY14, led by ‘Community, Social
and Personal Services’. Despite an adverse base, growth
in ‘Community, Social and Personal Services’ clocked a
growth of 9.1 per cent, led by government spending.
Other components within services, namely ‘Trade, ho-tels,
Transport and communication’ and ‘Financing, In-surance,
Real estate and Business’ both saw decelera-tion
in growth in the first quarter.

15
DOMESTIC TRENDS
At market prices, however, GDP grew at 5.8 per cent
in Q1FY15, lower than 6.1 in Q4FY14. Further, the pri-vate
consumption demand grew by merely 5.6 per cent
against the earlier quarter’s figure of 8.2 per cent, indi-cating
the need for monetary policy intervention. Gov-ernment
consumption, which rose by 8.8 per cent as
compared to a contraction of 0.4 per cent in the previ-ous
quarter, can be seen to boost demand. The demand
has also received support from boost in exports earn-ing,
growing by 11.5 per cent, compared to 10.5 per cent
in the previous quarter. Growth in investments surged
to a 2 year high of 7.0 per cent in Q1FY15 as against a
mild contraction of 0.1 per cent in FY14. While a favoura-ble
base was helpful, the sharp growth in capital goods
output (IIP data) by 13.9 per cent in Q1FY15 from a con-traction
of 11.0 per cent in Q4FY14, underlines the recov-ery
in investments. Further, the recent turnaround seen
in core sector growth led by higher output in leading
indicators of coal, cement and electricity, should have
had a positive impact on overall investment sentiment.
However, given that these are early days of economic
recovery, policy efforts would have to be sustained to
provide momentum to investment activities.
Outlook
Sharp rise in GDP growth to 5.7 per cent in the 1QFY15, after remaining in sub-5 per cent range for the last 2 years,
is noteworthy and reinforces faith in India’s growth story. Going forward, improvement in business sentiment, pro-ject
clearances, lower inflation and continued government commitment towards reforms is likely to lead to strong
recovery in industry and services. We expect GDP growth to come in a range of 5.5-6.0 per cent in the current fiscal.

Industrial Output Decelerates Sharply in July 2014
ECONOMY MATTERS 16
DOMESTIC TRENDS
Industrial output growth moderated sharply to 0.5
per cent in July 2014, after growing at a modest pace
in first quarter of the current fiscal, partly attributable
to a high base of last year. Consumer goods sector out-put
continued to contract for the second consecutive
month. However, in some positive news, the sequential
momentum as indicated by the movement in the sea-sonally-
adjusted month-on-month series showed that
industrial output growth increased in July 2014 (from
Mirroring the moderation in IIP growth in July 2014,
the output of eight core industries, having a combined
weight of 37.90 per cent in the IIP, eased to 2.7 per cent
in July 2014, from healthy rate of 7.3 per cent recorded
in June 2014. The output has shown an increase of 4.1
per cent for April-July 2014. Coal production increased
-1.2 per cent in June 2014 to 0.4 per cent in July 2014).
For April-July 2014 as a whole, the average IIP growth
stands at a respectable 3.3 per cent as compared to de-cline
to the tune of 0.1 per cent in the same period last
year. This clearly shows that the nascent signs of a re-vival
in manufacturing growth are very much evident on
the horizon, despite some weakening visible in the last
couple of months.
by 6.2 per cent, while the electricity generation and ce-ment
output increased sharply to 11.2 and 16.5 per cent
respectively in July 2014. However, the production of
natural gas, fertilizer, refinery products declined sharply
by 9.0, 4.2 and 5.5 per cent respectively in July 2014.

17
DOMESTIC TRENDS
On the sectoral front, output of the manufacturing sec-tor,
which constitutes over 75 per cent of the index, de-clined
to 1.0 per cent in July 2014 as compared to 2.5 per
cent in the previous month, partly due to a high base
of last year. In terms of industries, twelve (12) out of
the twenty two (22) industry groups (as per 2-digit NIC-
2004) in the manufacturing sector have shown positive
growth during the month of July 2014 as compared to
the corresponding month of the previous year. The in-dustry
group ‘Other transport equipment’ showed the
highest positive growth of 17.1 per cent, followed by
12.3 per cent in ‘Basic metals’ and 11.8 per cent in ‘Other
non-metallic mineral products’ in July 2014. On the other
hand, the industry group ‘Radio, TV and communication
equipment & apparatus’ showed the highest negative
growth of (-) 58.3 per cent, followed by (-) 26.0 per cent
in ‘Office, accounting & computing machinery’ and (-)
17.4 per cent in ‘Furniture; manufacturing n.e.c.’. Mining
sector, which had turned the corner in the last couple of
months, continued to post healthy growth rate, albeit
moderating to 2.1 per cent in July 2014 as compared to
4.5 per cent growth in the previous month. In line with
the core sector data, electricity sector output growth
grew at a brisk pace of 11.7 per cent in the reporting
month as compared to a healthy 15.7 per cent in the
previous month.
Amongst the use-based sectors, capital goods output
contracted by 3.8 per cent in July 2014 as compared
to healthy rate of 23.3 per cent in the previous month.
Despite, the blip in the month of July 2014, the perfor-mance
of the volatile sector this year has been good
as it has grown at an average rate of 8.5 per cent as
compared to an anemic 1.4 per cent in the same period
last year. Intermediate goods, which registered steady
growth for most part of last fiscal, continued its good
performance in July 2014 too, growing by 2.6 per cent.
Basic goods growth eased to single-digit of 7.6 per cent
in July 2014 from 10.0 per cent in the previous month.
Consumer goods sector growth collapsed to -7.4 per
cent, pulled down by poor showing in its durables sub-component.
Consumer durables growth declined by a
sharp 20.9 per cent, while non-durables growth stood
at 2.9 per cent during the month. With the improve-ment
in the coverage of monsoons, consumer non-durables
sector growth has shown an uptick during the
reporting month.
Outlook
The muted performance of the industrial sector, with IIP expanding at the slowest pace in three months, on the
back of the negative growth of the manufacturing sector indicates that full fledged industrial recovery could still
be some distance away. However, anecdotal evidence suggests some pick-up in new orders. A sustained recovery
would be indicated by an improvement in off-take of commercial credit by industry. The government has under-taken
significant reforms and is receptive to industry concerns and the industry sentiments are strong. This, we
believe will foster higher industrial output growth, going forward.

