ECONOMY MATTERS 2

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FOREWORD

MAY-JUN 2016

With Britain deciding to exit the European Union in a historic referendum, the implications for Britain and global economies are expected to be profound. However, the implications for India are at best expected to be limited, given the strong fundamentals of the Indian

economy. Sound economic management of the Indian economy has resulted in contraction in the fis-cal deficit to a reasonable level, a comfortable external position and declining inflation - all of which make for a solid foundation to withstand the short-term issues that Brexit may create. India’s strong macro-economic environment and stable, predictable and transparent policy regime would make it an attractive destination for investors in such a volatile global scenario and thereby spur growth further.Of course, Indian companies will need to re-engineer their European strategy, as border-free access to the European market can no longer be taken for granted. Financial market volatility will also have an impact on Indian businesses.

Domestically, monsoons are progressing slowly but steadily and will most likely cover the entire coun-try by the end of June. The growth prognosis for 2016-17 hinges heavily on how the monsoons will pan out, especially after two consecutive years of drought. GDP grew at an impressive rate of 7.6 per cent in 2015-16. The main impetus behind strong growth last year was the impressive growth of private con-sumption which is a propitious sign indeed as it signifies that domestic demand drivers are playing a major role in cushioning GDP. This is particularly crucial at the current juncture when the support from external demand has waned sharply. We are expecting GDP to grow at around 7.75-8.25 per cent in 2016-17 riding on the crest of strong macro-economic fundamentals, positive business sentiment and pro-growth monetary and fiscal policy.

The Indian industry is in the midst of a very challenging time. On the one hand the global trading pat-tern and rules are on the course of major shift in coming years while on the other India is currently fac-ing one of its worst export slowdown of recent years. Exports declined for the eighteenth consecutive month in May 2016. Adverse external situation related to weak commodity prices, currency fluctuation and sluggish growth potential in major export markets have weakened India’s export performance over the last one year. Going forward, the decision of Britain to exit EU could impact India’s exports adversely, at least in the short-run.

Chandrajit BanerjeeDirector General, CII

3 MAY-JUN 2016

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EXECUTIVE SUMMARY

MAY-JUN 2016

Global TrendsWith the citizens of Britain voting in favor of British exit from the European Union (popularly called as Brexit) in a referendum held on 23rd June, 2016, the implications for Britain and the other global economies including India are expected to be huge. Reflecting a significant drop in sentiment as Brexit became a reality, the global financial market volatility increased manifold. However, the direct economic impact of Brexit on the rest of the EU would probably be far smaller than on Britain. Addi-tionally, the negative implications of Brexit for India are expected to be minimal. Coming to the latest update of World Bank’s Global Economic prospects released in early June 2016, global growth has been pared down to 2.4 per cent from 2.6 per cent forecasted earlier in January 2016. The downgrade was mainly underpinned by slowing growth in advanced economies, weak global trade, stubbornly low commodity prices and diminish-ing capital flows. Meanwhile, the US Federal Reserve maintained status-quo and kept the Fed funds target range unchanged at 0.25-0.50 per cent in its meeting held on June 16th, 2016. The median Fed funds rate for this year retained the projection of two rate hikes.

Domestic Trends As per the revised estimates released by the Central Statistical Organization (CSO), India’s GDP grew at an estimated 7.6 per cent in FY16 as compared to 7.2 per cent in the previous fiscal. Also, with this, India has be-come the fastest growing major economy in the world, overtaking China. The sectoral data print reveals inter-esting insights into the data. Even as investment growth slowed in fiscal 2016, private consumption has emerged as the bulwark of the economy. Going forward, in the short-run, growth will receive a boost from the cumu-lative impact of economic reforms and improved infla-tionary expectations. Therefore in FY17, CII is projecting a base case of 7.75-8.25 per cent growth. Meanwhile, the data released on higher frequency such as index of industrial production (IIP) contracted by 0.8 per cent in April 2016 as compared to 0.3 per cent growth in the previous month mainly on the back of poor per-formance of manufacturing and capital goods sectors. In FY17, we expect industrial production to grow at a higher rate as compared to the previous fiscal on the back of policy aided domestic upturn and low global commodity prices.

Corporate PerformanceThe corporate results at the end of the fourth quarter of fiscal year 2016 brought a reason for cheer in the form

of rising profitability as the financial performance of In-dian companies, especially manufacturing sector firms, improved during the year 2015-16. Our analysis factors in the financial performance of a balanced panel of 1676 manufacturing companies (excluding oil and gas com-panies) and 903 service firms extracted from the CMIE’s Prowess database. In FY16, the bottom-line of the firms improved to 14.5 per cent on an aggregate basis, as compared to 1.2 per cent in the year earlier. Manufac-turing companies registered growth in PAT as high as 17.8 per cent in FY16 as compared to a contraction of 9.3 per cent in the previous year. At the same time, profit-ability in service firms moderated in FY16. However, in contrast, in FY16, net sales on an aggregate basis con-tracted further to the tune of 7.0 per cent, as compared to a contraction of 0.8 per cent previously. The growth in net sales on an aggregate basis has been contracting for the past six quarters straight now. Total expenditure contracted sharply to 14.2 per cent in FY16 as against a contraction of 2.5 per cent in the fiscal year 2015, thus fairly cushioning the severe impact of lower net sales growth during the year.

Focus of the Month: India’s Trade & Interna-tional AlliancesExports have declined for the eighteenth consecutive month in May 2016 in US dollar terms, albeit the rate of decline has sharply moderated. Merchandise exports till now have contracted by an average 14.0 per cent in the last eighteen months till May 2016. There are both demand as well as supply-side factors that are nega-tively impacting India’s export volumes, and strate-gies to reverse the impact of these factors is the need of the hour. India’s competitiveness, on both cost and efficiency of production lags that of China and some other developing country exporters. Indian companies require the requisite infrastructure, still sorely lacking in comparison to its trade competitors, to allow prod-uct export prices to be globally competitive. Coming to India’s international trade alliances, since it is not a party to Transpacific Partnership Pact (TPP) compris-ing Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Viet-nam, and the US, it has serious implications for India’s exports including the textile and clothing sector. Join-ing TPP can help India’s trade and revitalize its textile & clothing sector, but accepting WTO plus proposals on IPR, investment protection, services and state-owned enterprises (SOE) as envisaged under TPP will not find favors among either policy makers or India Inc. There are several options available for India, which are dis-cussed in detail in this month’s Focus of the Month.

ECONOMY MATTERS 6

GLOBAL TRENDS

Brexit: Implications for Britain and India

With the citizens of Britain voting in favor of British exit from the European Union (popu-larly referred to as Brexit) in a referendum

held on 23rd June, 2016, the implications for Britain and the other global economies including India are expected to be profound. The contest was a closely fought one, with 51.9 per cent voting to leave the European Union (EU) and 48.1 per cent voting to remain a part of the EU.

Reflecting a significant drop in sentiment as Brexit be-came a reality, the global financial market volatility in-creased manifold. Markets across the world tanked in the aftermath of Brexit. Crude oil prices dropped by more than six per cent on the day the results of the referendum were announced. S&P 500, the bellwether index of US slipped by 3.6 per cent, reflecting the sharp decline in investor confidence triggered by Brexit. Along with its many other adverse repercussions, the referendum has also raised the possibilities of referen-da in other European countries. We bring together the perceived implications of Brexit on Britain and India.

Implications for BritainBrexit likely to compound problems for Brit-ain’s economy

The impact of Brexit is likely to be much more on the British economy than on the rest of EU, given that ex-ports from the rest of EU to Britain accounts for only 3 per cent of EU’s GDP while Britain exports to the EU accounts for 13 per cent of Britain’s GDP. Hence, the im-pact of Brexit is likely to be significant for Britain’s econ-omy. The plausible impact has been enumerated below:

1. Economic impact: As per the estimates of British Treasury, post Brexit, Britain’s GDP is likely to be 6.2 per cent lower than it would otherwise have been by 2030, an annual cost that would work out at some £4,300 ($6,000) per household. The Treas-ury’s numbers are bigger than those in some other recent studies, but that is mainly because these in-clude the dynamic effects on productivity.

2. Impact on trade: As a member of EU, British indus-tries were getting access to the European market to sell their products under the European free market system. But now with Brexit, all this could change and would significantly impact trade prospects of

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and positive ways are as follows:

1. Create Uncertainty about future economic engage-ments and trade: The Indian companies consider the UK as a gateway for entry into the European Union. Presently, due to continued border-free ac-cess to rest of Europe, Indian exporters send their goods to branch offices in London from where these are shipped to different parts of Europe. Post Brexit, it would not be possible for Indian compa-nies to leverage the EU markets through branch offices in London. Brexit would necessitate rework-ing business plans.

The exit of UK from the European Union would hence create a considerable amount of uncertainty for Indian companies, especially those located in the UK or having significant exposure to that coun-try. The concerns could range over terms of exit, nature of future engagement with EU or uncertain-ty relating to exchange rates and dealing with per-ceived tariff barriers and taxes when importing into UK. Client dealing would become more difficult.

However, on the positive side, Brexit may compel Indian companies to forge new ties with other countries of EU. This would bear good results in the long-run. India is already trying to build trade nego-tiations with Netherlands, France, Germany, and others, albeit in a small way.

2. Impact on investment: UK has been India’s third largest foreign direct investor across different sec-tors during FY16. The uncertainty created by Brexit could lead to capital flight from UK or cause inves-tors to adopt a wait and watch approach. This could adversely affect FDI inflows to India across sectors.

At the same time, India is the second biggest source of foreign direct investment (FDI) for Britain. With Brexit, Indian companies may find Britain to be a less attractive investment destination. In a bid to not lose out to an attractive source of investment, the British government could hand out bigger in-centives in the form of tax breaks, lesser regulation etc. to Indian companies. If that happens, Indian companies could expect a deregulated and freer market in Britain.

With Britain being out of EU, India’s FTA negotia-tions with the EU would have to be reworked. India would have to negotiate fresh agreement with the

Britain. With Britain withdrawing from EU, it will sig-nificantly narrow its export market. Moreover, the imposition of import duty on export material from Britain will further have a detrimental impact on its export growth.

Britain would now need to look into markets like India and China and other emerging economies for trade. However, in the best-case scenario, Britain may be able to negotiate access to the European market that isn’t that different from what it has now. A case in point being Norway which is not a member of the EU, but it has agreed to abide by a number of EU rules in exchange for favorable ac-cess to the European Common Market.

