CII Economy Matters, September-October 2013
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CII Economy Matters, September-October 2013

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Underlying risks in the global economy have not abated and there is still good reason to be worried about the future growth prospects of large economies. This was the clear message from IMF’s second ...

Underlying risks in the global economy have not abated and there is still good reason to be worried about the future growth prospects of large economies. This was the clear message from IMF’s second bi-annual outlook released in October 2013. We cover this in the section on Global Trends in this month’s issue of Economy Matters.

In the section on Domestic Trends, we discuss the trends emanating out of the recent releases on Current Account, IIP and Inflation during the month of October 2013.

The Sectoral spotlight for this issue is on Food Processing, which has shown robust performance in the recent years owing to factors such as growing per capita income, large availability of raw materials, changing lifestyles, and conducive government policies.

In the Special Article, we discuss the key drivers and reasons behind high food inflation plaguing the economy currently.

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    CII Economy Matters, September-October 2013 CII Economy Matters, September-October 2013 Document Transcript

    • ECONOMY MATTERS Volume 01 September-October 2013 10 12 14 6 8 2 4 16 18 Food Inflation in India No. 9
    • FOREWORD Underlying risks in the global economy have not abated and there is still good reason to be worried about the future growth prospects of large economies. This was the clear message from IMF's second bi-annual outlook released in October 2013. Taking cognizance of the risks, the multilateral agency pared its global growth forecast by 0.3 per cent to 2.9 per cent for the current year. The slower-than-expected growth this year is mainly attributable to the sluggish growth in the emerging economies. However, notwithstanding the dim prospects of emerging economies, they still continue to account for the bulk of global growth. Growth in the advanced economies has turned around to some extent, but the durability of the recovery process remains a concern, noted IMF. In this regard, the resolution of the debt crisis in US, in the nick of time, came as a huge relief. Coming to the domestic front, the resurgence of current account deficit (CAD) to 4.9 per cent of GDP during April-June 2013 quarter from 3.6 per cent in the last quarter clearly indicates that the economy continues to remain vulnerable to the external environment. However, going forward, the positive turn in exports evidenced during the past two months along with early signs of revival in the US economy would bring down CAD. A favourable policy environment such as lowering the cost of credit for exporters and providing priority sector status for export finance to improve cost competitiveness in international markets would help to further improve exports. Other indicators of economic health like industrial production continued to exhibit stress. In order to lift industrial growth, we urge the government to take immediate action to bring demand back into the economy. Easing monetary policy alone is not sufficient. This must be supplemented with government action to revive investment and stimulate demand. There is a crying need to expedite project clearances, implement the national manufacturing policy, indicate timelines for implementation of industrial and freight corridors and provide a competitive market for the coal and mining sectors. High food inflation has been one of the key drivers of overall WPI inflation since the last many years. High food inflation, in turn, has been primarily driven by supply-side shocks. The shocks arose from a shortfall in food-grain and non-food grain commodities (vegetables, fruits, protein-based foods - pulses, milk, eggs, meat and fish). Sharp increases in international prices of fuels and commodity too were a trigger. The concerns over food inflation are driven by the fact that an average household in India still spends almost half of its expenditure on food, with the poor spending as much as 60 per cent. With the National Food Security Act on the anvil, it will be ever more important to rein in food inflation. There are several policy prescriptions suggested in order to contain high food prices like liberalising agricultural markets, developing advanced supply chains and, developing integrated agri-intelligence hubs amongst other measures. Chandrajit Banerjee Director-General, CII 1 SEPTEMBER-OCTOBER 2013
    • The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India, partnering industry, Government, and civil society, through advisory and consultative processes. CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in India's development process. Founded over 118 years ago, India's premier business association has over 7100 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 enterprises from around 257 national and regional sectoral industry bodies. CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized services and strategic global linkages. It also provides a platform for consensus-building and networking on key issues. Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated and inclusive development across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment of women, and water, to name a few. The CII Theme for 2013-14 is Accelerating Economic Growth through Innovation, Transformation, Inclusion and Governance. Towards this, CII advocacy will accord top priority to stepping up the growth trajectory of the nation, while retaining a strong focus on accountability, transparency and measurement in the corporate and social eco-system, building a knowledge economy, and broad-basing development to help deliver the fruits of progress to all. With 63 offices, including 10 Centres of Excellence, in India, and 7 overseas offices in Australia, China, Egypt, France, Singapore, UK, and USA, as well as institutional partnerships with 224 counterpart organizations in 90 countries, CII serves as a reference point for Indian industry and the international business community. ABOUT CII Research The CII Research team regularly tracks economic, political and business developments within India and abroad to comment on the emerging economic scenario for the Indian corporate sector. It tracks policy developments, offers comprehensive analysis of industries and comments on and analyzes the economic climate through its regular publications– Economy Matters, Business Outlook Survey and, Fortnightly Economic Updates. We have in-house expertise in providing the most comprehensive, in-depth, unbiased and incisive analysis and forecasts on the Indian economy and various sectors. CII Research is also well versed and well equipped to offer customized research based consultancy services on any theme. It has been catering to the needs of various stakeholders including industries, business houses and government providing meaningful insights about the prevailing trends, outlook on likely future trends, factors behind these trends, existing government policies and policy recommendations with an objective to help stakeholders in better understanding of the issues at hand. The objective of CII Research is to assist stakeholders in taking more informed and strategic decisions with due focus on the attainment of short term as well as long term goals. For more details and to advertise in our products, write to us at ecoresearch@cii.in DISCLAIMER Copyright © 2013 by Confederation of Indian Industry (CII), All rights reserved. No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the copyright owner. CII has made every effort to ensure the accuracy of information presented in this document. However, neither CII nor any of its office bearers or analysts or employees can be held responsible for any financial consequences arising out of the use of information provided herein. However, in case of any discrepancy, error, etc., same may please be brought to the notice of CII for appropriate corrections. Published by Confederation of Indian Industry (CII), The Mantosh Sondhi Centre; 23, Institutional Area, Lodi Road, New Delhi110003 (INDIA), Tel: +91-11-24629994-7, Fax: +91-11-24626149; Email: info@cii.in; Web: www.cii.in ECONOMY MATTERS 2
    • CONTENT Inside This Issue Executive Summary .................................................................04 Overview of the World Economic .....................................05 Outlook Projections Global Trends Cover Story 06 IMF Predicts a Grim Outlook for the Global Economy Domestic Trends High food inflation is the worst form of hidden tax often inflicted on poor people. Supply-side shocks have led to high food inflation in the last few years. The shocks arose from a shortfall in food-grain and non-food grain commodities (vegetables, fruits, protein-based foods - pulses, milk, eggs, meat and fish). We discuss the various aspects of food inflation to explore its hows and whys coupled with recommended policy prescription to tame it in this month's Special Article. 09 Current Account Deficit, IIP, Inflation CII-BOS Taxation 16 Base Erosion and Profit Shifting Sector in Focus 18 Food Processing Special Article 23 Food Inflation in India Special Feature 35 Impact of Government Moves on Fertilizer Industry Economy Monitor ................................................................... 39 3 SEPTEMBER-OCTOBER 2013
    • EXECUTIVE SUMMARY economy. Driven by factors such as growing per capita income, large availability of raw materials, changing lifestyles, and conducive government policies, the sector has shown robust growth performance in the recent years. The FP sector in India, however, has yet to go a long way in realizing its full potential, which in turn will also help in ensuring remunerative prices to farmers and affordable prices to consumers, thereby resulting in a win-win situation to both. Given the huge unexploited potential of agriculture in the country and rapidly growing per capita income leading to ever expanding demand for agriculture and processed food products, not only is India capable of fulfilling its own food demand, it has vast potential to become top five food exporter over the next two decades. This in turn, will also make the Indian food business an exciting investment destination for global players. The need of the hour is to trigger the process of transformation in the sector towards realizing its full potential in meeting the growing demand and thus in the process creating income, employment and, export earnings for the country. Global Trends Highlighting the underlying global risks still prevailing on the horizon, International Monetary Fund (IMF) in its second bi-annual outlook released in the first week of October 2013, pared its global growth forecast by 0.3 per cent to 2.9 per cent. The slower-than-expected growth in the current year is mainly attributable to the sluggish growth in the emerging economies. Growth rates in emerging markets and developing economies are now down some 3 percentage points from 2010 levels, with Brazil, China, and India accounting for about two-thirds of the decline. The largest economy in the group, China is expected to now grow by 7.6 per cent in the current year as compared to 7.8 per cent in the July forecast. This slowdown will reverberate across developing Asia, where growth is expected to remain between 6.25 and 6.5 per cent in 2013-14. In sum, the latest round of forecasts from IMF clearly indicates that the glimmer of hope seen in its April review seems to have faded somewhat. Domestic Trends Special Article The latest data for the Indian economy released for the first-quarter of 2013-14 shows that the current account deficit (CAD) widened to 4.9 per cent of GDP from 3.6 per cent in the previous quarter. Widening of CAD in the first quarter was due to a sharp increase in gold imports. On BoP basis, there