Inflation Trajectory on Downward Momentum
ECONOMY MATTERS 18
DOMESTIC TRENDS
WPI based inflation slowed down to a 58-month low of
3.7 per cent in August 2014 from 5.2 per cent in the previ-ous
month, at a time when retail inflation (as measured
by CPI) too decelerated. The fall in WPI inflation was at-tributable
to all round moderation in all its sub sectors.
In line with the moderation in headline, core inflation
too eased to a 7 month low of to 3.5 per cent from 3.6
per cent in July 2014 supported largely by lower prices
of imported commodities. Retail inflation too eased to
7.8 per cent in August 2014 from 7.96 per cent in the
previous month. This was attributable to a sharp drop
in core CPI to 6.9 per cent, lowest level in the current
Primary inflation moderated sharply to 3.9 per cent in
August 2014 - its lowest reading since January 2012. Pri-mary
food inflation too eased to 5.2 per cent from 8.4
per cent in the previous month. Amongst primary food
prices, the data showed that vegetable prices including
onions dropped nearly 45 per cent during the month.
In contrast, primary non-food inflation increased to 4.2
per cent from 3.3 per cent in the month before. Fuel
inflation decelerated sharply to 4.5 per cent in August
2014 as compared to 7.4 per cent in the previous month,
benefitting from a favourable base effect. Fuel prices
came off sharply tracking a fall in global Brent crude
prices, which is now trading at a two-year low. Petrol
series. Apart from a favourable base effect, the fall in
sequential momentum to nearly half compared to prior
month, supported the easing in core inflation. Fuel CPI
slipped to another record low of 4.2 per cent, on the
back of recent reduction in LPG cylinder prices. Not-withstanding
the fall in core and fuel CPI, food inflation
remained elevated at 9.2 per cent during the month.
With this, there seems to be clear visibility towards at-tainment
of 8 per cent CPI target by January 2015. From
monetary policy perspective, lower core WPI inflation
amid recent moderation in retail inflation is likely to pro-vide
some near term comfort to RBI.
prices were cut thrice in August 2014, helping bring
down petrol inflation to -0.2 per cent in August against
5.9 per cent in July.
Manufacturing inflation eased to 3.5 per cent in August
2014 as compared to 3.7 per cent in the previous month.
Encouragingly, non-food manufacturing or core infla-tion,
which is widely regarded as the proxy for demand-side
pressures in the economy, moderated to 3.5 per
cent during the month as compared to 3.6 per cent in
July 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
showed a deceleration during the month.

Outlook
The sharp drop in wholesale inflation comes just ahead of the Reserve Bank’s scheduled policy meet on September
30 and raises expectations of a rate cut. However, inertia in CPI inflation might be of some cause of worry to the
Central Bank, as it is still hovering around the Reserve Bank’s inflation target of 8 per cent by January 2015.
External Sector Gathers Steam
19
DOMESTIC TRENDS
Cumulative value of exports for the first five months of
the current fiscal (Apr-Aug) were valued at US$134.8 bil-lion
as against US$125.6 billion a year ago, registering a
y-o-y growth of 7.3 per cent. Imports during the same
period stood lower at US$190.9 billion from US$196.2
billion in comparable time period, thus registering a de-growth
to the tune of 2.7 per cent. Amongst imports,
oil imports during April-August 2014 were valued at
US$67.9 billion, which was 1.7 per cent higher than the
oil imports of US$66.7 billion. In contrast, non-oil im-ports
in the comparable time period were valued 4.9
per cent lower than the comparable levels seen in last
fiscal. As exports growth accelerated compared to a de-cline
in imports, merchandise trade deficit narrowed to
US$56.1 billion in the period from April-August 2014 as
compared to US$70.6 billion in same period last year.
Given the benign trade balances, first quarter (Q1FY15
henceforth) current account deficit (CAD) remained
comfortable at 1.7 per cent of the GDP as against 4.8
per cent of GDP in Q1FY14. Sequentially, CAD widened
to US$7.8 billion in Q1FY15 as against US$1.3 billion in
Q4FY14. However, the lower CAD (as compared to last
year) was primarily on account of a contraction in the
trade deficit contributed by both a rise in exports and a
decline in imports.
On BoP basis, merchandise exports grew by 10.6 per
cent in Q1FY15 to US$81.7 billion as against US$73.9 bil-lion
in Q1FY14. Improving growth prospects in devel-oped
economies and stability in Indian Rupee bodes
well for exports sector performance going forward.
Meanwhile, on BoP basis, imports contracted by 6.5 per
cent to US$116.4 billion in Q1FY15 as against US$124.4
billion in Q1FY14. Non-gold imports recorded a modest
rise of 1.3 per cent in Q1FY15 as against (-) 0.6 per cent
in corresponding quarter of last year. The sharp con-traction
in imports reflects the steep decline (-57.2 per
cent YoY) in gold imports. As a result, the merchandise
trade deficit (BoP basis) contracted by about 31.4 per

ECONOMY MATTERS 20
DOMESTIC TRENDS
cent to US$ 34.6 billion in Q1 of 2014-15 from US$50.5 bil-lion
in the corresponding quarter a year ago. Revival in
the domestic economy is likely to boost future imports
Strong capital inflows under portfolio and FDI route
supported the capital account surplus of US$19.8 billion
in Q1FY15. While, net portfolio inflows remained strong
at US$12.4 billion in Q1FY15 (vs. outflow of US$0.2 bil-lion
in Q1FY14), net FDI inflow was substantially higher
at US$8.2 billion (US$6.5 billion in Q1FY15). Additionally,
loans (net) availed by deposit taking corporations (com-mercial
banks) witnessed an outflow of US$2.6 billion
growth. Net services receipts improved marginally in Q1
of 2014-15 on account of higher exports of services.
in Q1FY15 owing to higher repayments of overseas bor-rowings
and a build-up of their overseas foreign cur-rency
assets.
In sum, lower CAD and stronger capital flows resulted
in net accretion of US$11.2 billion to India’s foreign ex-change
reserves during Q1FY15, compared to a draw-down
of US$0.3 billion in the same period last year.
Outlook
Going ahead, with the Fed tapering nearing its end, there are risks of FII withdrawals from emerging economies
including India. It is therefore important for India to attract long-term capital flows to reduce its vulnerability to
external shocks. The government has already taken steps in this direction by liberalising FDI limits in defence and
railways infrastructure. It is also making efforts to facilitate and fast track FDI investments in Indian infrastructure
from countries like Japan.