3. Problems for the Pound: The pound plunged to a 30-year low against the dollar after the results of the referendum were announced, sliding by a mas-sive 12 per cent. As the pound loses its value, im-ports by Britain are set to become more expensive. This would hurt the already fragile economic pros-pects of Britain.

4. Hindering free movement of people: Currently there are about 1.2 million Britons living in other EU countries, while about 3 million non-British EU nationals live in Britain. Thanks to EU rules, they were able to move across the English Channel with a minimum of paperwork. Britain’s exit from the EU could change that considerably.

5. Trigger break-up of the UK: Now with Britain on its way out of the EU, there is a danger that the four countries which make up the United Kingdom, namely, England, Wales, Scotland, and Northern Ireland won’t stay united for very long as well. Britain has been a strong player in EU. The break-up would reduce the bargaining power of Europe when it comes to passing International laws and treaties which effect Europe.

Impact of Brexit on IndiaFor India, the economic impact of Brexit should be some-what subdued as compared to other open economies in Asia. Britain contributes only around 3.4 per cent and 1.4 per cent of India’s exports and imports respectively. Still, India is not immune, as it is vulnerable to weaken-ing of business confidence and a potential tightening of financial conditions. The key channels through which Brexit could potentially impact India both in negative

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GLOBAL TRENDS

UK, which may be easier to accomplish at the bilat-eral level.

3. Impact on IT sector: Brexit is expected to have a negative impact on the Indian IT sector in the short-term. In the near term, a likely decline in the value of the British pound could render many existing contracts losing propositions unless they are rene-gotiated. Many Indian IT service firms such as TCS, Infosys and Wipro have a large footprint in Britain. The fall in sterling will shrink the sector’s earnings in Britain. Additionally, the uncertainty surrounding protracted negotiations on the terms of exit and/or future engagement with EU could also impact deci-sion making for large projects.

4. Make Movement of Skilled labour and human capi-tal Difficult: Skilled labour mobility across EU and UK would be impacted. This is likely to negatively impact the Indian industries having their headquar-ters in Britain as it would lead to scarcity of skilled labour force. But this could be an opportunity for skilled workers from India as Britain may relax im-migration laws for workers coming from emerging economies like India.

5. Impact on Rupee: There was a fear of a sharp exit of capital flows following Brexit which was supposed to be detrimental for the Rupee. It was perceived that increased volatility in the stock and currency markets would increase the risks for Indian firms. However, the impact on the rupee has not been as much as feared.

Besides, the robust foreign exchange reserves of over US$360 billion would help deal with volatility in currency flows, if it happens. The government is in the position to infuse liquidity to stabilize the markets. Furthermore, with the flight of capital to

safe avenues, it is looking less likely there will be an interest rate hike in the US. This will work in Ru-pee’s favour. However, the currency movements would need to be closely watched for timely and suitable intervention.

6. Hasten decline in crude oil prices: On the positive side, the crude oil decline which occurred after Brit-ish’s vote to leave EU could be beneficial to India if it is sustained for a longer duration. Though Brit-ain is only a small producer of oil with an output of less than 1 million barrels per day, its position as one of the largest world economy would mean that economic slowdown in Britain would send ripples across the whole world and hence send the crude oil prices on their southward journey. Thus, being an oil importer, India stands to gain from a sus-tained fall in oil prices as it helps it to save on its oil import bill.

What is more, the strong fundamentals of the Indian economy- high growth, low inflation, narrow current ac-count deficit, stable government- would minimize the adverse impact of Brexit. Similarly, India is among the ten most preferred destinations for foreign investment, a position which is unlikely to be impacted by Britain’s decision to exit from EU. The government’s commit-ment to reforms has also ignited the ‘feel good’ factor which would make India an attractive destination for business.

Thus, even though Britain stands to suffer from leaving the EU in terms of reduced trade and a sustained drop in its GDP, the net effect may not turn out to be nega-tive for India. Given India’s strong cultural and historical ties with Britain, the loss in the EU free trade market for the latter could force its policymakers to relax rules in order to facilitate entry of Indian firms.

According to the latest update of World Bank’s Global Economic prospects released in early June 2016, global growth has been pared down to 2.4 per cent from 2.6 per cent forecasted earlier in January 2016. The down-grade was mainly underpinned by slowing growth in advanced economies, weak global trade, stubbornly low commodity prices and diminishing capital flows. In an environment of anemic growth, the global economy

faces mounting risks, including a further slowdown in major emerging markets.

One of the key highlights of the report was the mark-edly different prospects for commodity exporters and importers. The exporters, crushed by tumbling prices of oil and other commodities, collectively grew just 0.2 per cent last year and are expected to expand 0.4 per cent

World Bank Pares Global Growth Forecast

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GLOBAL TRENDS

MAY-JUN 2016

US Jobs Data Surprises Sharply on the Downside

in 2016. The importers, which benefit from lower raw materials prices, are still growing at healthy rates — 5.9 per cent last year and a predicted 5.8 per cent this year

Key highlights of the update are enumer-ated below:

• Advanced economies are projected to grow 1.7 per cent in the current year, below the Bank’s 2.2 per cent forecast in January. World Bank estimates the U.S economy will grow by 1.9 per cent this year, well below the 2.7 per cent forecast in January. The euro area economy is expected to expand by 1.6 per cent, just 0.1 per cent below the January esti-mate.

• The Bank expects developing and emerging mar-ket economies as a group to grow 3.5 per cent this year, down from the 4.1 per cent it forecast in Janu-ary and has barely changed from last year’s 3.4 per cent.

• Among major emerging market economies, China is estimated to grow at 6.7 per cent in 2016 after re-cording 6.9 per cent growth last year. India’s robust economic expansion is expected to hold steady at 7.6 per cent while Brazil and Russia are projected to plunge into deeper recession than forecast in Janu-ary.

• Latin America and the Caribbean region is fore-cast to contract by 1.3 per cent in 2016 after a 0.7 per cent decline in 2015, the first two back-to-back years of recession in more than 30 years. It is pro-jected to begin expanding again in 2017, gradually

gaining momentum to around 2 per cent in 2018.

• Growth in Middle East and North Africa is forecast to pick up slightly to 2.9 per cent in 2016, 1.1 percent-age points less than that expected in the January outlook. The downward revision comes as oil prices are expected to track lower for the year, at an aver-age of US$41 per barrel.

• Growth in South Asia is forecast to accelerate to 7.1 per cent in 2016, despite weaker-than-expected growth in advanced economies, which has damp-ened export growth in the region. Activity has re-mained resilient as domestic demand, the main driver of growth, remained robust.

• Growth in the East Asia and Pacific region is pro-jected to slow to an unrevised 6.3 per cent in 2016. This outlook assumes an orderly growth slowdown in China accompanied by steady progress on struc-tural reforms and appropriate policy stimulus as needed.

• Growth in Sub-Saharan Africa is forecast to slow down in 2016 to 2.5 per cent, down from an estimat-ed 3.0 per cent in 2015, as commodity prices are ex-pected to remain low, global activity is anticipated to be weak and financial conditions are tightening.

• Growth in Europe and Central Asia is forecast to grow at 1.2 per cent in 2016, a 0.4 percentage point downward revision from the January outlook. Geo-political concerns, including flare-ups of violence in eastern Ukraine and the Caucasus and terror at-tacks in Turkey, weigh on the outlook.

US non-farm payrolls (NFP) came in sharply lower than

expected, increasing by only 38,000 in May 2016. While

employment increased in health care, mining continued

to lose jobs, and employment in information services

sector decreased due to a strike by Verizon employees.

The NFP print now stands at its lowest level since Octo-

ber 2010. In its policy meeting held in the month of June

2016, Federal Reserve Bank acknowledged the slowing

pace of improvement in the labour market in the wake

of the disappointing non-farm payrolls data for May

2016. However, the Committee continued to expect the

gradual strengthening of labour market indicators go-

ing forward.

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Private sector prove to be the key laggard

A break up of the NFP data reveals that private payrolls

declined sharply from 130,000 in April 2016 to 25,000 in

May 2016, thereby trimming 105,000 off the headline

print. Within this sector, private service-providing seg-

ment came in 83,000 lower than the April 2016 print

with professional and business services leading the

losses. However, job gains in education and healthcare

provided some cushion. Manufacturing sector recorded

job losses to the tune of 10,000 on the back of sluggish

durable goods sector employment. In contrast, the

Government sector added 13,000 jobs this month.

In contrast to the lower-than-expected addition to non-

farm payroll in May, according to the household survey

data, the seasonally adjusted unemployment rate in

May 2016 decelerated to 4.7 per cent from 5.0 per cent

previously and labour force participation rate fell from

62.8 per cent to 62.6 per cent. Consequently, the de-

cline in unemployment rate is likely to mirror the people

leaving the labour force.

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Hence, Federal Reserve maintains status-quo in its June 16th meeting

Given, the concerns emanating from the job market, US Federal Reserve maintained status-quo and kept the Fed funds target range unchanged at 0.25-0.50 per cent in its meeting held on June 16th, 2016. The median Fed funds rate for this year retained the projection of two rate hikes. Moreover, the policy statement lowered the

GDP projection for 2016 and 2017 to its long term tar-get level of 2 per cent, despite stating that growth in economic activity “appears to have picked up”. The Fed added that while household spending and the housing sector have strengthened, business fixed investment has remained subdued. Going forward, the policy has kept the window open for a July 2016 rate hike, contin-gent on incoming data.

ECB leaves its GDP projections unchanged for 2017 & 2018ECB’s economists left their growth predictions for 2017 and 2018 unchanged at 1.7 per cent for both years. To be sure, the first quarter 2016 GDP growth in Euro Area came at 1.5 per cent as compared with 1.3 per cent in the same quarter last year. President Draghi of ECB remarked that while downside risks to the outlook persist from global headwinds, balance of risk seem to have improved slightly in light of ECB’s monetary policy stimulus.Inflation forecast faces upside risksPresident Draghi pointed out that inflation is expect-ed to remain sticky at negative levels in the coming months before picking up in the second half of the year. The European Central Bank’s charter defines its main job as keeping inflation below 2 per cent, but not too far below it. Hence, President Draghi also added that the Central Bank stands ready to act further by

using all tools available within its mandate, if inflation fails to pick up. Inflation in the Euro zone was minus 0.1 per cent in May 2016, according to an official esti-mates, still far from the bank’s official target of 2 per cent. But a 1 per cent increase in the price of services in May 2016, as well as a turnaround in oil prices that has pushed oil to near US$50 a barrel from around half that in January, signal that overall inflation could rise in months to come.Immediate risks arises from BrexitThe Euro zone economy is recovering, but slowly and unevenly. The unemployment rate remains above 10 per cent and is falling only gradually. With UK voting for leaving European Union after the crucial voting which took place on 23rd June, 2016, the uncertainties have risen for Euro zone economy. There are several repercussions of Brexit which will have an impact on the growth prospects of Britain and Euro zone as a whole as well, going forward.