was a slight drawdown in foreign exchange reserves of US$0.3 billion in the first quarter as against an accretion of US$0.5 billion in same period of last year. Going forward, however CAD is expected to exhibit an improvement due to several policy measures announced in the last few months, like curb on gold imports coupled with moderating imports due to slowdown in domestic demand. In other domestic developments during the month, index of industrial production (IIP) decelerated to 0.6 per cent in August 2013 as compared to 2.8 per cent in the previous month and 2.0 per cent in the same period last year. Contraction in manufacturing output during the month was the key driver behind the deceleration in overall industrial output. WPI inflation on the other hand, accelerated to 7-month of 6.5 per cent in September 2013 as compared to 6.1 per cent in the previous month mainly because of higher vegetable prices. Low growth and high inflation has given rise to a stagflationary type of environment in the economy currently. India has been facing high and persistent inflation in the last five years except in the intervening year of 2009-10. High growth during this period facilitated a steep rise in incomes, which in turn pushed up the purchasing power of the population. WPI inflation averaged 7.5 per cent in the five year period, which is way higher than the RBI's comfort threshold of 5 per cent. One of the main drivers of inflation during this period has been the high food prices. Total food inflation (primary and manufacturing) has averaged 10.3 per cent during the period under consideration. To be sure, in the current fiscal, even though overall WPI inflation has averaged 5.3 per cent in the first five months (April-August), food inflation has remained high at 9 per cent. Further, food inflation has remained above the psychological 10 per cent mark in 26 months out of 60 months in the last five years, while it has remained above 9 per cent mark for more than two-thirds of the period. This clearly highlights the fact that food inflation in the past few years has remained not only high, but persistent as well. The concerns over food inflation are driven by the fact that an average household in India still spends almost half of its expenditure on food, with the poor spending as much as 60 per cent. Such price spikes adversely impacts the household budget allocation for food and non-food items. Sector in Focus: Food Processing Food processing (FP) is an emerging sector of the Indian ECONOMY MATTERS 4
    • GDP FORECAST Overview of the IMF World Economic Outlook Projections Year over Year (%) GDP at market prices Difference from July 2013 WEO Update Projections 2011 2012 2013 2014 2013 2014 World Ouput 3.9 3.2 2.9 3.6 -0.3 -0.2 Advanced Economies 1.7 1.5 1.2 2.0 0.0 0.0 United States 1.8 2.8 1.6 2.6 -0.1 -0.2 Euro Area 1.5 -0.6 -0.4 1.0 0.1 0.0 - Germany 3.4 0.9 0.5 1.4 0.2 0.1 - France 2.0 0.0 0.2 1.0 0.3 0.1 - Italy 0.4 -2.4 -1.8 0.7 0.0 0.0 - Spain 0.1 -1.6 -1.3 0.2 0.3 0.1 -0.6 2.0 2.0 1.2 -0.1 0.1 United Kingdom 1.1 0.2 1.4 1.9 0.5 0.4 Canada 2.5 1.7 1.6 2.2 -0.1 -0.1 Emerging & Developing Economies 6.2 4.9 4.5 5.1 -0.5 -0.4 Russia 4.3 3.4 1.5 3.0 -1.0 -0.3 China 9.3 7.7 7.6 7.3 -0.2 -0.4 India* 6.3 3.2 3.8 5.1 -1.8 -1.1 ASEAN-5 4.5 6.2 5.0 5.4 -0.6 -0.3 Brazil 2.7 0.9 2.5 2.5 0.0 -0.7 South Africa 3.5 2.5 2.0 2.9 0.0 0.0 Japan Source: IMF, WEO Update, October 2013 Note: * For India, data and forecasts are on a fiscal year basis. At factor costs, GDP forecasts stand at 4.25 per cent and 5 per cent in FY14 & FY15 respectively 5 SEPTEMBER-OCTOBER 2013
    • GLOBAL TRENDS IMF Predicts a Grim Outlook for the Global Economy second half of 2012. It should pick up to 3.6 per cent in 2014, but that is still weaker than the IMF's previous forecast of 3.8 per cent. The slower-than-expected growth in the current year is mainly attributable to sluggish growth in emerging economies. The differing growth dynamics between the major economies are projected to come with subdued inflation pressure, for two reasons. First, the pickup in activity in the advanced economies will not be sufficient to mitigate the large output gaps. Secondly, the commodity prices have fallen amid improved supply and lower demand growth from key emerging market economies, notably China. H ighlighting the underlying global risks still prevailing on the horizon, International Monetary Fund (IMF) in its second bi-annual outlook released in the first week of October 2013, pared its global growth forecast by 0.3 per cent to 2.9 per cent. As per the IMF, global growth averaged just 2.5 per cent during the firsthalf of 2013, which is about the same pace as in the IMF Scales Down Global Growth Forecasts (Growth, %) 7.8 7.6 5.6 3.8 3.1 2.9 1.6 1.7 -0.6 July'13 Oct'13 World Source: IMF Outlook, October 2013 ECONOMY MATTERS July'13 Oct'13 July'13 US -0.4 Oct'13 July'13 Euro Area Oct'13 China Note: India's forecasts are for fiscal year and at market prices 6 July'13 Oct'13 India
    • IMF's new assessment of medium-term prospects in large emerging economies - China, India, Brazil and South-Africa is the most sobering one. Having been optimistic from 2010 onward that emerging Asia could grow faster than its pre-2008 trend, IMF is now sceptical about its growth prospects. Notwithstanding the dim prospects of the emerging economies, they continue to account for the bulk of global growth. According to the Fund, the blame lies not with the policies of the US or Europe, but delays in structural reforms that differ from country to country. Emerging market and developing economy growth rates are now down some 3 percentage points from 2010 levels, with Brazil, China, and India accounting for about two-thirds of the decline. According to IMF forecasts, the group is expected to grow by 0.5 per cent points lower at 4.5 per cent in the current year, while next year the growth is expected to stand at 5.1 per cent. The largest economy in the group, China is expected to now grow by 7.6 per cent in the current year as compared to 7.8 per cent