India’s Merchandise Exports: Some Important Issues and
Policy Suggestions
21
DOMESTIC TRENDS
Summary
The paper brings to attention important concerns
regarding the current status of India’s merchandise
exports, provides perspective in light of the ongoing
global happenings. It goes on to deliver useful and plau-sible
policy suggestions, general as well as sector-spe-cific.
While the export figures last year were definitely
encouraging, they fell short of the target numbers. A
quick comparison with the growth figures in China over
the last two decades shows that while both India and
China started off with nearly same export growth rates,
the latter has surpassed us by enormous margins. At
present the export rate (merchandise) stands at 1.7 per
cent and a respectable figure of 4 per cent in the next
five years is achievable given the right kind of policy de-cisions.
Most important of these decisions encompass
altering export basket, improving infrastructure and
modifying existing Foreign Trade Agreements apart
from specific policies for different sectors. The paper
further provides recommendations for boosting ex-ports
potential all major sectors including agriculture,
mining, capital goods, manufacturing, electronics,
gems and jewelry, textiles and leather.
The July 2014 update of IMF‘s World Economic Outlook
has lowered both the global growth and trade volume
projections for 2014 by 0.3 percent to 3.4 percent and to
4.0 percent respectively. India‘s exports during 2013-14
stood at US$312.6 billion against a target of US$325 bil-lion,
though they grew by 4.1 percent as compared to
a contraction of 1.8 percent during the previous year.
This coupled with plunge in imports led the trade defi-cit
to fall by 27.8 percent. Export growth has picked up
during the first quarter of 2014-15 to 8.6 percent while
import growth fell by 3.8 percent; further trade deficit
fell by 24.4 percent mainly due to the fall in gold and
silver imports.
Policy Issues
Between 1990 and 2013, India‘s share in world exports
(merchandise) increased from 0.5 percent to 1.7 per-cent
while China‘s share increased from 1.8 percent to
11.8 percent. The aim should be to increase our share
to at least 4 percent in the next five years. For this the
CAGR of exports should be around 30 percent, which
is plausible; from 2003-04 to 2007-08, this figure was
above 20 percent with 29 and 31 percent growth in two
years.
In the top 100 imports of the world, except for dia-monds
(21.0 percent) and jewellery (11.2 percent), In-dia
has three other items with only around 6-7 percent
share. Most items in top 100 include the three Es— elec-tronic,
electrical, and engineering items and textiles. A
resounding shift from hitherto supply-based exports to
demand-based diversification with perceptible shift to
the three Es is essential.
Export infrastructure, particularly transportation and
ports-related infrastructure, requires immediate at-tention.
Poor road conditions and port connectivity,
congestions and vessel berthing delays, poor cargo
handling techniques and frequent EDI server down are
major issues. The Multi-modal Transportation of Goods
Act 1993 needs revisions to ease existing restrictions on
transportation and documentation. Higher exchange
rate for freight payments and additional charges by
shipping companies require a check. So do the gang
system in ports and arm-twisting by unions.
Some Foreign Trade Agreements have led to an in-verted
duty structure-like situation, with import duty
on finished goods being lower than that on raw materi-als
imported. Some such cases include textile imports
from India by Bangladesh. Other apprehensions include
anomalies in guidelines of Nepal Banks and Indo-Nepal
treaty, exports to Nepal and Bhutan under rupee pay-
Paper Review
Dr. H. A. C. Prasad, Dr. R. Sathish, Salam Shyamsunder Singh
August 2014
Department of Economic Affairs, Ministry of Finance, Government of India

ECONOMY MATTERS 22
DOMESTIC TRENDS
ment for export incentives and tariff rate quota on foot-wear
imports by Japan. Additionally, there are some
non-FTA countries where Indian exporters face discrim-ination
like duty by China on cashew and oilseeds im-ports
exclusively on India. Further, we need to gear up
to new threats like Trans-Pacific Partnership and Trans-
Atlantic Trade and Investment Partnership between EU
and US, which are likely to produce restrictions for Indi-an
exporters. There is also need for new FTAs with Chile
(automobiles), South Africa (leather) and EU (textiles,
coir, leather).
India has been successful in getting concerns addressed
in WTO negotiations at Bali and blocking trade facilita-tion
agreement in recent WTO meeting at Geneva. This
comes a long way forward from Agreement on Agricul-ture
and Information Technology Agreement-1, which
affected us adversely.
Export credit as a proportion of net bank credit has de-clined
from 9.8 percent in March 2000 to 3.7 percent in
March 2013, even as Canada, Germany, Italy, Japan, US
and China aggressively finance exports. Further, levy-ing
of taxes breaching initial promises have affected
investor‘s confidence in SEZs. More tax related issues
include early implementation of GST, clarification on
TDS on Foreign Agents Commission and service tax on
remittances.
Greater trade facilitation by reducing delays and costs
on account of procedural and documentation factors,
besides infrastructure bottlenecks presents major chal-lenge.
A World Bank and International Finance Corpora-tion
publication, ‘Doing Business 2014’, places India at
134th position in the ease of doing business. Singapore
is at 1st place and China at 96th. In trading across bor-ders,
India ranks 132. India needs 9 export and 20 import
documents with time to export being 16 days. Cost of
exports and imports per container is over twice as com-pared
to China and Singapore. Inter-ministerial delays
and policy overlaps is also a concern.
State-wise exports show domination of only two states,
Gujarat followed by Maharashtra. Tamil Nadu and Kar-nataka
are a distant third and fourth. A performance
based scheme ‘Assistance to States for Developing Ex-port
Infrastructure and Allied Activities’, is expected to
encourage state exports.
Sector Specific Issues
The issues in agriculture sector include absence of or-ganized
market and uniform rules and levies across
states. Mining needs special focus due to high linkage
effects. In the medium to long-term we have to devise
policies to use Iron ore domestically, however, in the
short term there is need to abolish export duty on low
grade Iron ore as it cannot be economically used do-mestically.
Lower taxes on finished goods as compared to raw
materials is discouraging domestic value addition es-pecially
in aluminum, capital goods, cement, chemicals,
paper, steel, textiles and tires. Further, the issue of defi-nition
of MSME in terms of capital Investment needs re-dressal
as technological upgradation will take company
out of MSME limits depriving it of other benefits. For
electronics and IT hardware manufacturing, levies on
components makes trading more viable than manufac-turing.
Further, the activity of electronic manufacturing
has been arbitrarily declared as mere assembly thereby
denying local manufacturers the credit of being genu-ine.
Major concerns in textiles include customs duty reduc-tion
for synthetic garments machinery and fabrics, al-lowing
increased overtime and FTAs with EU and Cana-da.
Procedural ambiguities and delays plague the gems
& jewellery sector. Also, there is no policy to control the
premium charges of banks/nominated agencies for gold
import. The issues in leather sector include revising the
FTA with EU, Canada, Australia and Russia, restoring im-port
of second hand machinery as many factories are
closing down in Europe and focusing on exports of la-dies
and children‘s footwear.

23
TAXATION
GST in India – Its Current State of Play
Eight long years have passed after the announce-ment
about the introduction of the Goods and
Services Act (GST) in India. The delay has made
the sceptics and cynics to loose hope. But Arun Jaitley,
the Union Finance Minister has silenced all Doubting
Thomases when he said in his first Budget Speech that
the debate “whether to introduce Goods and Services
Tax (GST) must now come to an end. I do hope we are
able to find a solution in the course of this year and ap-prove
the legislative scheme which enables the intro-duction
of GST.....˝. This statement has spurred all the
stakeholders to resume their preparations for ushering
in the GST.
GST is a broad based tax levied at multiple stages of
production and distribution of goods and services, with
taxes on inputs credited against taxes on output. It is
a destination based consumption tax. GST has various
models – different in different countries, depending
upon the politico-economic situation of a country. For
India, the policy makers have opted for the ‘Dual GST’
model. They felt that this model would take care of the
federal character of the Indian Constitution and the
concern for retaining the fiscal autonomy of the States.
In the ‘Dual GST’ model, there will be two streams of
GST running concurrently. The Centre will administer
the Central GST (CGST), and the individual States would
administer their respective State GST (SGST). In respect
of inter-state movement of goods and services, the In-tegrated
GST (IGST) model would take care of the share
of State GST (SGST); the SGST would accrue to the desti-nation
state, since GST is a destination based tax.
The ‘Dual GST’ would be a joint-venture between Centre
and the States, and therefore, there has to be consen-sus
between them. But, consensus continues to elude.
The major dispute is with respect to the Constitution
Amendment Bill to be passed by the Parliament for em-powering
both the Centre and the States to levy GST
concurrently. The bill was tabled before the Parliament
in 2011, which referred it to the Parliamentary Standing
committee on Finance. In its report submitted in July