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DOMESTIC TRENDS

Two Years of the Modi Government: Achieve-ments on Policy Reform and the Way Forward

The Modi Government has brought in multi-di-mensional reforms in its first two years that will have a long-lasting impact on the country. These

include pro-active measures to restore demand, revive the investment cycle and to undertake structural re-forms that will give positive returns in the medium to long term.

As a result, since the present government assumed of-fice, major macro-economic indicators are showing pos-itive trends. For one, GDP growth has picked up steadily from 6.6 per cent in 2013-14 to 7.6 per cent in 2015-16

and is expected to increase further in the current year. At the same time, inflation has declined, fiscal consoli-dation is on track, current account deficit has narrowed, exchange rate is stable and foreign investment is once again coming back to India with renewed zeal.

Hence, at a time when the global economy is facing headwinds, India continues to stand tall having emerged as the world’s fastest growing economy in 2016. A lot of this could be attributed to the orderly management of the economy spurred by conducive policies across mul-tiple sectors. It is quite apparent that a new growth nar-rative has been scripted for the country.

Some key initiatives

The launch of fresh initiatives by the government like Make in India, Skill India and Digital India to revive in-vestments and manufacturing has done much to im-prove business confidence and add to the dynamism in the economy. The credo of development through good governance, with a focus on execution, has struck the right chord and the results have been uplifting.

Some of the key reform initiatives announced by the

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government such as opening up of foreign investment in multiple segments, procedural reforms to improve the business climate, revamping tax administration, streamlining dispute resolution system, making tax re-gime more friendly and so forth would go a long way to reduce transactions costs of business.

The current Government has identified ‘Ease of Doing Business’ as a very critical subject and has, in the last two years, taken a range of pro-reform initiatives to ease procedures by simplifying rules and incentivizing states to become key champions. As a result of actions by the government, our country has moved up 12 notch-es in the World Bank’s Doing Business Rankings –from 142 to 130 among 189 countries- according to the World Bank’s ‘Doing Business 2015’ report. The improvement in rankings by 12 places is in the correct direction, given that large economies do not move more than 10 places in rankings in one year. Similarly, industry has gained by simplification and rationalization of rules and proce-dures in terms of time and cost. It now takes fewer days and lesser number of procedures to start a business, get power connection, gain access to credit, among others.

Trade procedures have been simplified for faster clear-ance at the border. The decision to phase out Foreign Investment Promotion Board (FIPB) which obviates the need for board approval, would simplify the process of foreign investments in the country.

Reforms are also happening among states to attract foreign and Indian capital in the state in the spirit of cooperative and competitive federalism. Some states such as Rajasthan and Gujarat are also taking a lead in initiating policies such as reforming labour laws and making changes in land acquisition rules to attract in-vestment. What is notable is that both the central and state governments are acting in tandem to address the concerns of industry and take remedial action.

The RBI, through its policy of monetary easing wherein it has reduced repo rates by 150 bps since January last year, is also walking in step with the government to pro-mote investment and growth.

The passage of the Bankruptcy code in Parliament is

a testimony to its commitment to plug the crucial gap in India’s regulatory architecture and pave the way for companies to free up investible resources locked up in sub-optimal projects. The passage of Real Estate Regu-lation Act will go a long way in bringing transparency to the real estate market, protecting buyers and promot-ing honest and healthy practices.

The government has renewed its focus on infrastruc-ture development by enhancing resource allocation particularly for national highways, roads, railway sta-tions, airports and seaports. In fact, road construction is progressing well with a rapid acceleration in length of roads and highways being built.

The infusion of public funds in infrastructure will help unleash economic activity in these sectors with econ-omy-wide implications. In addition, the renewed em-phasis on infrastructure development in rural areas including roads and irrigation facilities, will help reduce stresses on the agricultural front in the country.

The work done by the government in the direction of fiscal consolidation, rationalisation and better targeting of subsidies would help in building efficiency and take the country to the path of inclusive and sustainable growth.

Programmes like Aadhar, Jan Dhan Yojana, PAHAL, Pradhan Mantri Ujjwala Yojana, Mudra Bank, Stand up India, Crop Insurance Scheme and Skill India are steps in the direction of improving the quality of life of the common man, and would go a long way in ensuring the delivery of benefits to a larger percentage of the popu-lation. Gram Jyoti is aimed at putting in place the requi-site infrastructure to electrify every single village in the country.

The way forward

Notwithstanding the above, while the Government has carried out several path-breaking reforms to power growth in the economy, some crucial reforms and policy interventions remain unfulfilled. Early implementation of these reform measures are important for attaining higher levels of productivity and competitiveness and

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thereby take the country to a higher orbit of growth.

For re-energising growth, it is crucial to rejuvenate in-vestment demand which is still tepid and is coming in the way of capacity creation. To kick-start the virtuous cycle of investment and growth, capital expenditure on key infrastructure projects such as roads, railways, irrigation and power could be further increased. With private investors weighed down by debt overhang and banks remaining risk averse, public spending can ‘crowd in’ private investment.

In fact, continuous action on infrastructure invest-ments, improving our connectivity through better roads and highways, rail networks and ports, uninterrupted power supply and communications network would go a long way to attract domestic and foreign investment on a sustained basis. These are the areas where other developing nations such as China are ahead of us and as a result are more competitive.

The government also needs to address the problem of burgeoning non-performing assets (NPAs) of banks. Measures are needed to remove the NPAs from the bal-ance sheets of banks and also focus on rehabilitation, recapitalization and refinancing of banks.

Industry is hopeful that the government would work more strongly towards building a political consensus so that the GST Bill is passed in Rajya Sabha. GST is a land-mark reform which will lead to single market for India, reduce transactions costs of business and add up to 1.5 per cent to GDP growth. It will give the necessary fillip to most of the industry sectors of the economy and the States as well.

For expenditure control, subsidies on food, fertiliz-ers, electricity will need to be examined closely and be linked to implementation of direct benefit transfer. Fer-tiliser subsidy should be paid directly to farmers as cash transfers to ensure better targeting.

It is important to meet the target laid out for public sec-tor disinvestment, encourage privatization of loss mak-ing units and monetize unutilized land available with PSUs. The resources raised could be used to finance infrastructure. Such a policy has been successfully im-plemented in countries such as USA, France, Canada, China, among others.

For further improvement in business confidence, there is need to clarify the roadmap to bring down the cor-porate tax rate and phasing out of incentives, as an-nounced by the Finance Minister. The government should ensure that this does not raise the effective tax rate for industry.

At the same time, procedures should be further simpli-fied and streamlined to facilitate ease of doing busi-ness. In fact with most big ticket reforms having been implemented by the Central government, it is critical that the State Governments are aligned and reforms implemented at the ground level. We believe that the NITI Ayog can play a crucial role in facilitating this exer-cise as it brings the necessary expertise. Timely enforce-ment of contracts, establishment of commercial courts to settle disputes expeditiously and widespread use of e-governance are essential.

To conclude, the government has in the past two years taken exceptional and path-breaking measures to re-kindle the investment cycle, take the economy towards a trajectory of inclusive growth. The relentless focus of the government to infuse more competition in the marketplace, facilitate ease of doing business and un-dertake measures to improve the quality of life of the underprivileged is noteworthy. Industry is ready to partner with the government at each stage and ensure that it is a win-win situation. By taking actions in the non-legislative and executive space, India can realise its potential of emerging as a front-ranking economy in the comity of nations.

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GDP Grows at an Impressive Rate of 7.6% in FY16

As per the revised estimates released by the Central Sta-tistical Organization (CSO), India’s GDP grew as estimat-ed, at 7.6 per cent in FY16 as compared to 7.2 per cent in the previous fiscal. The final numbers were in line with the advance estimates released by CSO earlier during the year. Also, with this, India has become the fastest growing major economy in the world, overtaking China. The sectoral data print reveals interesting insights into

Impressive growth in manufacturing pow-ers industrial GDP

On the supply-side, on a quarterly basis, GVA growth at basic prices, for the fourth quarter of the last fiscal rose to 7.4 per cent as compared to 6.9 per cent in the third quarter. Agriculture growth moved into the posi-tive territory, posting a growth of 2.3 per cent in the 4QFY16 after contracting in the previous quarter. For full year FY16, agriculture sector grew at 1.2 per cent as compared with -0.2 per cent in FY15. Strong growth in agriculture is also expected to continue in FY17 pro-vided monsoons are normal. This will also support the rural sector and provide a further fillip to consumption demand as well. On the brighter side, manufacturing

the data. Even as investment growth slowed in fiscal 2016, private consumption has emerged as the bulwark of the economy.

Gross value added (GVA) growth at basic prices came in at 7.2 per cent for FY16, a tad higher than 7.1 per cent of the previous year. Pay Commission pay-outs, contained inflation, and easy monetary conditions are expected to support demand, going forward.

growth came in at a robust 9.3 per cent in 4QFY16, al-beit, lower than the robust 11.5 per cent posted in the 3QFY16, thus taking full year FY16 growth to an impres-sive 9.3 per cent (vis-à-vis 5.5 per cent growth in FY15).

Growth in mining and quarrying was at 7.4 per cent for FY16, down from 10.8 per cent in FY15, taking overall industrial growth to 7.4 per cent in FY16 from 5.9 per cent in the previous fiscal. Going forward, lower inter-est rates and smart recovery in private consumption expenditure will help drive industrial growth in FY17. Services sector grew at a slower rate of 8.9 per cent in the FY16 as compared to 10.3 per cent in the previous fiscal. This was owing to slower growth in ‘trade, hotels, transport, communication’ and government services.