in the July forecast. This slowdown will reverberate across developing Asia, where growth is expected to remain between 6.25 and 6.5 per cent in 2013-14. The forecasts assume that Chinese authorities do not enact major stimulus and accept somewhat lower growth, consistent with the transition to a more balanced and sustainable growth path. India's economy will grow by 3.8 per cent this fiscal year (April-March) as per the IMF, lower than the rate at which Sub-Saharan Africa's economy will expand (5 per cent). To be sure, the numbers are based on GDP estimates at market prices which IMF prefers. At factor cost, the fund expects India's growth to come at 4.25 per cent in the current fiscal and about 5 per cent in the next fiscal. Growth in the advanced economies has turned around to some extent, but as per the IMF, the durability of the recovery process is a concern. The fund expects that the impulse to global growth would come mainly from the US, where activity will move into higher gear as fiscal consolidation eases and monetary conditions stay supportive. GDP growth of US at 1.6 per cent in the current year is expected to be lower by 0.1 per cent than the July forecast, while next year it is expected to come at 2.6 per cent. In the Euro Area, business confidence indicators suggest that activity is close to stabilizing in the periphery and already recovering in the core economies. Consequently, IMF raised its forecast for the 17-country Euro Area to a contraction of 0.4 per cent this year compared with a 0.6 per cent decline in July forecast. It now expects an expansion of 1 per cent next year instead of 0.9 per cent three months ago. While Italy and Spain are expected to shrink this year, Spain's forecast contraction of 1.3 per cent is an improvement from a 1.6 per cent prediction three months ago. As per the IMF, the region's financial industry still remains fragile and next year's planned assessment of the banks' balance sheets by the European Central Bank "provides a critical opportunity to put the system on a sounder footing. In sum, the latest round of forecasts from IMF clearly indicates that the glimmer of hope they saw in their April review seems to have somewhat faded as new challenges have emerged on the horizon. The belowpar performance by the emerging economies led by China is mainly responsible for this. The Fund in no uncertain words clearly indicated that global growth is still weak, its underlying dynamics are changing, and the risks to the forecast remain to the downside. passed the measure on a 81-18 vote, and the Republicancontrolled House followed suit 285 to 144, clearing the way for President Obama to sign it into law. The deal, however, offers only a temporary fix and does not resolve the fundamental issues of spending and deficits that divide Republicans and Democrats. It funds the government only until January 15th 2014 and raises the debt ceiling until February 7th 2014. Last Minute Deal Averts a Major Default by the US Capping weeks of political brinkmanship that had unnerved global markets, the US Senate and House of Representatives each passed the spending measure after Republicans dropped efforts to link the debt legislation to changes in President Barack Obama's signature healthcare law, hours before the October 17th deadline. The Democratic-led Senate overwhelmingly Technically, the US$16.69 trillion debt ceiling was hit on 19th May, 2013. The US Treasury has been using extraordinary measures to keep going. If Congress 7 SEPTEMBER-OCTOBER 2013
    • a major feature of 'Obamacare' (officially Patient Protection and Affordable Care Act). hadn't raise the so-called "debt ceiling", then the Treasury estimated that it can only stretch out the money until 17th October. At which point, it could run out of money to pay the interest on US government debt, and the US would technically be in default if it missed an interest payment. However, in a last minute deal reached hours before the 17th October 2013 deadline was expiring, both the houses passed the legislation to avoid a damaging default on government debt, in order to pull back the economy from the brink of a historic debt default that could have threatened financial calamity. o Meanwhile, the 'Senate' (Democrat-majority) opposed all moves of the 'House' to delay Obamacare by a year. The US is not new to the government shutdown, though it is not frequent. The first government shutdown happened in 1976. Since then, there have been 17 occasions when there was no agreement on the funding of government spending. The last time was 17 years ago during the Clinton administration, which also saw the House and Senate divided over spending priorities. The current shutdown would have a fairly big impact on the economy. Economists estimate that a two-week shutdown could cut US GDP growth by 0.3 percentage points and one that lasts three-to-four weeks could cut growth by as much as 1.4 percentage points. Earlier in the month, the two houses of the US Congress the Democrat-led "Senate" and the Republican majority "House of Representatives" had failed to agree over extending funding for the government's non-essential expenditures before the October 1 deadline, resulting in US government shutdown for more than two weeks. Before the start of the new Budget year 2013-14, the Congress was required to pass appropriation bills to fund the 'discretionary' spending programmes. However, political disagreement saw failure to pass the required bills. The two houses of the Congress could not agree on the following terms of funding extensions: The US Government consequently ordered a shutdown of its various non-essential services. Consequently, around 800,000 employees of the Federal Government (out of total 2.1 million) went on unpaid leave. The 'discretionary' or 'non-essential services' were affected. However, essential services like, military, federal police, air traffic control, postal services continued unaffected. o The US 'House of Representatives' (Republicanmajority) wanted a one-year delay in the