ECONOMY MATTERS 24
TAXATION
2013, the Committee endorsed the Dual GST model, and
allayed the fears of the States about loss of fiscal auton-omy.
While agreeing broadly with the Bill, the Report
recommended certain changes. After accepting most of
the recommendations, the Centre had drafted a revised
bill and sent to the States for their endorsement, but
the States expressed strong differences with Centre on
certain issues, and consequently the revised bill could
not be presented before the expiry of the Parliament
in May 2014, and the Bill died its natural death. Now, a
fresh bill will have to be presented after reconciling the
differences between Centre and the States. The differ-ences
are on following issues:
(i). Goods to be kept outside the ambit of GST
Petroleum and petroleum products and alcohol are ma-jor
inputs for other industries. If these are kept outside
GST, there would be cascading effect of taxing the tax-es
for other sectors and the cost of production would
increase. But having failed to convince the States, the
Centre had at one point agreed to the exclusion of
these items from GST, to start with. The Centre, how-ever,
urged the States not to insist on their exclusion
to be embodied in the Constitution itself, so that in fu-ture
these items could be brought within the GST, with-out
going through the arduous route of Constitution
amendment. The States however have not relented.
(ii). Taxes to be kept outside the GST
Some agricultural States have demanded to keep ‘Pur-chase
Tax’ on purchase of farm produce in bulk out of
the ambit of GST, because under GST regime, this major
source of revenue for them would accrue to the des-tination
consuming states. Some States have also de-manded
that Entry Tax including Octroi should not be
subsumed in GST. The Centre feels that charging Octroi
or Entry Tax for interstate movement separately would
cause interruption of free flow of goods inside the
country, and would defeat the purpose of making India
a common market.
(iii). Compensation to the States for loss
of revenue
The Centre had promised that the States would be
compensated for any revenue loss on account of intro-duction
of GST. The States have demanded that these
promises regarding compensation should be enshrined
in the constitution. The Centre has not agreed stating
that the existing institution of Finance Commission
could take care of this concern. In order to instil trust
in the minds of the States, the Centre is working on an-other
legal framework that will provide a mechanism
for compensation to the States in case of revenue loss.
Thus, the major challenge now would be to bridge the
trust deficit between Centre and the States, and to get
a consensus evolved on the Constitution Amendment
Bill. After the empowerment by the Constitution to levy
and collect GST, the Centre has to get the Central GST
Act enacted by the Parliament. Similarly the State GST
Act will have to passed by respective State Assemblies.
These will have to be drafted on the basis of a Model
GST Law so as to avoid any further dispute between
Centre and the States, and also to have uniform legisla-tion
for CGST and SGST.
The next major challenge would be with respect to the
IT infrastructure. The administering of GST would nec-essarily
have to be technology based. The Goods and
Services Tax network (GSTN), a Special Purpose Vehicle
(SPV) has been set up in 2012. The GSTN would operate
a common GST portal which would provide a common
PAN-based Registration, Returns and Payment facilities
for all stakeholders. The tax payers and tax men would
be connected through this common portal. In order to
make the GST Net fully operational, it would be impera-tive
that the IT ability of different States are brought on
par. At present, the States are at different levels of IT
ability.
The other challenge would be the restructuring of the
current tax administrations, both at the Centre and the
States so as to make it GST specific. It would be neces-sary
to ensure that the administrative structures as well
as the laws and procedures with respect to both CGST
and SGST are harmonious.
Besides, a good number of technical issues will need
to be finalized jointly by Centre and the States. Some
such issues are with respect to finalization of common
threshold for CGST and SGST, common list of exemp-tions,
common rules, procedures for registration, re-

25
TAXATION
turns, payments, and refunds etc. There is also an ur-gent
need for a quick finalization of the ‘Place of goods
and Services Rules’ which is essential to determine the
‘Place of Supply’ in the context of the interstate move-ment
of goods and services. Further, IGST being the
keystone in the GST structure, the chosen IGST model
for taxing the interstate transactions would need to be
put in place on priority.
The apprehension of the States regarding loss of fiscal
autonomy has been allayed by allowing the States to
keep a band of rates to be varied with a fixed ceiling
rate and a floor rate. The loss of revenue by manufactur-ing
States because of the State GST getting accrued to
the destination States can be taken care of by a suitable
mechanism for compensation.
The challenges are no doubt daunting. But, with strong
political will and commensurate bureaucratic efficiency,
these challenges can be met effectively. Positive state-ments
from the Union Finance Minister and leaders of
different political parties have already rekindled the
hope. It has been realised by the people of India that
subsuming of different indirect taxes, both at Central
and State level, will do away with the multiple points of
collection for multiple taxes. This, added with the fact
that the GST administration will be completely technol-ogy
based, will drastically reduce the points of physical
contact between Tax Payers and Taxmen. This will in
turn cut down the corruption, and further reduce the
cost of doing business. Besides, a broad tax base for the
GST would reduce the rate of duty, and thus bring down
the price. Above all, in light of the factors discussed
above, introduction of GST will surely help in building
up an integrated national market. It will also boost up
investments and contribute in increase of GDP. Now is
the time for all the stake holders to join their hands and
work together in ushering in the GST. Once the struc-ture
of GST is finalised, a period of two years should be
good enough for completing the preparations with re-spect
to both tax men and tax payers.
[Mr. Sumit Dutt Majumdar is also the author of a book titled “GST in India – its travails, tribulations and chal-lenges
ahead”]

SECTOR IN FOCUS
Food Processing Industry
The changing preferences of the upward mobile
middle class families from the urban areas have
given prominence to food processing sector and
also fuelled the growth in the last few years to make
the industry the fifth largest in India in terms of produc-tion
and export growth. Indian food processing indus-try
was between US$121 billion to US$130 billion (various
sources) and accounts for 30 per cent to 35 per cent of
the total food market.
Food processing industry includes the following sub-sectors:
1. Dairy – milk, milk powder, ice cream, butter, cheese
and ghee
2. Fruits & Vegetables –Slices, Pulps, Juices, Concen-trates,
Beverages, Potato wafers/ chips etc
3. Grains & Cereals – Flour, Bakery products, Corn
flakes, Starch, Glucose, Malted foods, Vermicelli,
Beer and malt extracts
ECONOMY MATTERS 26
4. Fisheries – Frozen and canned foods mainly in fresh
form
5. Meat & Poultry – Frozen and packed foods mainly
in fresh form
6. Consumer goods, which includes snack food, bis-cuits,
ready-to-eat foods, alcoholic and non-alcohol-ic
beverages
The following section reviews the food processing sec-tor
based largely on the Report “Indian Food & Beverage
Sector” prepared by the Confederation of Indian Indus-try
(CII) and Grant Thornton. The report, which was re-leased
in August 2014 explores and assesses the growth
drivers and challenges for the sector.
Overview of the Food Processing
Sector
Food processing is an important segment in terms of
contribution to GDP, and share in the agriculture and
manufacturing sectors. The industry’s GDP as a share of
agriculture GDP is 12 per cent and that of manufacturing
GDP is 10 per cent in FY13, which has increased from 10
per cent and 9 per cent, respectively in FY09.
Food processing industry has been performing better