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DOMESTIC TRENDS

CII expects GDP growth between 7.75-8.25% in FY17Going forward, in the short-run, growth will receive a boost from the cumulative impact of economic reforms and improved inflationary expectations. Therefore in FY17, CII is projecting a base case of 7.75-8.25 per cent

From the demand side, private consumption growth was the star performer

At market prices, private consumption expenditure has not shown signs of any significant distress and showed a further uptick to 8.3 per cent in 4QFY16 from 8.2 per cent in the previous quarter. With this, the full year FY16 growth of PFCE came at 7.4 per cent as compared to 6.2 per cent in FY15. Government spending component growth came lower at 2.2 per cent in FY16 as compared with 12.8 per cent in the previous fiscal. The subdued

growth, higher than the 7.6 per cent posted in FY16. However, risks to growth in FY17 remain in the form of - 1) monsoons not panning out as expected, 2) further fall in exports if global growth remains weak and 3) sharp reversal of the fall in oil prices.

growth rate posted by the gross fixed capital invest-ment component was indeed disheartening as for the economic recovery to gain full momentum, it is impor-tant for this component to grow at a higher rate. In the FY16, investment spending moderated sharply to 3.9 per cent as compared to 4.9 per cent growth in the year before. The external sector continued to remain a matter of concern as export growth contacted by 5.2 per cent in FY16 from 1.7 per cent in the previous fiscal mainly on account of a slowdown in global trade flows and a sharp decline in commodity prices.

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DOMESTIC TRENDS

MAY-JUN 2016

OutlookThe rise in GDP by 7.6 per cent in FY16 reaffirms the CII prognosis of growth recovery underway. This is a cause for cheer as this points to a revival of growth impulses which would gather further momentum riding on the crest of strong macro-economic fundamentals, positive business sentiment and pro-growth monetary and fiscal policy.

Industrial Output Contracts in April 2016 Industrial production growth contracted by 0.8 per cent in April 2016 as compared to 0.3 per cent growth in the previous month mainly on the back of poor per-formance of manufacturing and capital goods sectors.

Manufacturing output contracts for the sec-ond consecutive month

On the sectoral front, output of manufacturing sector, which constitutes over 75 per cent of the index, contin-ued to remain in the negative territory for the second consecutive month. Manufacturing output contracted at a rate of 3.1 per cent in April 2016 after declining by 1.0 per cent in March 2016. Meanwhile, a slight pickup in growth in electricity and mining sectors was seen at 14.6 per cent and 1.4 per cent respectively in April 2016.

Poor performance of capital goods remains a serious cause of concern

Among the use-based classification, capital goods out-put, which is a volatile component, continued to re-main in the negative territory for the sixth consecutive

In FY17, we expect industrial production to grow at a higher rate as compared to the previous fiscal on the back of policy aided domestic upturn and low global commodity prices.

month even while the rate of decline has moderated. The sector contracted by 24.9 per cent in April 2016 as compared to -15.3 per cent in the previous month. The recently announced National Capital Goods Policy 2016 is a bid to rejuvenate the growth process in this belea-guered sector (for more details on this policy, see Policy Focus section).

Consumer goods output contracts due to weakness in non-durables sector

Consumer goods have mostly shown a tepid perfor-mance essentially on account of weakness in consumer non-durables. The sector contracted by 1.2 per cent in April 2016 as compared to growth to the tune of 0.5 per cent in the previous month. In contrast, consumer du-rables have been on a strong footing and on a positive

ECONOMY MATTERS 18

DOMESTIC TRENDS

trajectory for eleven months in a row with the April 2016 print at 11.8 per cent. The concerns over non-durable sector continued to prevail. For the month of April 2016, the non-durables sector entered deeper into the nega-tive territory at (-) 9.7 per cent. This is partly reflective

In sharp contrast to industrial performance in April 2016, core sector output registered a robust growth of 8.5 per cent during the month. This marks the fifth consecutive month of positive growth in the core sec-tor industries. The main drivers of core sector growth were refinery products and electricity both of which recorded double-digit growth. Among the eight core

of the cumulative effect of two past years of drought and growing distress in the rural economy. But a favour-able monsoon prognosis this year augurs well for the growth of this sector, going forward.

industries, petroleum refinery products performed the best and grew at 17.9 per cent in April 2016, followed by electricity production that rose 14.7 per cent. Mean-while, production of fertiliser and cement eased from March 2016 but remained robust. The fertiliser sector grew 7.8 per cent, steel by 6.1 per cent and cement by 4.4 per cent in April 2016.

Source: Office of Economic Advisor

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DOMESTIC TRENDS

MAY-JUN 2016

OutlookGrowth in industrial production decelerated to -0.8 per cent in April 2016 due to a sharp decline in manufactur-ing and tepid performance of the mining sector. Although the figures indicate a contraction of industrial output which is a matter of concern, they are quite contrary to the feedback received from industry which points towards a distinct recovery in business activity across an increasing number of sectors. Under the circumstances, the con-traction in industrial output could be attributed to one-off factors like unfavourable base effect which has found a reflection in the production numbers. Going forward, CII believes that industrial production would pick up pace on the back of conducive government policies, reform initiatives and favourable monsoon forecast.

Higher Food Prices Fuel Inflationary PressuresWholesale Price Index (WPI) based inflation print con-tinued to remain in positive territory for the second consecutive month in May 2016 after 17 months of de-flation. WPI inflation rose to 0.8 per cent in May 2016

Food inflation weighs on both WPI and CPI

In the month of May 2016, a common feature which underlined the spurt in both WPI and CPI inflation was the sharp rise in food inflation under both the inflation heads. CPI-food inflation came in higher at 7.6 per cent in May 2016 as compared to 6.4 per cent in the previous month. Amongst food inflation, vegetables inflation witnessed a sharp rise during the month at 10.8 per cent as compared to 5.0 per cent in April 2016. WPI primary food articles too witnessed inflation to the tune of 7.9

from 0.3 per cent posted in April 2016. CPI inflation, the data print which the Central Bank tracks while tak-ing its monetary policy decisions, too accelerated to its 21-month high of 5.8 per cent during the month as com-pared to 5.5 per cent in the previous month.

per cent during May 2016 as compared to 4.2 per cent witnessed in the last month.

Inflation in WPI-primary articles doubles in May 2016

Coming to WPI sub-categories, inflation in WPI primary article prices nearly doubled to 4.5 per cent in May 2016 from 2.3 per cent in the previous month, as mentioned above, mainly on account of higher food prices. In con-trast to the increase in inflation in primary food articles, inflation in non-food category decelerated to 4.5 per

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DOMESTIC TRENDS

OutlookBoth CPI and WPI indices edged up in May 2016 on the back of higher food prices. CII hopes that the food prices would ease going forward on account of a spate of reforms undertaken by the present government to address the supply bottlenecks and the expectation that monsoon would be normal after two consecutive years of drought.

RBI Maintains Status Quo on Policy RatesReserve Bank of India (RBI) maintained a status quo and kept repo rate unchanged at 6.5 per cent in its second bi-monthly policy meeting held on June 7th, 2016. The reverse repo rate and marginal standing facility (MSF)

rate currently stands at 6.0 per cent and 7.0 per cent respectively. RBI is currently in a wait and watch mode awaiting further clarity on movement of global crude oil prices, progress of monsoons and other macroeco-nomic developments.

cent in the reporting month from 7.1 per cent in April 2016, while minerals category continued to record de-flation for the 22nd consecutive month.

Fuel group continues to witness deflation

Deflation in the fuel group stood lower at 6.1 per cent in May 2016 as compared to -4.8 per cent in the previous month. The deflationary trend in the group continued for the 19th consecutive month. The deceleration in May 2016 was led by mineral oils category. With global crude oil prices recovering from their lows in recent weeks due to ongoing political tensions in Venezuela, Libya and Nigeria, we can expect fuel category to record

some mild inflation in the months to come.

Core inflation is slowly inching up

Inflation in manufactured group increased marginally to 0.9 per cent in May 2016 from 0.7 per cent posted in the previous month, driven by higher food prices. Though inflation in manufactured food products came down slightly to 7.5 per cent from 8.0 per cent, it still re-mains high. Non-food manufacturing or core inflation, which is widely regarded as the proxy for demand-side pressures in the economy came higher at -0.5 per cent during the month as compared to -0.8 per cent in April 2016.

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DOMESTIC TRENDS

MAY-JUN 2016

As per RBI document, domestic demand con-ditions remain solid

On the growth front, the monetary policy document was of the view that the domestic conditions for growth are improving gradually, mainly driven by consumption demand, which is expected to strengthen with a normal monsoon and the implementation of the 7th Pay Com-mission award. Hence, RBI on a reassessment of bal-ance of risks, retained the GVA growth projection for 2016-17 at 7.6 per cent with risks evenly balanced.

But, RBI says that upside risks to inflation evident

On the inflation front, the monetary policy document was of the view that the inflationary pressures have started rising again in April 2016 after remaining sub-dued for two consecutive months to March 2016. Retail inflation measured by the consumer price index (CPI) rose more sharply than expected due to a more-than-seasonal jump in food prices. However, RBI retained its March 2017 inflation target at around 5 per cent, high-lighting the upside risks on account of 7th Pay Commis-sion and firming global commodity prices (especially crude). A strong monsoon, continued astute food man-agement, as well as steady expansion in supply capaci-ty, especially in services, could help offset these upward pressures.

Liquidity conditions improve in the system

The policy acknowledged the sharp improvement in liquidity conditions since the April policy meet (when the new liquidity regime was adopted). The average daily liquidity deficit has narrowed to around Rs 1 tril-lion in May 2016 from Rs 2 trillion in March 2016 owing to a host of liquidity improving measures announced by RBI like reducing the minimum daily maintenance of CRR from 95 per cent of the requirement to 90 per cent, conducting regular open market operations etc.

Thus, would lead to improvement in mon-etary transmission

The rate cutting cycle which was initiated by the Central Bank in January 2015, has seen the policy rate getting pared by 150 bps. However, the base lending rates of banks have come down only by about 60 bps. Thus, the monetary policy transmission has not been that strong so far. But going forward, a host of policy changes like the cut in small savings rate, shifting to marginal cost of funds based lending rate (MCLR) for pricing of loans etc. are expected to improve the transmission process.

Further easing by RBI cannot be ruled out

Despite upside risks to inflation, RBI maintained that its monetary policy stance remains accommodative. The Reserve Bank noted that it will monitor macroeconom-ic and financial developments for any further scope for policy action.