activation of Other Global Developments During the Month - China's economy grew by 7.8 per cent in the third quarter, picking up from 7.5 percent in the second quarter and compared with 7.7 percent in the first. The latest expansion was the strongest since 7.9 percent in the fourth quarter of 2012. Growth was fuelled by firmer foreign and domestic demand that lifted factory production and retail sales. - Higher food prices pushed up China's consumer inflation to 3.1 per cent in September, up from 2.6 per cent in August as the government tried to keep to keep an economic recovery on track. - Headline inflation in UK stood at 2.7 per cent in September 2013, unchanged from August 2013. Core inflation, however, was higher at 2.2 per cent during the reporting month, as against 2.0 per cent in the previous two months. - Business sentiment in Japan rose to its highest level in almost six years in the September quarter, the closelywatched Bank of Japan's Tankan survey showed. The headline index of sentiment among big manufacturers rose to plus 12 in the three months to September from plus 4 in the June quarter. - In a bid to cut Japan's mounting domestic debt, Prime Minister, Shinzo Abe, announced the decision to raise sales tax by 3 percentage points to 8 per cent from April of next year, the first increase since 1997. To cushion the blow, he unveiled a package to be compiled in early December, which a Cabinet Office statement showed will include public works spending and tax breaks encouraging companies to boost capital spending and wages. ECONOMY MATTERS 8
    • DOMESTIC TRENDS Rise in Gold Imports Widens Current Account Deficit in 1QFY14 US$14.5 billion, which translates into 3.2 per cent of GDP. On BoP basis, there was a slight drawdown in foreign exchange reserves of US$0.3 billion in the first quarter as against an accretion of US$0.5 billion in same period of last year. Going forward, CAD is expected to exhibit an improvement due to several policy measures announced in the last few months, like curb on gold imports coupled with moderating imports due to slowdown in domestic demand. As per the Ministry of Commerce and Industry, exports in the second quarter (July-September 2013) grew by 5.1 per cent while imports fell by 1.8 per cent. This resulted in narrowing of the trade deficit to US$29.9 billion as compared to US$50.2 billion in the first quarter. T he latest data released for the first-quarter of 201314 shows that the current account deficit (CAD) widened to 4.9 per cent of GDP from 3.6 per cent in the previous quarter. Widening of CAD in the first quarter was due to a sharp increase in gold imports. As per RBI, by excluding the increase in gold imports of US$7.3 billion in first quarter of 2013-14 over the corresponding quarter of the preceding year, CAD would work out to Current Account Deficit Reaches Alarming Levels 35 8.0 6.7 7.0 30 5.4 25 20 3.6 4.0 22.6 18.1 17.1 21.8 Source : RBI 3.0 2.0 1.0 5 0 5.0 4.0 32.6 15 10 6.0 4.9 0.0 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 CAD (as a % of GDP) RHS CAD (US$ billion) 9 SEPTEMBER-OCTOBER 2013
    • quarter of 2012-13, primarily led by a steep rise in gold imports in the first two months of the quarter. Within the invisible category, while net services exports improved (i.e. US$16.9 billion in first quarter of 2013-14 as compared to US$15.0 billion in first quarter of 2012-13) transfers (US$ 16.7 billion) and income (-US$4.8 billion) were broadly flat as compared to same period last year. As a result of wider trade deficit and slow recovery in the transfers and income component of the invisible segment, CAD widened in the reporting quarter. Merchandise trade deficit (BoP basis) widened further to US$50.5 billion in first quarter of 2013-14 from US$43.8 billion a year ago. Component wise, merchandise exports declined by 1.5 per cent on y-o-y basis to USD$73.9 billion in the first quarter as compared to US$75.0 billion in the same period of last fiscal. The muted exports sector performance primarily reflects the subdued global growth prospects. In contrast, merchandise imports recorded an increase of 4.7 per cent at US$124.4 billion in the reporting quarter as against a decline of 3.9 per cent at US$118.9 billion in first Current Account Deficit Widens in 1QFY14 (US$ billion) Q1FY13 Q4FY13 Q1FY14 Trade Balance -43.8 -45.6 -50.5 - Exports 75.0 84.8 73.9 - Imports 118.9 130.4 124.4 26.8 27.5 28.7 - Services 15.0 17.0 16.9 - Transfers 16.7 15.7 16.7 - Income -4.9 -5.2 -4.8 Current Account Balance -17.1 -18.2 -21.8 Current Account Balance as a % of GDP -4.0 -3.6 -4.9 Invisibles Source : RBI dwindled to net outflow of US$245 million, while net overseas borrowing by banks increased by 57.5 per cent to US$4.7 billion in first quarter of 2013-14. Outflow of portfolio investment occurred essentially from the third week of May 2013 after the US Fed indicated the possible tapering of quantitative easing. In the capital account, foreign investment improved to US$3 billion in the first quarter of the current fiscal as against US$1.9 billion in the same quarter last year. The improvement was entirely on account of strong FDI flows. Net foreign direct investment surged sharply by a huge 71 per cent on an annual basis to US$6.5 billion in the reporting quarter. Portfolio investments meanwhile Capital Account Remains Unchanged (US$ billion) Q1FY13 Q4FY13 Q1FY14 - Direct Investment 3.8 5.7 6.5 - Portfolio Investment -1.9 11.3 -0.2 Loans 6.0 9.2 3.6 Banking Capital 9.4 -3.6 10.3 Other Capital -0.7 -2.1 0.3 Capital Account 16.5 20.5 20.5 0.5 2.7 -0.3 Overall BoP Source: RBI ECONOMY MATTERS 10