27
SECTOR IN FOCUS
than agriculture and manufacturing. FY13 growth was
lower at 3 per cent due to lower growth in agriculture
and manufacturing; however the industry has per-formed
marginally better than both those sectors.
Higher growth of food processing industry over agricul-ture
since FY11 indicates that the level of processing has
been increasing over the years. Earlier food processing
was limited to food preservation, packaging and trans-portation,
whereas the industry has evolved and wid-ened
its scope with emerging new trends in consumer
preferences and the advancement in technologies
adapted to meet those preferences.
These new developments include establishment of cold
storage facilities, food parks, packaging centres, irra-diation
centers and modernised abattoir to offer new
products like ready to eat foods, beverages, processed
fruits & vegetables, processed marine and meat prod-ucts,
etc.
Extent of Processing in the Industry
The level of processing has been the key driver for
growth in the industry. While the current data does not
Export Potential of the Industry
With the growth in the industry driven by the domes-tic
demand, the industry has also geared up for tap-clearly
indicate the extent of processing, a look at the
composition of the industry indicates the trend. The un-organised
sector accounted for 40 per cent to 45 per
cent of India’s food processing industry in FY12.
The key trends in the industry are:
• While share of processing in dairy is high at around
35 per cent only 15 per cent of the processing is
done by organised players. This is after white revo-lution/
Operation Flood till early 1990s, which saw
emergence of cooperative societies. Private sector
players started investing post liberalisation in 1992-
93.
• Only 2 per cent of fruits and vegetables are pro-cessed
as against 65 per cent in US, 78 per cent in
Philippines and 23 per cent in China.
• Rice mills account for the largest share of process-ing
units in the organised sector.
• The sizeable presence of small scale industries
points to the sector’s role in employment genera-tion.
ping the export potential. The share of food process-ing
exports in total exports was around 12 per cent in
the last few years. This was on the back of significant
growth experienced in the sector. Exports of the sector
during the period from FY10 to FY14 is set out below:

ECONOMY MATTERS 28
SECTOR IN FOCUS
Value Chain of the Industry
The supply chain of the industry involves five stages of
inputs, production, procurement, processing and retail-ing.
Food processing industry is a key step in the value
chain and it is broadly categorised into two segments:
• Primary processing, which includes basic steps of
processing like cleaning, grading, sorting, packing
etc to make the products fit for human consump-tion.
Finished products in this case include packed
milk, fruits & vegetables, milled rice, flour, pulses,
spices and salt largely unbranded.
• Value-added processed food (secondary/ tertiary
processing), which includes dairy products (ghee,
cheese and butter), bakery products, processed
fruits & vegetables, juices, jams, pickles, confec-
This growth was primarily driven from -
• Location advantage as India is geographically close
to some of the top export destinations.
• Increased participation of private sector due to in-vestments
in the recent past.
• Improvements in product and packaging quality .
The key trends in food exports are:
• US is the top destination for India’s exports of pro-cessed
food, followed by Vietnam, Iran, Saudi Ara-bia
and UAE.
• Rice is the key food product exported by India, fol-lowed
by meat preparations, gaur, gum, wheat and
other cereals.

29
SECTOR IN FOCUS
tionery, chocolates and alcoholic beverages. These
products undergo higher level of processing to
convert into new or modified products. This is esti-mated
to account for the balance 38 per cent of the
total processed food and mostly falls in the organ-ised
sector.
Regulations, Policies and Risks
Food processing sector is estimated to generate em-ployment
for 48 million (13 million directly and 35 million
indirectly). In addition, food processing industry is seen
as to have the potential to provide alternate employ-ment
opportunities to rural youth, who are currently
dependent on agriculture or moving to urban areas for
employment. Sine a large section of the population is
dependent on agriculture and allied sectors, the income
enhancement of such a large section of population is
possible only through adding value in the food chain.
Government of India has accorded high prior-ity
status to food industry with an objective to re-duce
inefficiencies resulting in wastages/ losses by
setting up infrastructure (expect cold storage facili-ties)
and generate huge employment in this sector.
Government Initiatives for Food
Industry
• Entities in infrastructure development are given a
deduction of 100 per cent for the first 5 years & 30
per cent for the next 5 years for the calculation of
taxable income.
• Customs duty on all imported capital goods and
raw materials & other inputs is exempted, in addi-tion
to excise duty & sales tax on domestic inputs,
for all export oriented units.
• There is a provision for duty-free import replenish-ment
of inputs, subject to basic input-output norms
for approximately 600 export categories.
• Encouragement to private sector – 100 per cent ex-port-
oriented units are allowed to sell up to 50 per
cent of their produce in the domestic market. Ex-port
earnings are exempted from corporate taxes.
• Tax incentives and Sops - Import duty scrapped on
capital goods and raw materials for 100 per cent
export-oriented units. 100 per cent tax exemption
for 5 years followed by 25 per cent in subsequent
years.
• Tax exemption for the next 5 years for new agro-processing
industries. Full excise duty exemption
for goods that are used in installation of cold stor-age
facilities.
• Relaxed FDI norms – 100 per cent FDI under auto-matic
route (except for alcohol, beer, and sectors
reserved for small scale industries). Repatriation of
capital and profits permitted.
• Focus on infrastructure - Assigned priority sector
for bank credit. 60 Agri Export Zones (AEZ) have
been set up across the country. According to Vision
2015, formulated by MoFPI, the government plans
to establish 30 mega food parks in public-private
partnership mode across the country; out of these
10 have already been approved in the first phase.
Government has also announced setting up of 15
Mega Food Parks in its FY12 Budget, as part of the
third phase of Mega Food Park Scheme.
• Incentives for development of storage facilities-
Investment-linked tax incentive of 100 per cent de-duction
of capital expenditure for setting up and
operating cold chain facilities (for specified prod-ucts),
and for setting up and operating warehous-ing
facilities (for storage of agricultural produce).
• Focus on R&D and modernisation - The govern-ment
launched initiatives such as the Setting Up/
Upgradation of Quality Control/Food Testing Labo-ratory,
R&D and Promotional Activity Scheme and
the Technology Upgradation/Setting Up/Moderni-sation/
Expansion of Food Processing Industries
Scheme.
Challenges in the Sector
Food processing industry is key for the overall develop-ment
of the economy as it is a critical linkage between
the agriculture sector, which is yet to achieve the target
yields, and the emerging Indian consumer, whose as-

ECONOMY MATTERS 30
SECTOR IN FOCUS
pirations and commitments are driving a fundamental
shift in his lifestyle preferences, including food habits.
Historically, food processing industry has witnessed low
margins due to the investments which need to be made
in processing facilities, volatility in material prices due
to scarcity of resources and uncertainty in consumer
preferences.
Hence, it has been facing lack of funds as banks are re-luctant
to extend loan to the industry as this is perceived
to be high risk, high gestation period and low returns.
Various industry studies indicate that the top challenges
faced by the industry are as follows:
• Ambiguity in the regulations as there is no compre-hensive
national level policy on food processing
sector and also as there are inconsistencies in the
centre and state policies
• Shortage of skilled manpower is a concern as it is a
labour intensive operations
• Supply chain is not geared up for the scale of the
sector
• Rising food prices would have an impact on the de-mand
for the sector
• Lack of product development and innovation
These challenges are still relevant in the current
stage of the food processing industry. While there
is scope for growth in the industry, there will be re-strictions
due to these challenges.
Conclusion
Given its significance to the national economy, CII accords top priority to growth and development of Food Pro-cessing
sector in the economy. As a part of the ‘inclusive growth’ agenda of CII, it is anticipated that the optimum
development of food processing sector will contribute significantly in tackling several developmental concerns,
such as, disguised unemployment in agriculture, rural poverty, food security, improved nutrition of food, reduc-tion
in food wastage etc. The CII National Committee on Food Processing is a high-powered industry forum, which
works towards the overall vision of positioning India as a Food Factory to the world. The Committee works in close
partnership with Ministry of Food Processing Industries, State Missions on Food Processing, Food Safety Stand-ards
Authority of India as well as other stakeholders in this regard.