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CII ReactionRBI could have given more emphasis to the need to continue the rate cutting cycle. Instead, the RBI has chosen to rely on the transmission of lower interest rates to borrowers by the banks. At this time when credit demand is still flat and industry is facing a demand crunch, a rate cut would have done much to restore the investment cycle. CII is hopeful that RBI will resume the rate cutting cycle and support growth impulses in the economy in the next monetary policy.

Exports Recovery in SightRate of decline in exports narrows sharply in May 2016Merchandise exports posted a marginal fall of 0.8 per cent in May 2016 to US$22.2 billion as compared to de-growth to the tune of -21.6 per cent in April 2016, thus indicating that exports may finally be readying to slip out of the red territory. To be sure, this is the 18th con-secutive month of decline for the country’s exports, hit by low global demand and falling commodity pric-es. Non-petroleum exports in May 2016 were valued at US$20.1 billion, thus posting an increase of 1.01 per cent on a year-on-year basis. Exports of gems & jewel-lery, handicrafts, engineering products, chemicals and marine products rose in May 2016 while exports of petroleum products, pharmaceuticals, meat, oil-meals and yarn declined. On a cumulative basis, for the period

April-May 2016, merchandise exports stood at US$42.7 billion, registering a negative growth of 3.7 per cent on year-on-year basis.

In contrast, imports post a larger decline during the monthImports on the other hand posted a decline to the tune of 13.2 per cent to US$28.4 billion in May 2016 as com-pared to contraction to the tune of 23.1 per cent in April 2016. Oil imports in May 2016 dipped by 30.5 per cent to US$5.9 billion. Non-oil imports too fell by 7.1 per cent to U$22.5 billion during the reporting month. During April-May FY17, India’s cumulative merchandise imports stood at US$53.8 billion, thus registering a negative growth of 18.2 per cent on a year-on-year basis.

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DOMESTIC TRENDS

MAY-JUN 2016

Current Account Deficit Narrows in FY16 on lower Mer-chandise Trade DeficitCurrent account deficit stood at 1.1% of GDP in FY16 from 1.3% in FY15

Current account deficit (CAD) narrowed sharply to US$0.3 billion (0.1 per cent of GDP) in Q4FY16, signifi-cantly lower than US$7.1 billion (1.3 per cent of GDP) in Q3FY16 and marginally lower than US$0.7 billion (0.1 per cent of GDP) in Q4FY15. The contraction in CAD was pri-marily on account of a lower merchandise trade deficit (US$24.8 billion) than in Q4 of last year (US$31.6 billion) and US$34.0 billion in the preceding quarter. With this, for full year FY16, CAD narrowed to 1.1 per cent of GDP from 1.3 per cent in FY15 on the back of narrowing of trade deficit to US$130.1 billion in FY16 from US$144.9

Volatility in global financial markets weighs on net portfolio flows in FY16Net capital account, after picking up to US$10.9 billion in 3QFY16, once again decelerated sharply and stood at US$3.5 billion in Q4FY16. The main reason for this sharp moderation in capital account could be attributed to net portfolio outflows during the quarter. There was a net outflow to the tune of US$1.5 billion in portfolio investment in Q4FY16 as against net inflow of US$0.6 billion in the preceding quarter. On an annual basis too, portfolio investment, recorded a net outflow US$4.5 billion in FY16 as against a net inflow of US$40.9 billion

Merchandise trade deficit stood at US$6.3 billion in May 2016 as compared to US$4.8 billion in the previous month. Going forward, while improving domestic competitive-ness through structural reforms is crucial to improve

billion in FY15. While trade deficit remained lower in FY16, headwinds in terms of lower global demand and the decline in commodity prices weighed on external sector performance.

Invisibles related flows were lower in Q4FY16 as com-pared to the previous quarter. Component wise, net services receipt moderated on quarterly basis in line with the muted global trade prospects. Transfer re-ceipts, which represent remittances by overseas In-dians, amounted to US$15.0 billion in Q4FY16, slightly lower as compared to the previous quarter. Going for-ward there is a risk of lower inflows from Middle East region amid steep decline in crude prices and economic slowdown in that part of the world.

in FY15. The global financial market uncertainty, led by the slowdown in China, steep decline in commodity prices and the likely trajectory of US Fed rate hikes, has weighed on the capital flows across EM economies and India was not immune to the trend.

FDI flows too moderated during the reporting quarter, thus narrowing the BoP balance to US$3.3 billion in Q4FY16 as compared to US$4.1 per cent in the preceding quarter. On an annual basis, in FY16, there was an accre-tion of US$17.9 billion to foreign exchange reserves (on a BoP basis) as compared with US$61.4 billion in FY15.

exports performance; we believe that this can only ma-terialize in the medium-term. In the near-term, a weaker rupee can act as a catalyst to revive competitiveness.

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DOMESTIC TRENDS

We expect CAD to come below 1 per cent of GDP in FY17. The key risk to the outlook is volatility in portfo-lio related flows and deceleration in remittance relat-ed inflows. From a longer term perspective, although

the external sector performance remains favorable, the sustainability of the same is still doubtful. Contin-ued weakness in exports performance due to global headwinds is a potential headwind for the sector.

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CORPORATE PERFORMANCE

Corporate Performance in 2015-16

MAY-JUN 2016

Manufacturing firms register rising profit-ability in FY16

The corporate results at the end of the fourth quarter of fiscal year 2016 brought a reasonfor cheer in form of rising profitability as the financial performance of Indian companies, especially manufacturing sector firms,improved during the year 2015-16. Data released by the Central Statistics Office showed that GDP ex-panded by 7.6 per cent in 2015-16 as against 7.2 per cent growth in the previous fiscal. Manufacturing sector, buoyed by a significant fall in inputs costs following the collapse of global commodity prices, registered a sharp pickup in 2015-16, growing at a robust rate of 9.3 per cent.

The analysis factors in the financial performance of a balanced panel of 1676 manufacturing companies (ex-cluding oil and gas companies) and 903 service firms extracted from the CMIE’s Prowess database.

Bottom-line of firms registers a stellar per-formance in FY16

In the fiscal year 2016, the bottom-line of the firms im-proved to 14.5 per cent on an aggregate basis, as com-pared to 1.2 per cent in the year earlier. Manufacturing companies registered growth in PAT as high as 17.8 per cent as compared to a contraction of 9.3 per cent in the previous year. Profitability in service firms moderated in FY16. Similar trends were witnessed for operating prof-its (PBDIT).

ECONOMY MATTERS 26

CORPORATE PERFORMANCE

As far as the quarterly analysis is concerned, profitabil-ity moved to positive territory in the fourth quarter in all sectors, after having witnessed contractions in manu-facturing as well as on aggregate basis in the compara-ble quarter in 2014-15. Growth in PAT stood at the tune of 9.4 per cent, on an aggregate basis, in the fourth quarter of 2015-16, as compared to a contraction of 19.8

In contrast, net sales growth continues to re-main anemic in FY16

Growth in net sales remained a bit of sore point, even though falling input costs provided a respite. In the year 2015-16, net sales on an aggregate basis contract-ed further to the tune of 7.0 per cent, as compared to a contraction of 0.8 per cent previously. As far as the yearly outlook is concerned, in the final quarter of fis-

per cent in the same quarter in FY15. Growth in profits after tax in the service sector also rose sharply to 28.0 per cent in the January-March quarter of 2016, as com-pared to 2.0 per cent in 4QFY15. Operating profits too followed fairly similar trends, and witnessed improve-ments on all accounts in the fourth quarter of fiscal year 2016.

cal 2016, net sales, though still in the negative territory, witnessed an improvement over comparable quarter in fiscal year 2015. The growth in net sales on an aggre-gate basis has been contracting for the past six quarters straight now. The low net sales of firms were reflective of the lack of ample demand in the economy, a scenario that has been persistent for quite some time now. The slowing demand in the external markets has been doing no good either.

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CORPORATE PERFORMANCE

MAY-JUN 2016

But, contraction in expenditure costs in FY16, cushions impact of low net sales growth

During the year 2015-16, on an aggregate basis, total ex-penditure contracted sharply to 14.2 per cent as against a contraction of 2.5 per cent in the fiscal year 2015. This was mostly led by a contraction in the cost of services and raw materials. While expenditure for the manufac-

As far as the quarterly analysis is concerned, amongst the various components of total expenditure on an ag-gregate basis, encouragingly, the growth in wages and salaries moderated to 4.5 per cent in the fourth quarter of fiscal year2016 as compared to 16.2 per cent recorded in the corresponding period of 2014-15.This appropriate-ly mirrors the cost-cutting measures being taken by the firms. Growth in cost of raw materials contracted to the

turing sector contracted to 15.2 per cent as compared to a contraction of 3.1 per cent in the same quarter a year ago, growth in expenditure in the service sector too dropped to negative territory. The expenditure has been on a contracting trajectory for six quarters straight now. This has come as a breather and fairly cushioned the severe impact of lower net sales growth.

tune of 11.6 per cent, in the fourth quarter of 2015-16 as against a contraction of 21.5 per cent in the same quar-ter of 2014-15. Moderation in growth of expenditure has to some extent mitigated the impact of the current bout of economic crisis characterized by falling growth in net sales, and reductions have been able to provide cushion to the bottom-line of the corporate.

ECONOMY MATTERS 28

CORPORATE PERFORMANCE

Gross margin improves across sectors in FY16

Our analysis shows that while gross margin improved across sectors and on an aggregate basis, net margin moderated only slightly. This was aided by both rising profitability and falling net sales, with both the numera-tor and the denominator effect in play. Falling net sales is still a cause of worry though. For the fourth quarter in the fiscal year 2016, while the gross margin stood at

Over the past eight quarters, while net sales and ex-penditure has mostly followed a downward trend, prof-itability has displayed wide fluctuations. A period of positive growth has reigned for the past four quarters which saw PAT growing to as much as 55.2 per cent in

14.3 per cent on an aggregate basis, improvement over 13.6 percent the previous period in year on year terms, for manufacturing and services, it stood at 12.8 per cent and 20.8 per cent respectively. On an aggregate basis, net margin stood at 5.4 per cent in the fourth quarter of 2015-16, as against 6.0 per cent in the corresponding quarter of 2015-16.

the third quarter of fiscal year 2016. While decelerat-ing net sales have been a concern to the industry, the bottom-line has been displaying healthy trends on the back of production efficiencies and employment of cost effective measures being exercised by the firms.