    • Outlook The resurgence of current account deficit to 4.9 per cent of GDP during April-June 2013 quarter from 3.6 per cent in the last quarter is essentially on account of the burgeoning trade deficit and indicates that the economy continues to remain vulnerable to external environment. However, going forward, with the positive turn in exports evidenced during the second quarter along with early signs of revival of the US economy and strengthening of the economies of both Japan and China, CAD during the current fiscal is expected to come down. Industrial Growth Decelerates in August 2013 Springing a negative surprise, index of industrial production decelerated to 0.6 per cent in August 2013 as compared to 2.8 per cent in the previous month and 2.0 per cent in the same period last year. The main driver behind the subdued growth during the month was the de-growth witnessed in the manufacturing sector. However, the moderation of industrial output in August was surprising as the eight infrastructure industries (which constitutes close to 38 per cent of the total index) had posted a 7-month high growth rate of 3.7 per cent during the month on the back of good performance by power, cement, steel and fertiliser sectors. The sequential momentum declined too as the seasonally-adjusted month-on-month series slid into the negative territory in August 2013. On a cumulative basis, for the first four months of the fiscal, IIP growth stood at a paltry 0.1 per cent. IIP Growth Moderates in August 2013 SA m-o-m% y-o-y% 10 5 Aug/13 Jun/13 Apr/13 Feb/13 Dec/12 Oct/12 Aug/12 Jun/12 -5 Apr/12 0 Source : CSO On the sectoral front, manufacturing output declined by 0.1 per cent in August 2013 after registering a relatively robust growth of 3.2 per cent in the previous month. As per the industry classification, of the 22 industries, 14 showed positive growth, mainly led by electrical machinery and wearing apparel, while negative growth was seen in sectors such as radio, TV & communication equipment and furniture. Rebound of manufacturing sector output is very critical for aiding the pickup in overall industrial growth. In this respect it's important for the RBI to cut interest rates at the earliest and for government to ensure the fast track implementation of National Manufacturing Policy amongst implementing other measures. Meanwhile, regulatory and environmental issues continued to plague the mining sector, as it contracted by 0.2 per cent in August 2013. Electricity sector remained on a strong footing as it grew by 7.2 per cent during the month as compared with 5.2 per cent in the previous month. 11 SEPTEMBER-OCTOBER 2013
    • On the use based front, after growing in double-digits in July 2013, capital goods once again slipped into the negative territory in August 2013. The sector's output contracted by 2 per cent as compared to 15.6 per cent growth in the previous month. The sector's poor performance in the month is worrisome as its output declined on the back of a low base of last year. Notably, industrial production output excluding capital goods sector stood at 1.0 per cent during the month. Consumer goods continue to remain in negative territory for the fourth consecutive month, primarily on account of consumer durables. Overall consumer goods sector showed de-growth to the tune of 0.8 per cent in August 2013 as compared to -0.5 per cent in the previous month. The continued poor performance by consumer durables since last the last three quarters, wherein it remained in the negative territory, is a matter of concern as it is widely regarded as a proxy for consumption growth. Non-durables on the other hand remained in the positive territory, albeit showing a moderation in output in August 2013 as compared to the previous month. Sectoral Growth Apr-Aug Weight Aug-12 Jun-13 July13 Aug-13 FY13 FY14 1000.0 2.0 -1.8 2.8 0.6 0.2 0.1 Manufacturing 755.3 2.4 -1.7 3.2 -0.1 0.0 -0.1 Mining 141.6 -0.3 -4.3 -2.5 -0.2 -1.7 -3.4 Electricity 103.2 1.9 0.0 5.2 7.2 4.8 4.5 456.8 3.0 -1.5 1.5 1.5 2.8 0.5 88.3 -4.4 -5.8 15.6 -2.0 -14.4 0.8 Intermediates 156.9 2.7 1.3 3.1 3.6 1.0 2.3 Consumer Goods 298.1 3.6 -1.9 -0.5 -0.8 3.2 -1.6 - Durables 84.6 1.0 -10.4 -8.9 -7.6 5.1 -11.0 - Non durables 213.5 6.0 5.7 7.0 5.0 1.6 6.6 General Use-Based Basic Capital Source : CSO Outlook The lower-than-expected industrial growth in the month of August 2013 is worrying as it follows healthy performance by the core sector output. Contraction in manufacturing output during the month was the key driver behind the deceleration in overall industrial output. In this regard, CII, while fully appreciating the RBI's compulsions to keep inflation under check, urges RBI to start reducing the interest rates to revive demand. However, easing monetary policy alone is not sufficient. It would need to be complemented with policy measures on the part of government in the form of easing the procedural reforms by ensuring faster clearances of industrial projects. The Cabinet Committee on Investment (CCI) which was constituted by the government to achieve the latter has not shown the desired results so far. ECONOMY MATTERS 12
    • Inflation Continues to Remain a Worry WPI inflation accelerated to 7-month of 6.5 per cent in September 2013 as compared to 6.1 per cent in the previous month mainly because of higher vegetable prices. This is the fourth straight month that wholesale inflation has remained above the Reserve Bank of India's comfort zone of 5 per cent. Indicating the upward sequential momentum, the seasonally-adjusted monthon-month series climbed to 1.2 per cent during the month. The July reading was also revised up to 5.85 per cent versus prior estimate of 5.79 per cent, mainly on an upward revision in primary articles inflation to 9.7 per cent from 9.0 per cent previously. Manufactured products inflation, however, has been revised down to 2.6 per cent from 2.8 per cent previously. To be sure, consumer prices based inflation (CPI) too quickened to 9.84 per cent from 9.52 per cent during the month. Rising food prices have continued to remain the key driver behind the jump in both WPI and CPI inflation in the last few months. We analyse this component in detail in this month's Special Article. Both WPI & CPI Inflation Remain High % 12 10.9 10 8 9.9 7.3 6.5 6 WPI y-o-y Sep/13 Aug/13 Jul/13 Jun/13 May/13 Apr/13 Mar/13 Feb/13 4 CPI (Combined) y-o-y Source : Office of Economic Advisor & CII calculations Primary inflation increased to 13.5 per cent in August 