31
FOCUS OF THE MONTH
Improving Investment in Infrastructure
As per CII’s latest report titled “Investment Re-quirements
in India: 2014-15 to 2018-19”, infra-structure
investments are estimated to stand at
Rs 64 lakh crore (US$1.07 trillion) in the next five years
at current market price and Rs. 29 lakh crore (US$483
billion) at 2004-05 prices. Total investment in infrastruc-ture
was 7.21 per cent of GDP during the XI Plan period.
The Planning Commission has set a target of raising this
to a level of 8.18 per cent of GDP in the XII Plan. With
overall investment in the economy doing far below ex-pectations
in the XII Plan period so far, achieving the
plan investment target in infrastructure is going to be
difficult. The report foreassumes that investment in in-frastructure
will increase gradually from 6.9 per cent of
GDP in 2011-12 to 8 per cent by 2018-19. Accordingly, it
will average only 7.67 per cent over the next five years.
The report further highlights that, in terms of sources
of infrastructure investments, share of private sector
has gone up from X Plan to XI Plan. XII Plan has further
set an ambitious target of 48 per cent of infrastruc-ture
investments to be accounted for by the private
sector. However, this appears to be a very optimist
target in the present scenario, when economic slow-down
and policy paralysis in the last 2-3 years has hit
the business sentiment hard. Therefore, in the next 5
years, CII expects this share of private sector to be 40
per cent and that of public sector to be 60 per cent.
In view of the importance of this topic in the current
milieu, we have invited experts in the field of infra-structure
to voice their opinions on its various aspects.

Why India Needs a ‘National Power Distribution
Company’
ECONOMY MATTERS 32
FOCUS OF THE MONTH
The reality that states, left to themselves, had neither
the political will, bureaucratic energy nor the financial
resources to cater to India’s expected need for power
was realised as early as 1975 by the Union government.
In order to ensure that the country did not merely de-pend
on the uncertain addition of state-owned generat-ing
stations, NTPC Ltd (formerly known as the National
Thermal Power Corporation Ltd), a central public sector
undertaking under the ministry of power, was set up
in 1975. It is today the largest power company in India
with a generating capacity of 42,964 Mw. The Nuclear
Power Corporation of India Ltd, a central government-owned
corporation, was set up in 1987 with the objec-tive
of undertaking the design, construction, operation
and maintenance of atomic power stations. NHPC Ltd
(formerly the National Hydroelectric Power Corpora-tion)
was incorporated in 1975 with the objective to
plan, promote and organise the integrated and efficient
development of hydropower. PowerGrid (the Power
Grid Corporation of India) was incorporated in 1989 and
charged with planning, executing, owning, operating
and maintaining high-voltage inter-state power trans-mission
systems. Similar needs to push for financing of
the power sector led to the creation of the Rural Elec-trification
Corporation in 1969, and the Power Finance
Corporation in 1986.
The concept of a national power distribution company
(NPDC) that builds and owns networks and distributes
power is, therefore, well within the realms of possibil-ity.
To suggest that it encroaches on the constitutional
right of states to be left alone in the power sector is de-molished
by the spate of central involvement and cen-tral
schemes over the years.
My colleague and partner P Ramesh (who heads our
Group Energy Businesses) and I have been discussing
the need for an NPDC for almost a year now.
To start with, the NPDC could be charged with taking
over the assets of urban areas falling under the purview
of the “Restructured Accelerated Power Development
and Reforms Programme” (RAPDRP), as well as being
the channelling entity for the central funds for revamp-ing
the network in these areas. The RAPDRP scheme
envisions reaching a 14 per cent “loss” level after invest-ments
and, therefore, what can emerge is an efficient
network within five years across almost 1,300 towns
that are under the purview of this scheme. With less
than 10 per cent of the RAPDRP funds disbursed as of
now, the time is right for creating an NPDC. Over time,
the entity could also be charged with running the distri-bution
network covered under the rural schemes of the
Rajiv Gandhi Grameen Vidyutikaran Yojana, with the di-rected
subsidy for the needy being routed through this
entity in a transparent manner.
In a related development, the government is consider-ing
the model in which a power supplier will not man-age
the electricity distribution network. In a separate
“carriage and contract” model, like the UK, the network

33
FOCUS OF THE MONTH
would be owned by one company, while the suppliers
of electricity could be more than one. India has 5,545 ur-ban
agglomerations and towns. With the NPDC model
in place, the targeted 1,300 towns under the RAPDRP
scheme can provide the demonstration effect, setting
the example for the rest of the country to emulate.
But why this urgency for a power distribution company
at the national level? Here are three pressing reasons:
(i) Fix the leaking bucket of discoms: Distribution is
the tail that wags the power dog, and is in the realm
of 29 state governments. India’s distribution losses
and power sector economics are inter-related, and
in the theatre of the absurd. The average cost of
supply for all power companies has exceeded the
average revenue realised. Not surprisingly, the ac-cumulated
losses of financial utilities were esti-mated
at Rs 2,00,000 crore at the end of 2011-12, up
from Rs 1,23,000 crore at the end of the previous
year. The “unintended consequence” in the push
for distribution company (discom) profitability is
that they are aggressively using load management
(power cuts) to control purchases. India just can-not
afford to wait any longer for the turnaround of
state discoms. Society and the economy are both
being held to ransom for what is euphemistically
called T&D (“theft & dacoity”) losses. After a Rs
10,000-crore bailout package in 2002, we now have
a Rs 2 lakh crore financial restructuring plan for dis-coms.
Will that be Rs 10 lakh crore by 2020?
(ii) Stranded capacities and effective alternative to
discoms: All stranded capacities, surprisingly, are
not because of a lack of gas, coal or evacuation
capacity. A substantive portion is because of a lack
of off-take by discoms - often referred to as case 1
and case 2 bids. This is an embarrassing waste of
ready capacity to deliver power to a power-starved
nation that parallely erodes the net worth of pro-moters
and creates stressed assets in the banking
sector.
An NPDC would be able to pick up stranded capaci-ties
and become an effective market-maker for gen-erators
in the face of slothful behaviour by discoms.
It would also make for a robust alternative market
that could even bring back sparkle to the sector by
having sovereign-backed power purchase agree-ments.
(iii) Energy security, price pooling and a national pric-ing
benchmark: India clearly requires a price-pool-ing
arrangement. First, there is need to diversify our
energy basket. If nothing is done, the country is set
to become 83 per cent energy-import-dependent
by 2040. The diversified basket should embrace nu-clear,
hydro, renewable, gas and coal-based power
with purpose and focus. Today, discom behaviour
is short-sighted and tends to buy from only the
cheapest source, which happens to be coal-thermal
in the short run. Price pooling can only be achieved
at a national level, and national energy-security can-not
be left to the self-serving micro decisions of 50+
regional entities.
Second, electricity tariffs cannot be allowed to have
great variations from state to state depending on
the input-basket, and the vagaries of state regula-tors
setting, or not setting appropriate tariffs, and
often queering the pitch completely in other ways.
The renewable power obligation and its related re-newable
electricity certificates trading market have
also not taken off. With a combination of input and
efficient distribution, an NPDC can create a nation-al
price-point for power purchase and retail tariff,
which can be the benchmark that other utilities can
aspire to emulate.
Clearly, a national power distribution company is an
idea whose time has come.
This article appeared in Business Standard dated August 11th, 2014. The online version can be accessed from the fol-lowing
link: http://www.business-standard.com/article/opinion/vinayak-chatterjee-why-india-needs-a-national-power-distribution-
company-114081101082_1.html