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POLICY FOCUS

POLICY FOCUS

MAY-JUN 2016

1. National Capital Goods Policy 2016

In a bid to give the growth of beleaguered capital goods sector a kick-start, the NDA government approved In-dia’s first ever National Capital Goods Policy 2016 that intends to make the country a world-class hub and looks to create over 21 million additional jobs by 2025. The Capital Goods (CG) industry is one of the key contribu-tors to value added manufacturing and is significant for overall economic development of India. The Prime Min-ister’s Group constituted under the Chairman of the Na-tional Manufacturing Competitiveness Council (NMCC) identified Capital Goods as one of the strategic sectors for strengthening national capabilities in the long-term.

The growth and development of capital goods is criti-cal for India to achieve the vision of “Make in India” by increasing the share of manufacturing to 25 per cent of gross value added. This in turn will help generate addi-tional jobs, improve India’s trade balance and increase domestic self-reliance. The National Policy on Capital Goods is envisaged to unlock the potential of the prom-ising sector and establish India as a global manufactur-ing powerhouse.

The policy proposes a comprehensive policy agenda to achieve these goals, as summarized below:

• Make in India initiative: To integrate major capital goods sub-sectors like machine tools, textile ma-chinery, earthmoving and mining machinery, heavy electrical equipment, plastic machinery, process plant equipment, dies, moulds and press tools, printing and packaging machinery and food pro-cessing machinery as priority sectors to be envis-aged under ‘Make in India’ initiative

• To create an enabling scheme as a pilot for ‘Heavy Industry Export & Market Development Assistance Scheme (HIEMDA)’ with a view to enhance the export of Indian made capital goods. This will also require developing a comprehensive branding plan for the CG sector with the support of India Brand Equity Foundation (IBEF).

• Strengthen the existing capital goods scheme: The policy recommends increasing the budgetary allo-cation & scope of the present ‘Scheme on Enhance-ment of Competitiveness of Capital Goods’ which include setting up of Centers of Excellence, Com-mon Engineering Facility Centers, Integrated Indus-

Several important policy documents were released in the months of May-June 2016, which we cover in this month’s Policy Focus section. Our endeavor through this section is to keep our readers abreast of the latest happenings on

the policy front so that they can take an informed decision accordingly.

ECONOMY MATTERS 30

POLICY FOCUS

trial Infrastructure Park and Technology Acquisition Fund Programme.

• The policy recommends increasing the scope of the present ‘Scheme on Enhancement of Competitive-ness of Capital Goods’ by adding a set of compo-nents including technology, skills & capacity build-ing, user promotional activities, green engineering and energy, advanced manufacturing and cluster development.

• To launch a Technology Development Fund under PPP model to fund technology acquisition, transfer of technology, purchase of IPRs, designs & draw-ings as well as for commercialization of such tech-nologies of capital goods.

• To create a ‘Start-up Center for Capital Goods Sec-tor’ shared by Department of Heavy Industry (DHI) and CG industry/industry association in 80:20 ratio to provide an array of technical, business and finan-cial support resources and services to promising start-ups in both the manufacturing and services space. These services should focus on pre-incuba-tion, incubation and post-incubation phases of a start-up’s growth to ensure that a robust founda-tion is established.

• Mandatory Standardization which includes, inter alia, defining minimum acceptable standards for the industry and adoption of International Organi-zation for Standardization (ISO) standards in the absence of other standards, to institute formal development program for promoting and framing Standards with Standards Developing Organiza-tions (SDOs) including Bureau of Indian Standards (BIS), international standard bodies, test / research institutions and concerned industry/ industry asso-ciations.

• To upgrade development, testing and certifica-tion infrastructure such as Central Power Research

Institute (CPRI) and set up 10 more CMTI like insti-tutes to meet the requirements of all sub-sectors of capital goods.

• Skill development: To develop a comprehensive skill development plan/scheme with Capital Goods Skill Council and to upgrade existing training cent-ers and set up 5 regional State-of-the-Art Greenfield Centers of Excellence for skill development of CG sector.

• Cluster approach: To provide schemes for enhanc-ing competitiveness through a cluster approach, especially for CG manufacturing SMEs. Thrust to be on critical components of competitiveness such as quality management, plant maintenance manage-ment, energy management, cost management, hu-man resource management and prevention of cor-rosion with Government support to the extent of 80 per cent of the cost.

• To modernize the existing capital goods manu-facturing units, especially SMEs by replacing the modern, computer controlled and energy efficient machineries across capital goods sub-sectors, there is need to create a scheme based on capital subsidy to promote the manufacturing of quality products.

• Support services: A robust mechanism for report-ing data of production, export and import for all capital goods sub-sectors with minimal time lag to facilitate continuous monitoring of policy effective-ness and timely actions is proposed.

A monitoring and evaluation mechanism for governing and ensuring implementation of policy recommenda-tions is also proposed. This includes an inter-ministerial committee coordinated by Ministry of Heavy Industries & Public Enterprises with Secretariat participation to annually review the progress on policy objectives and driving coordinated action and a joint implementation mechanism with State governments.

CII ReactionCII is committed to support the Government and is delighted to be a partner in the unique initiative of the National Capital Goods Policy. The Policy is a first for the Indian capital goods sector and can be expected to drive growth in Manufacturing and enable “Make in India”. The Policy’s thrust on Demand Creation, Technology Depth and Ex-ports will go a long way to address the challenges and issues that the sector is currently going through.

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POLICY FOCUS

MAY-JUN 2016

2. National Intellectual Property Rights Policy

The Union Cabinet has approved the National Intellec-tual Property Rights (IPR) Policy that will lay the future roadmap for intellectual property in India. The Policy recognises the abundance of creative and innovative energies that flow in India and the need to tap into and channelise these energies towards a better and bright-er future for all.

The National IPR Policy is a vision document that aims to create and exploit synergies between all forms of intellectual property (IP), concerned statutes and agen-cies. It sets in place an institutional mechanism for im-plementation, monitoring and review. It aims to incor-porate and adapt global best practices to the Indian scenario. This policy shall weave in the strengths of the Government, research & development organizations, educational institutions, corporate entities including MSMEs, start-ups and other stakeholders in the crea-tion of an innovation-conducive environment, which stimulates creativity and innovation across sectors, as also facilitates a stable, transparent and service-orient-ed IPR administration in the country.

The broad contours of the National IPR Policy are as follows:

Vision Statement: An India where creativity and inno-vation are stimulated by Intellectual Property for the benefit of all; an India where intellectual property pro-motes advancement in science and technology, arts and culture, traditional knowledge and biodiversity re-sources; an India where knowledge is the main driver of development, and knowledge owned is transformed into knowledge shared.

Mission Statement: Stimulate a dynamic, vibrant and balanced intellectual property rights system in India to:

• foster creativity and innovation and thereby, pro-

mote entrepreneurship and enhance socio-eco-nomic and cultural development, and

• focus on enhancing access to healthcare, food se-curity and environmental protection, among other sectors of vital social, economic and technological importance.

Objectives:

The Policy lays down the following seven objectives:

i. IPR Awareness: Outreach and Promotion - To cre-ate public awareness about the economic, social and cultural benefits of IPRs among all sections of society.

ii. Generation of IPRs - To stimulate the generation of IPRs.

iii. Legal and Legislative Framework - To have strong and effective IPR laws, which balance the interests of rights owners with larger public interest.

iv. Administration and Management - To modernize and strengthen service-oriented IPR administra-tion.

v. Commercialization of IPRs - Get value for IPRs through commercialization.

vi. Enforcement and Adjudication - To strengthen the enforcement and adjudicatory mechanisms for combating IPR infringements.

vii. Human Capital Development - To strengthen and expand human resources, institutions and capaci-ties for teaching, training, research and skill build-ing in IPRs.

These objectives are sought to be achieved through de-tailed action points. The action by different Ministries/ Departments shall be monitored by DIPP which shall be the nodal department to coordinate, guide and oversee implementation and future development of IPRs in In-dia.

CII ReactionThe Government promises to provide a positive environment for technology transfer and IPR licensing. The IPR policy will help consolidate efforts of multiple agencies associated with the national IP ecosystem. The policy would help multiply innovations and entrepreneurship and generate more jobs in newer areas of technology. In addition, IPR provides a strong framework for the Make in India program. The question will always remain how to achieve these goals and when would one start seeing the result? The next step is to have an action plan with various meas-urable milestones and definite timeframe. Without the action plan some of the laudable goals may not be fulfilled.

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3. Model GST LawThe long-awaited indirect tax reform, Goods and Servic-es Tax (GST), made headway as the Empowered Com-mittee of State Finance Ministers on GST, which met in Kolkata on 14th June, 2016 approved a model GST law with “general consensus” on the issue of dual control over taxation structure between the Centre and States.Following are the key highlights of the model GST law which was approved:

• As per the model integrated GST law (iGST), all on-line purchases will attract uniform GST, effective April next year, when passed by Parliament. Viola-tion of the provisions of the statute will attract a jail term of up to 5 years and fine.

• Refund claims of upto Rs 5 lakh can be filed without documentary evidence. A declaration based on the documentary evidence to suffice for a valid refund claim.

• Full input tax credit to be available of GST paid on purchase of capital goods in the first year itself. Presently a maximum of 50 per cent of the input tax credit can be availed in the first year under the Cenvat credit law.

• Stringent provisions with potential to cause undue harassment to entrepreneurs continue to find their way into the GST law in respect of access to busi-ness premises, inspection of goods vehicles carry-ing the consignment, detention of vehicles, scru-tiny of returns filed, etc.

• Provisions of Reverse Charge Mechanism, currently applicable for notified services, have been extend-ed to supply to goods. Transactions attracting Re-verse Charge to be specified at the time of presen-tation of draft law in the Parliament/Legislature.

• The draft model law also provides for constitution of a National Goods and Services Tax Appellate Tri-bunal by Centre on the recommendation of the GST Council. The Tribunal shall be headed by a national president, with a branch in each state. The state GST tribunal will be headed by a state President and consist of Members (Judicial), Members (Technical – CGST) and Members (Technical – SGST).

• A National GST Settlement Commission to be set up by the Centre has also been proposed in the draft law for settlement of cases under the proposed GST Act. The National Commission chairman will be a High Court judge and the commission will have one bench for one or more states.

• The draft law also seeks to establish a Consumer Welfare Fund, which shall be utilised by the Centre/state government for the welfare of the consumers in accordance with such rules as that government may make in this behalf. A GST compliance rating has also been proposed for every taxable person. The score will be based on his/her record of compli-ance with the provisions of the Act.