Distribution Reforms & Way Forward
ECONOMY MATTERS 34
FOCUS OF THE MONTH
Distribution continues to be the weakest link in
the Indian Power sector with customer not be-ing
the centre stage of the delivery process and
the fiscal viability in question. Aggregate Technical and
Commercial (AT&C) losses across India continue to be
at one of the highest in the world and wastefully tol-erated,
despite time and again Delhi and Gujarat have
proved that it can easily be corrected.
The commercial losses for discoms in India (after includ-ing
subsidies) increased from Rs. 16,666 crore in 2007-
08 to Rs. 37,836 crore in 2011-121. According to a report
released by the 13th Finance Commission, these finan-cial
losses may increase to Rs. 116,089 crore (excluding
subsidies) by FY 2016-17, assuming tariffs remain at the
2008 level.2 It is imperative to address the issues that
may otherwise jeopardize the growth of an already ail-ing
power sector, which in turn continues to be one of
the key infrastructural challenges coming in the way of
achieving higher rate of GDP growth.
Impact of distribution losses on
power value chain
The emphasis of almost all state governments is cur-rently
on capacity addition in the generation sector.
Capacity addition will not bear fruits unless distribu-tion
reforms are taken forward on a war footing. Any
increase in generation capacity is more than offset by
inefficiencies and wastage at each stage - production,
transmission, distribution and delivery. This is a matter
of great concern as the buyers of merchandise have to
be solvent and efficient, failing which the fiscal health
of all associates in the value chain are impacted and this
leads into vicious and unviable circle of uncertainty.
Distribution companies are tiding over the cash short-falls
by borrowings from commercial banks and this
repeated borrowings with no commensurate increase
in efficiency, has seriously undermined the financial
health of the sector. Though the previous government
had come out with financial restructuring schemes in
the recent past, this needs to be viewed only as a short
term survival instinct for infusing funds into the ailing
distribution sector. Moreover, the financial restructur-ing
should be done through due engagement of Elec-tricity
Regulatory Commissions and should not be done
by the state governments independently. That means
money should be made available, as a financial support,
to regulators who should then set targets and pursue
restructuring to happen only against the achievement
of those targets.
Recommended Way Forward
In addition to significant reform-intervention and a
combination of tariff increases, going forward, the dis-tribution
segment also needs implementation of open
access and competition & enforcement of the ‘obliga-tion
to service’ and not just use.
1 http://www.adlittle.com/downloads/tx_adlreports/Indian_Power_Disco__s_and_Debt.pdf
2 http://planningcommission.nic.in/reports/genrep/hlpf/ann6.pdf

35
FOCUS OF THE MONTH
The present policy system is governed by the overarch-ing
Electricity Act, 2003. The Act replaced the Electricity
(Supply) Act, 1948 (which had earlier effectively nation-alized
the sector), and introduced a host of reforms like
unbundling of State Electricity Boards (SEBs), open ac-cess,
competition, development of market mechanisms
and independent tariff setting and regulation. It also
paved the way for greater private sector participation
into a hitherto public sector dominated space.
From the experience of distribution sector reforms, so
far, Public Private Partnership (PPP) has helped in the
enhancement, effectiveness and discipline in distribu-tion
activities. The pace of PPP depends upon the Gov-ernment’s
will and private sector appetite for distribu-tion
assets. PPP has to be done with an efficient and
effective strategy, the main objective being reduction
in AT&C losses. Investors seek an anti-theft legislation
and its effective enforcement in addition to access for a
legal system for a speedy resolution of disputes. Inves-tors
also prefer to have a de-risked regulatory regime
with clear tariff policy framework from the regulator so
that they can understand the extent of independence,
philosophy and the overall direction of regulation. This
would in turn reduce regulatory risk.
The Electricity Act, 2003 provides for a robust regula-tory
framework for distribution licensees to safeguard
consumer interests. It also creates a competitive frame-work
for the distribution business, offering options to
consumers, through the concepts of open access and
multiple licensees in the same area of supply. The Act
enables competing generating companies and trading
licensees, besides the area distribution licensees, to sell
electricity to consumers when open access in distribu-tion
is introduced by the State Electricity Regulatory
Commissions. The concept of open access has been
long there but it has not been implemented in a large
number of states yet. If implemented holistically, dis-tribution
reforms can provide benefits of competition
to consumers. This is the thought behind the Mumbai
distribution model. However, artificial barrier like Cross
Subsidy Surcharges and wheeling charges negatively
impact consumer’s right to choose and must be done
away with immediately.
PPP also accelerates the implementation of modern
technology including Information Technology in utili-ties.
This facilitates creation of network information
and customer data base which will help in management
of load, improvement in quality of Customer Service,
detection of theft and tampering, customer informa-tion
and prompt and correct billing and collection.
The political environment is an important factor in in-fluencing
the investor’s decision. The recent announce-ment
by the present government of spending Rs 75,600
crore to supply electricity through separate feeders for
agricultural and rural domestic consumption is a pro-gressive
initiative aimed at providing round-the-clock
power.
Resistance to tariff hikes or reforms in the sector sub-lime
the investor’s confidence in the country’s business
environment.
Data suggests that the consumption power of Indians
has improved significantly, however, the tariffs for elec-tricity
are under charged. The tariffs can be accordingly
increased such that the system is able to tap into the
consumption power to restore sector viability. Tariff
growth has not been held back by consumer’s ability to
pay but by the inability of the system to tap this paying
capacity. Had power tariffs grown in line with house-hold
expenses, the Rs 88,000 crore loss at the discoms
in the 5 years to FY10 would have turned to a profit of
nearly Rs 8,000 crore.
It is time for all stakeholders to come together and
plan with a long term focus towards the country’s de-velopment.
Privatisation of electricity distribution has
brought in significant differences to the sector. It is high
time learning and achievements of these experiments
are multiplied by adoption in the rest of the country. The
criteria for selection of the best suited model should be
whether that will enable improvement of the efficien-cies,
reduction of losses and bringing in reliability fac-tor
much needed. Ultimately, the question one need
to answer will be whether you are making the sector
customer centric enough to delivery of maximum value
to the consumers.

Public Private Partnership in Highways Develop-ment
and Management: An Indian Perspective
ECONOMY MATTERS 36
FOCUS OF THE MONTH
World over, Public Private Partnership (PPPs)
broadly refers to long term contractual part-nerships
between the government/ public
and private sector agencies, explicitly aimed at financ-ing,
designing, implementing and operating infrastruc-tures
services that were traditionally provided by the
Public sector. In the case of India, since the early days
of economic reforms, infrastructure bottlenecks were
of serious concern. Policy makers and leading financial
institutions have visualized the need for high quality
infrastructure, which is pre requisite to kick start the
economic growth in the Country. Specialised Financial
Institution like Infrastructure Leasing and Financial Ser-vices
(IL&FS) was created to promote Infrastructure on
a commercial format using Public Private Partnership.
Evolution of PPP in the Indian High-way
Sector
Since the early nineties road had become the dominant
mode of transport with above 50 per cent share in the
freight as well as above 70 per cent in the passenger
traffic. The stress on the road sector came significantly
due to the inabilities of the Indian Railways to cater ad-equately
to the needs of the public. The need to involve
private sector in the development of highway network
became inevitable, the Government of India (GOI)
amended the National Highways Act 1956 to levy tolls
for the use of services of National Highways. Dr. Rakesh
Mohan Committee, estimated around Rs. 63,000 crore
was required by 2006 to develop our road network to 4
lane and international standards. Subsequent, Ministry
of Surface Transport (MOST) had also estimated in line
with the expert committee view, these estimations vali-dated
that budgetary support cannot address the need
for building National Highways as per international
standards in India. National Highway Authority of India
was established by on the basis of National Highways
Authority Act enacted in 1988. MOST’s policy paper
paved the way for of Build, Operate and Transfer (BOT),
bidding, tolling, four laning etc.
The first PPP road in India was built in Madhya Pradesh,
a 12 km- long tollway linking Indore to the industrial
township of Pithampur financed by IL&FS on a build-own-
operate-transfer basis. Even though, there were
initial resistances from the users paying users fees, over
the period of time due to better quality of road, the us-ers
appreciated the road. The new road link reduced
the distance between Indore and Pithampur by 10 km
and curtailed the travel time by over 45 minutes. The
Government of Gujarat (GOG) also initiated the BOT
approach, Bharuch Dahej Rob was awarded in 1997,
GOG along with IL&FS started the Vadodara Halol and
Ahmedabad Mehsana BOT (Toll) road projects in 1999
and 2000 respectively. By mid-2000, Model Concession
Agreement (MCA) was formulated for BOT (Toll), BOT
(Annuity) and Operations, Maintenance and Tolling
(OMT) projects, subsequently Request for Qualification
(RFQ) and Request for Proposal (RFP) was also intro-duced
in the highway sector. Measures like Viability Gap
Funding (VGF) also renewed the interest in the sector,
due to rapid economic growth, concessionaire instead
of seeking a grant for non-viable road project become
willing to pay premium based on his assessment on fi-nancial
viability. The introduction of revenue sharing
model in lieu of upfront negative grant, the road pro-jects
implemented under BOT (Toll) become the peren-

37
FOCUS OF THE MONTH
nial source of revenue for the Authority. The PPP mode
of procurement in a bigger way started with NHDP
Phase III. As on March 2013, around 239 PPP road pro-jects
were awarded. The economic downturn took the
sector for a toss; there were significant variations in the
projected traffic growth among the various market par-ticipants,
which also paved the way for renegotiation of
existing contracts with respective clauses.
Issues in the Current framework
During the early days of PPP, the commitment and
seriousness towards the respective project were sig-nificantly
higher than today (my observation). For
example, in one of our initial NHAI project – Belgaum
– Maharashtra Border (North Karnataka Expressway
Limited), the seriousness and commitment contributed
towards the project by the Authority, Concessionaire
and the Independent Engineer paved the way for the
smooth completion of the project within the stipulated
time as per the respective standards. Probably that’s
the reason; the road is still one among the best roads
in India. However, I feel today we don’t find that kind
dedication among the industry participants; partly due
to few concessionaires approach as well few officials
approach from the Authority. Strong dedication and
commitment is expected from the Authority as well as
from the concessionaire to revive the PPP interest in
the sector.
The widespread industry complaint is regarding the
quality of DPR, it has gone down tremendously in the
past 4-5 years. The cost estimates seems to be unreal-istic,
it’s easily more than 30 per cent in many cases. In
most cases the DPR studies have been conducted much
earlier, which didn’t address the current inflationary
scenario due to the prevailing economic scenario dur-ing
those days. Unfortunately the cost of VG-30 bitu-men
has increased significantly in recent years. The
case is same with all other materials used in the road
construction. This in turn has increased the cost of bitu-minous
road as well as the concrete road construction
significantly. Due to lower project cost, we developers
face lot of issues before financial closure of the project.
Bankers are reluctant to accept the realistic project
cost, quite often this amount also add to the develop-ers
kitty apart from the 30 per cent equity contribution.
As per the Model Concession Agreement (MCA), the Au-thority
should provide 80 per cent of the encumbrance
free land; it must be handed over to the Concession-aire
on or before appointed date with the balance to
be handed over within 90 days of the appointed date.
For a smooth functioning of PPP, the process of land
acquisition must be completed in the DPR stage itself so
that 100 per cent of land, free of encumbrance could be
handed over to the Concessionaire prior to the declara-tion
of appointed date.
A number of projects have been delayed on account of
delays in grant of various environmental consents. For
the benefit of PPP road project, all environmental con-sents
must be available with Government before launch
of RFP. Along with that, tree cutting or tree shifting
must be completed by government contractors before
appointed date. We anticipate the measures adopted
by the current government will address the environ-mental
and land acquisition issues.
The Road Ahead
It’s a well-known fact that, availability of quality infra-structure,
especially roads, is a pre-requisite to achieve
broad based and inclusive growth on a sustained basis
in India. In order to attain and sustain 7-9 per cent eco-nomic
growth in the coming years, highway sector will
have to be a main contributory sector. The recent CII es-timates
(Investment Requirements in India: 2014-15 to
2018-19) investment requirements to the tune of Rs 10.5
lakh crore in the Roads and Bridges sector, the study
anticipates private sector contribution to the tune of 40
per cent. To address these investment requirements,
we should have a PPP framework which incorporates
international best practices, embodying and enabling
contractual framework for construction of highways in
an efficient, economical and competitive environment,
keeping the user benefits in mind. Ideally, we shouldn’t
permit the lack of road infrastructure to prevent the re-gional,
sectorial and socioeconomic broadening of the
economy and its benefits affecting inclusive growth in
India.

CII Economy Matters, August-September 2014

CII Economy Matters, August-September 2014

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CII Economy Matters, August-September 2014