Government is hoping to get the Constitution Amend-ment Bill passed by Parliament in the upcoming Mon-soon Session. It plans to roll out GST from April 1, 2017 that will subsume excise, service tax and all local levies.

CII ReactionCII is greatly enthused by the outcome of the meeting of the Empowered Committee of State Finance Ministers held on 14th June, 2016 and welcomes the release of the Model Goods & Services Tax (GST) Law. This is indeed a step forward in implementation of the much awaited GST, and will encourage industry to think that GST may be-come a reality after the coming Monsoon Session. We look forward to the positive movement and with these initia-tives, it is expected that implementation of GST with effect from 1st April 2017 will become a reality. GST is India’s most significant tax reform in decades. GST, when implemented, is expected to usher in a harmonised national market of goods and services and shall lead to a simplified, assessee-friendly tax administration system. Once im-plemented, it will subsume most of the country’s central and state level duties and taxes, thus making the country a national market and contribute significantly to the growth of the economy.

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4. National Civil Aviation Policy, 2016

The Union Cabinet chaired by the Prime Minister Shri Narendra Modi gave its approval for the Civil Aviation Policy on 15th June, 2016. This is the first time since In-dependence that an integrated Civil Aviation Policy has been brought out by the Ministry of Civil Aviation.

Highlights

• The National Civil Aviation Policy would provide a thrust to India’s vision to become India’s 3rd largest civil aviation market by 2022 and largest by 2030.

• The policy envisages domestic ticketing to grow from 8 crore in 2015 to 30 crore by 2022.

• Airports having scheduled commercial flights to in-crease from 77 in 2016 to 127 by 2019 as per the new policy.

• The new policy endeavors to increasecargo vol-umes by 4 times to 10 million tonnes by 2027.

5. FDI Norms Relaxed in Host of Sectors

The Union Government has radically liberalized the FDI regime, with the objective of providing major impetus to employment and job creation in India. This is the second major reform after the last radical changes announced in November 2015. Now most of the sectors would be under automatic approval route, except a small nega-tive list. With these changes, India is now the most open economy in the world for FDI. Lists of changes brought about in the FDI policy areenumerated below:

- Food Products manufactured/produced in India: It has now been decided to permit 100 per cent

• The new policy aims to take flying to masses by enabling Indians to fly at Rs 2,500 per hour under Regional Connectivity Scheme at unserved airports.

• Flexible and liberalized ‘open skies’ and ‘code share’ agreements in the new policy.

• The new policy aims to give incentives to MRO (maintenance, repair, and overhaul) sector to de-velop as hub for South Asia.

• The new policy will ensure availability of quality cer-tified 3.3 lakh skilled personnel by 2025.

• There will be development of green-field airports and heliports as per the mandate of the new avia-tion policy.

• The ease of doing business has been enhanced through deregulation, simplified procedures and e-governance as elucidated in the new policy.

• Lastly under the new policy there will be promotion of ‘Make in India’ in Civil Aviation Sector.

FDI under government approval route for trading, including through e-commerce, in respect of food products manufactured or produced in India.

- Defence Sector: Foreign investment beyond 49 per cent has now been permitted through government approval route, in cases resulting in access to mod-ern technology in the country or for other reasons to be recorded. The condition of access to ‘state-of-art’ technology in the country has been done away with. FDI limit for defence sector has also been made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959.

CII ReactionCII welcomes the new civil aviation policy that aims to bolster the aviation sector in the country with thrust on re-gional connectivity, liberalization in open skies regime, abolition of contentious 5/20 rule, promotion of air cargo, maintenance, repair and operations (MRO) et al. The objective to make air travel affordable for masses and easing the norms for domestic carriers to operate services abroad have been the highlights of the new policy. We at CII are pretty hopeful that with the right framework and policies in place, India would be well placed to emerge as the largest aviation market by 2030.

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- Pharmaceutical Sector: With the objective of pro-moting the development of pharma sector, it has been decided to permit up to 74 per cent FDI under automatic route in brownfield pharmaceuticals and government approval route beyond 74 per cent will continue.

- Civil Aviation Sector

(i) The extant FDI policy on Airports permits 100 per cent FDI under automatic route in Green-field Projects and 74 per cent FDI in Brownfield Projects under automatic route. FDI beyond 74 per cent for Brownfield Projects is under gov-ernment route.

(ii) With a view to aid in modernization of the ex-isting airports to establish a high standard and help ease the pressure on the existing airports, it has been decided to permit 100 per cent FDI under automatic route in Brownfield Airport projects.

- Single Brand Retail Trading: It has now been decid-ed to relax local sourcing norms up to three years and a relaxed sourcing regime for another five years

for entities undertaking Single Brand Retail Trading of products having ‘state-of-art’ and ‘cutting edge’ technology.

- Direct to Home (DTH): Up to 100 per cent FDI through automatic route has also been permitted for setting up of uplinking HUBs/Teleports, Mobile TV, DTH, and cable networks operating at national, state and district levels, as well as local cable net-works.

- Animal Husbandry Sector: As per FDI Policy 2016, FDI in Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture and Apiculture is allowed 100 per cent under Automatic Route under controlled conditions. It has been decided to do away with this requirement of ‘controlled condi-tions’ for FDI in these activities.

- Private Security Agencies: The extant policy per-mits 49 per cent FDI under government approval route in Private Security Agencies. FDI up to 49 per cent is now permitted under automatic route in this sector and FDI beyond 49 per cent and up to 74 per cent would be permitted with government approv-al route.

CII ReactionCII strongly welcomes the landmark decisions taken on opening up the FDI regime during the meeting chaired by Hon’ble Prime Minister Shri Narendra Modi held on 20th June, 2016. CII is of the view that liberalization of the FDI regulations reflects the Government’s commitment to reforms and openness, and reassures investors that Ease of Doing Business remains high priority. Taken together, the new FDI rules will attract big new investments across key sectors such as food processing, defense production, pharmaceuticals and civil aviation, among others, thereby adding to growth and employment.

Permitting food products manufactured in India to be offered through FDI in trading and e-commerce will help bring in more investments into the food retail chain and increase production in the organized sector. The condi-tionality in defence production FDI regarding ‘state of the art’ technology has been done away with, allowing more defence producers to enter the large Indian defence procurement market. Relaxation of local sourcing norms un-der Single Brand Retail Trading for advanced technology products would encourage global brands to build up their participation in the country. Altogether, nine areas have been liberalized by the Government today.These major decisions affirm that India is open for business from the world, and would contribute greatly to investments and development of the country.

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India’s Trade & International Alliances

of decline has sharply moderated. Merchandise exports till now have contracted by an average 14.0 per cent in the last eighteen months till May 2016. Among non-oil items, exports of gems & jewellery, chemicals and elec-tronic goods have recorded improved performance in the recent months. In contrast, exports of engineering goods and readymade garments have recorded a fall for many months now. The fall in crude oil prices led to lower export realisations from petroleum products.

Analysing India’s Exports PerformanceExports have now declined for the eighteenth consecu-tive month in May 2016 in US dollar terms, albeit the rate

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Manufacturing exports continue to lag behindExport slowdown is definitely a major cause of concern. While imports too have contracted over the same pe-riod, their decline has not been as steep as that of ex-ports, resulting in a widening trade gap, despite a down-ward shift in overall trade. A micro level analysis shows that there are many sectors where growth is flagging: from vehicles, to machinery, to commodity exports. It also shows that even after many years of reform, India is still exporting the same products to largely the same markets. Trade has not seen a lateral or horizontal shift. The high-value added manufacturing exports from India have not taken off even though India has several advan-tages, including engineering skills (process, product, quality and capital), a growing domestic market, a raw material base and a large pool of skilled labour. India has the potential to increase manufacturing exports manifold, but unfortunately this has not happened yet.

Factors Stifling India’s Exports

There are both demand as well as supply-side factors that are negatively impacting India’s export volumes, and strategies to reverse the impact of these factors is the need of the hour.

Demand-Side Factors

• A large chunk of India’s exports go to OECD coun-tries, in particular the United States, the EU, and Ja-pan. However, the continuing impact of the global financial crisis, as evidenced from the constant downward revisions in the IMF’s global growth fig-ures since 2011, means that demand stimulus from India’s traditional trading partners will remain mut-ed and may not be able to pull back India’s export growth.

• Similarly, while South-South trade has continued to increase as a percentage of global trade, India cannot hope to counter the depression of demand from the global North by rebalancing trade rela-tions with the global South. This is because emerg-ing markets, in particular the BRICS nations, respon-sible for a large part of the growth in South-South trade, are now themselves struggling with the con-sequences of the global economic slowdown.

Supply-Side Factors

But beyond depressed demand factors, it is really the supply-side constraints that have impacted India’s abil-ity to expand trade into newer product and service are-as. While the Indian government has little or no control over external demand factors, it can certainly intervene with policies that aid in easing supply-side constraints, and this shall be the focus of recommendations aimed at revitalising India’s exports.

• Internal supply side constraints are actually con-taining India’s exports growth. India faces crippling infrastructure shortages, which includes power, roads, finances etc. For instance, debts of over Rs 3 trillion at the level of state electricity boards, the principal purchasers of power, dis-incentivizes the setting up of new generation capacity.

• Second major constraint relates to surface trans-port and ports. Export oriented production requires a significant edifice of infrastructure support, which is in chronic shortage in India. The inefficiency in lo-gistics system is raising the cost of exports consid-erably.

• For instance, in comparison to China or any other developing country where rail is predominant mode to carry commercial traffic, Indian commercial trade still relies on road. The obvious and more efficient alternative is rail transport. Unlike external factors, internal constraints can actually be addressed with necessary policy interventions.

• Another area of concern impeding manufacturing output is India’s outdated labour laws. These are coming in the way of enhancing manufacturing. India’s labour laws make it hazardous for business-es that face seasonality in their demand to set up mass production facilities. It cannot retrench a part of the workforce in accordance with depression of demand.

• Slow implementation of policies has done more to dissuade investment than the extant labour laws. The Government needs to continue its thrust on addressing challenges in these areas. In a limited industry survey, some of the identified constraints included lack of access to credit, inadequate infra-

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structure and high transport costs, low availability and high cost of inputs, and at time difficult and lim-ited access to land.

• Another area of concern to many of the country’s exporters is with respect to non-tariff measures and procedural obstacles, especially relating to li-censing, permits to export, inspections, certificates and taxes.

Focus Areas for Intervention

India’s competitiveness, on both cost and efficiency of production, lags that of China and some other develop-ing country exporters. Indian companies require the requisite infrastructure, still sorely lacking in compari-son to its trade competitors, to allow product export prices to be globally competitive.

Further, the cost of capital in India remains too high for companies to be able to borrow competitively. While the Reserve Bank has made commendable progress in inflation targeting, there needs to be a sustained period of contained inflation for bank rates to come down to levels where companies feel comfortable accessing debt for their working capital needs.

Integrating into Global Value Chains (GVCs)

• Alongside enabling infrastructure and cheaper capi-tal, Indian firms need to understand the changing dynamics of global trade, and recalibrate their pro-duction strategies to become a part of Global Value Chains (GVCs) of production.

Bringing State-Specific Export Strategy

• The Government of India, and in particular the Min-istry of Commerce and its affiliate bodies, need to enhance interaction with State Governments, with a view to building an understanding of the com-parative advantages states enjoy in the production of certain goods and services. Every State govern-ment must be mandated to come out with its own “Export Strategy” document.

• The central government also needs to educate the state governments about enhancing Trade Facilita-tion (TF) infrastructure, while concurrently improv-ing the ease-of-doing-business norms so that en-

trepreneurs and business can focus on improving products and services instead of focusing on com-pliance and administration.

Empowering Export Promotion Agencies

• The Government needs to empower export promo-tion agencies and industry association in order to improve prompt information sharing between the private sector, government ministries and the im-plementing agencies. Export associations and ex-port promotion authorities need to enhance use of information technology to reach a wider exporting constituency.

‘Make in India’ to Lead the Way

• Flagship schemes such as Make in India are good in terms of giving industry direction, but they lack the detailing to enable business to know the steps to be taken to change course and integrate into global supply chains. The Make in India scheme should not just cater to domestic consumption, but look to integrating into global production chains, which enhances value-added income from trade, and im-proves the terms of trade, leading to improved bal-ance of payments.

• If the avowed objective of the Indian Government is to increase the share of manufacturing in India’s economy, then it must clear the decks through ap-propriate measures for large investments by global manufacturing companies that currently prefer to operate in south-east Asia or China.

Boosting Defence Manufacturing & Exports

• As part of the push to increase manufacturing out-put, the government needs to take substantive steps towards establishing a strong defence indus-trial base in the country with world class manufac-turing capabilities leading to strong export possi-bilities.

• While the right signals have been sent to industry with respect to enhanced participation in defence manufacturing, many areas require continued at-tention to release capacity and informational bot-tlenecks that restrict the participation of the pri-vate sector in defence manufacturing. A particular

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challenge is the lack of a diversified and distributed small-manufacturer base that contributes to the production of complex defence systems.

• The Government can adopt several best-practices from across the globe that encourages small and medium sized corporations to participate in the production of defence equipment.

Encourage Export Oriented FDI

• In general, companies that look to invest in India of-ten only eye the large domestic consumption mar-ket. Policies supporting export-oriented manufac-

turing zones need to be relooked at, with a study of global best practices as evidenced in China and elsewhere, so that MNCs look to India as one of the hubs of global goods production.

• Further, foreign direct investment (FDI) norms can also be differentiated so as to have schemes that incentivise investments geared towards generat-ing exportable goods and services. FDI can also be-come a channel for technology transfer and knowl-edge spill-over and it can assist in the structural transformation within the country.

Conclusion

The ‘Make in India’ policy no doubt has sent signals of vigour and enthusiasm. The objective has to be to cre-ate productive jobs for India’s rapidly-expanding work-force in India’s organized manufacturing sector with the aim of enhancing exports. The window for growth through export-led manufacturing is a limited one. In-dia cannot afford to miss the opportunity presented to it, as the costs of failure now are greater than ever.

Building productive capacities, market linkages and en-hancing investment attractiveness in selected sectors will have a strong impact on the export capacity of In-dian business and improve the country’s trade balance. Necessary reforms must be identified, both sector spe-cific for those identified above, as well as cross-cutting reforms for all sectors, which will help make Indian ex-ports competitive.

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Transpacific Trade Pact (TPP): Implications for India’s Textiles and Clothing Sector

India is not a party to Transpacific Partnership Pact (TPP) comprising Australia, Brunei Darussalam, Can-ada, Chile, Japan, Malaysia, Mexico, New Zealand,

Peru, Singapore, Vietnam, and the US. However, it has serious implications for India’s textile and clothing sec-tor.

Textile & clothing sector accounts for roughly 5 per cent of India’s GDP, 15 per cent of its industrial output and export earnings and provides livelihood support to 55-60 million people directly or indirectly. Thus, it would be pertinent to analyze the effect of TPP on India’s tex-tile and clothing sectoras the US is the top export des-tination.

When it comes to export of readymade garments and made ups, the US alone accounts for 30 per cent of In-dia’s total exports. TPP will affect textile and clothing sector of India (and of all non-TPP member countries like Brazil or China) in two ways:

Firstly, exporters from TPP member countries will get preferential access in the US market vis-à-vis the export-ers from non-TPP member countries like India. This will put India’s garment exports (to the US) at a disadvan-tage as the US import duties on readymade garments are quite high with average duty ranges around 7.9 per cent and duties on some clothing items are as high as 32 per cent as per WTO tariff profile database.

Secondly, a key feature of the TPP – ‘yarn forward rule’ makes it mandatory to source yarn, fabrics and other in-puts that are used in making clothes from any or a com-bination of TPP partner countries to avail ‘duty prefer-ence’ under the proposed trade pact. This is likely to disrupt well-integrated global and regional supply chain in textile and clothing.

And that will induce garment manufacturers in the TPP countries to source their inputs from TPP countries at the cost of non-TPP countries such as India or China even if the suppliers in TPP regions are not the least cost. This will be a clear case of trade diversion i.e. mov-ing trade away from more efficient producers to less ef-ficient producers.

Though this rule may be aimed at restricting Chinese manufacturers of yarn and fabrics to benefit from fur-ther opening of the lucrative US markets for clothing, it will create comparative disadvantage for all non-TPP member countries including India.

Already India’s textile and clothing sector is under se-vere pressure from slowing demand in key export mar-kets, and backdoor entry of Chinese goods via Bangla-desh under SAFTA/DFQF schemes that allows duty free import of garments from Bangladesh and other least developed countries such as Myanmar into India. Exclu-sion of India’s key textile products from US GSP ben-efits is another obstacle for the sector.

If this was not enough, to comply with its commitments to WTO, India will soon have to phase out its export incentives – latest 2018 - as it has already reached per capita GNP of US$1000 at 1990 prices and India’s textile products are deemed to have achieved export compe-tiveness as its global export share has crossed 3.25 per cent.

Export competitiveness is deemed to be achieved if a country’s global export share of a specific product group (defined as a section heading of the ITC-HS) is 3.25 per cent or more in two (consecutive calendar) years. India’s share in world export of textile and cloth-

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ing (falling under section heading XI of the HS) crossed this limit in 2007.

Disadvantageous to clothing retailers

Only 17 per cent of textile and clothing exports under NAFTA and Central American Free Trade (CAFTA) have gone through yarn forward rule even then the US trade negotiators have incorporated it in TPP. Clearly, the move seems to be protectionist aimed at reviving indig-enous textile industry at the cost of foreign one, but it will certainly limit the freedom of clothing retailers to choose their suppliers.

That explains the strong opposition of clothing retailers (e.g. JC Penny, Levis or Gap) and their associations (e.g. TPP Apparel Coalition) to the yarn forward rule. To deal with this, the US trade negotiators have come up with the idea of ‘short supply list’ – that will give some flexi-bility to clothing retailers in sourcing their inputs (which are not available in TPP region) from non-TPP countries either temporarily or on a long term basis.

India’s options

India can’t ignore the most lucrative US market that ac-counts for roughly one-fourth of its apparel exports i.e. US$3.5 to 4 billion especially when India’s merchandise exports have been declining for the last 18 months in a row. Reviving exports will require reviving textile and clothing exports for sure and that calls devising suitable strategy to deal with adverse impact of TPP for the sec-tor.

India’s best bet can be multilateral liberalization of duties on heavily protected textile and clothing items under the WTO framework. However, unfortunately, that’s not moving given the American disinterest in the WTO.

Joining TPP can help India’s textile & clothing sector, but accepting WTO plus proposals on IPR, investment protection, services and SOE as envisaged under TPP will not find favors among either policy makers or India Inc.

Another option would be to relocate part of India’s tex-tile production facilities to countries like Vietnam which is a party to TPP or in a least developed African country

such as Ethiopia which has duty free market access to the US that will bring India’s textile products at par with Vietnam. However, exercising this option would also mean relocation of jobs to Vietnam or Ethiopia in addi-tion to other risks associated with investing abroad.

India’s market for premium apparel is growing at 10-12 per cent per annum that explains the growing inter-est of foreign clothing brands in the country. India can consider sponsoring its own yarn forward rule in RCEP (of which it is a party) that will find support from China, the biggest loser of the rule. Going forward, India can leverage it to negotiate with the US for dilution of the TPP’s yarn forward rule or reduction of MFN duties on apparel.

Likely loss in export of textile items to TPP countries will have to be compensated by gains in other markets. Here, tweaking the rules of origin to stipulate utilization of yarns and fabrics of Indian origin as a pre-condition for allowing duty free import of garments from Bang-ladesh and other LDCs will help India’s fabrics export. It will also check backdoor entry of Chinese fabrics into India via Bangladesh or Ethiopia.

India needs to continue pushing its exports to non-tra-ditional emerging markets of Africa, Asia CIS and Latin America. Textile and clothing sector is heavily protected in Mercosur countries with import duties as high as 35 per cent on many items. Expediting the conclusion of India-Mercosur Comprehensive Economic Cooperation Agreement will help in countering the impending trade diversion because of the yarn forward rule under TPP.

India also needs to push for reduction in Chinese import duties on apparel under proposed RCEP as going for-ward China can be a high potential export destination for India’s apparel products given rising Chinese wages and per capita income despite growth slowdown.

Some kind of product differentiation (e.g. voluntary carbon labeling) will protect our textile and clothing ex-ports in the US despite the impeding post TPP compara-tive cost disadvantage vis-à-vis TPP partner countries like Vietnam.

(The views are personal. A version of this article has been published in The Hindu Business Line)

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