2013 as compared to 11.7 per cent in the previous month. This was mainly attributable to the spike in food inflation to 18.4 per cent as against 18.2 per cent in August-2013. The major increase in the food inflation came on account of a rise in inflation in vegetables to 89.4 per cent as compared to previous month's reading of 77.8 per cent. More specifically, a massive 323 per cent rise in onion inflation drove bulk of the rise in vegetable inflation during the month. Meanwhile, the structural inflation in protein rich-items particularly eggs, meat and fish slipped to 13.4 per cent as against 18.9 per cent in the previous month. Non-food inflation increased to 5.2 per cent as against 1.1 per cent in the previous month. Within non-food articles, the inflation in fibres jumped to 19.9 per cent as against previous month's reading of 10.5 per cent while it continued to remain very low in case of oilseeds. very favourable base effect. This has been mainly contributed by an increase in non-administered fuel component during the month. Inflation in petrol has tripled to 9.6 per cent as against 3.2 per cent in August2013, while inflation in diesel remained high at more than 20 per cent. Going forward, we expect fuel inflation to moderate due to stabilisation witnessed in global crude prices and the Rupee. Manufacturing inflation marginally increased to 2.0 per cent in August as compared to 1.9 per cent last month. Non-food manufacturing which is widely regarded as the proxy for demand-side pressures in the economy too increased marginally to 2.1 per cent during the reporting month as compared to 1.9 per cent last month. In contrast, manufacturing food inflation which consists of processed food products remained relatively subdued at 1.6 per cent as compared to 1.7 per cent in the previous month. Inflation under this head has fallen sharply in the last few months from 7.3 per cent at the start of the fiscal to below 2 per cent currently. This is Fuel inflation moderated to 10.1 per cent in August 2013 as against 11.3 per cent in the previous month amidst a 13 SEPTEMBER-OCTOBER 2013
    • reflective of the low pricing power of the producers as despite a steep in raw material prices (which primarily consist of food articles); they are not able to pass the price rise to the end-consumers. Sectoral Components of Inflation April-Sept Weight Sept-12 July13 Aug-13 Sept-13 FY13 FY14 General 100.0 8.1 5.9 6.1 6.5 7.6 5.3 Primary 20.1 9.2 9.7 11.7 13.5 10.3 8.2 - Food 14.3 8.1 12.3 18.2 18.4 10.4 11.0 - Non-Food 4.3 10.4 5.7 1.1 5.2 8.8 5.3 - Minerals 1.5 13.9 0.5 -7.2 0.0 12.3 -3.5 14.9 12.0 11.4 11.3 10.1 10.5 9.2 1.1 6.7 1.2 3.2 9.6 10.5 -0.9 4.7 8.9 26.3 27.6 20.1 5.0 23.8 65.0 6.5 2.6 1.9 2.0 5.6 2.9 - Food 10.0 10.3 4.3 1.7 1.6 6.9 5.2 - Non-food 55.0 5.7 2.3 1.9 2.1 5.4 2.4 Fuel - Petrol - High Speed Diesel Manufacturing Source : Office of Economic Advisor Outlook The continued rise in both WPI and CPI inflation has complicated the task of RBI as it meets this month-end to announce its second quarter monetary policy review. However one needs to remember that the bulk of the rise in inflation is attributable to jump in primary food inflation which is generally transient in nature and is expected to cool-off in the next few months, given the positive impact of a good monsoon this year. Under this backdrop, we would urge RBI to cut rates in the policy review, as the economy is in urgent need of fresh stimulus in the form of lower lending rates. CII Business Confidence Index Falls Sharply in Q2FY14 In an indication of continuing slowdown in the second quarter of current fiscal, CII Business Confidence Index (CII-BCI) fell by 5.5 points to its lowest ever value to 45.7 for the July-September 2013 quarter from 51.2 in the previous quarter. The dip below the psychological 50level mark does not augur well for the Indian industry as it mirrors the underlying weakness in the economy and has dashed any hopes of growth having bottomed out. The 84th Business Outlook Survey is based on the responses from 190 companies. improvement expected in the growth of agriculture output in the current year, achieving a GDP growth of around 5.5 per cent should be possible, if reforms efforts are sustained by the government and RBI eases the monetary stance going forward. Indicating that the economy is moving towards a situation of stagflation, respondents said that inflation has emerged as a major area of concern. A majority (47 per cent) of the respondents maintained that WPI inflation is expected to lie above 7 per cent for the current fiscal. However, by leveraging on a good monsoon, there is an ample scope for lowering the inflationary expectations by easing the distribution chain of food items. Most of the survey respondents (40 per cent) expected GDP growth to decelerate below 5 per cent in the current fiscal. However, a large proportion of 38 per cent of the respondents expect GDP growth to range between 5.0-5.5 per cent for the year. With a significant ECONOMY MATTERS The survey reveals that majority of respondents (57.3 14
    • CII's 84th Business Outlook Survey is based on sample survey of firms covering all industry sectors, including micro, small, medium and large enterprises from different regions. The survey also enumerated responses across industry groups both in public and private sectors engaged in manufacturing and services sector. per cent) expected capacity utilization to be below 75 per cent in the second quarter, while 69.1 per cent expected their company's spending on capacity expansion to have either declined or remained unchanged in the comparable period. Majority of the respondents (53.9 per cent) in the CII survey expected current account deficit to lie in a range of 4.0-5.0 per cent of GDP, while 32.6 per cent expected it to exceed 5 per cent of GDP in the current fiscal. Not surprisingly, therefore, majority of the respondents (57 per cent) expected the rupee to lie above 62 per US$ by endMarch 2014. CII-BCI is calculated as a weighted average of the Current Situation Index (CSI) and the Expectation Index (EI), with greater weight given to EI as compared to CSI. These indices are based on questions pertaining to performance of the economy and respondent's firm. Respondents are asked to rate the current and expected performance on a scale of 0 to 100. A score above 50 indicates positive confidence while a score above 75 would indicate strong positive confidence. On the contrary, a score of less than 50 indicates a weak confidence index. In the survey, high current account deficit, expectations of tapering of QE by US Federal Reserve leading to capital outflows and weak domestic sentiments were cited as major contributors for the weakening of the rupee. CII Business Confidence Index 66.2 66.7 62.5 53.6 Q3* FY11 Q4 FY11 Q1 FY12 Q2 FY12 48.6 Q3 FY12 55.0 52.9 Q4 FY12 Q1 FY13 51.3 Q2 FY13 49.9 51.3 Q3 FY13 Q4 FY13 51.2 45.7 Q1 FY14 Q2 FY14 Know Your Facts: Marginal Standing Facility (MSF) Reserve Bank of India reduced the Marginal Standing facility (MSF) rate by 50 bps to 9 per cent on October 7, 2013. This follows the reduction in MSF by 75 bps earlier in September 2013. Though traditionally the spread between Repo and MSF was fixed at 100 bps, the same now stands at 150 bps. MSF was brought in under the new operating procedure of monetary policy supplementing the repo and reverse repo rates. Earlier, RBI tried to keep the main money market rates under its LAF corridor of Reverse Repo and repo. This now shifted to Reverse Repo and MSF as corridors with Repo rate in the corridor. Banks are free to borrow any amount under the repo rate as long as they maintain the Statutory Liquidity Ratio (SLR). But in case any bank needs extra funds, it can get the same under the MSF, however at a higher rate. As a part of its liquidity tightening measures announced in July 2013, RBI had hiked the MSF by 200 bps to 10.25 per cent, without touching the key repo rate. Under normal times, banks usually borrow at the repo rate, but in this period, since RBI capped borrowing under repo at 0.5 per cent of NDTL, banks had no option but to borrow under the MSF. Hence, the recent decision of the Central Bank to ease the MSF rate is a bid to smoothen the liquidity requirements for the banks as the Rupee has now appreciated from its all-time lows. Additionally, with the credit deposit (CD) ratio rising to its all time high of 78.3 on 20th September 2013, there was a crying need to lower money market rates and ease liquidity, which was precisely what the RBI did. 15 SEPTEMBER-OCTOBER 2013
    • TAXATION Guest Article Base Erosion and Profit Shifting By Rohinton Sidhwa, Partner and Swati Goyal, Manager, Deloitte Haskins & Sells have a responsibility towards their shareholders to legally reduce the taxes, the same however do not alleviate government's fear around: n Distorted competition and issues with fairness: Businesses which operate cross border and are able to reduce tax expense on account of such planning, are likely to have competitive advantages over enterprises that operate mostly at domestic level. G one are the days when taxpayers were worried about double taxation of cross-border income and would make representations to authorities to draw a legislative framework that would prevent such 'injustice'. The tables seem to have turned and the governments today are vexed about 'double nontaxation'. Google "UK tax avoidance" and you would know what we mean. n Modern tax administration's dependence on voluntary compliance: If the perception that multinationals are dodging taxes continues, it would encourage the opinion that taxes are only paid by the naïve and would undermine the practice of voluntary compliance by other taxpayers. Multinationals these days are being accused of lowering their tax bill by shifting their revenues to low tax jurisdictions like Bermuda, Ireland etc. The structures that are set up or the schemes that are employed are perfectly legitimate, therefore the reference to 'tax avoidance' and not 'tax evasion'. Critics may allege 'immorality'; however there is nothing illegal about tax avoidance, as it involves working well within the framework of tax laws. Hence, the problem. n Detrimental for developing countries: Tax revenue is critical to foster long-term development in such countries. From the UK's Parliament's Public Accounts Committee report criticizing the UK tax avoidance practices of giant global firms to US President Obama stating incomeshifting behavior by multinationals as a serious concern, the issue is grabbing not only media attention, but has also reached political levels. G20 leaders and BRIC countries are expressing concern, and so is the A leading internet company's Chairman defended his company's tax strategies arguing that the corporates ECONOMY MATTERS 16
    • Organization for Economic Co-operation and Development (OECD). In light thereof, the OECD released its initial report in February 2013 to present aspects relating to Base Erosion and Profit Shifting (BEPS). Another report was released in July 2013 which presents a more comprehensive 'action plan' to address the issue of BEPS by identifying the actions needed, setting deadlines to implement these actions and identifying the resources needed and the methodology to implement the actions. overcome this concern, as BEPS may be technically legal, it is not intended by domestic policy. The recent Action Plan Report issued by the OECD sets out 15 areas for further work, some quite specific viz.: n addressing ecommerce situations and examining circumstances where significant digital presence exists in a country without the corresponding taxable presence; n amending the OECD model convention to eliminate undue tax advantages arising from hybrid instruments and entities; One would often come across terms such as 'tax havens', 'low-tax jurisdiction', 'double Irish with a Dutch sandwich strategy' when dealing with BEPS. Simply put, BEPS refers to shifting of profits by corporates in ways that erodes the taxable base to locations where they are subject to a more favorable tax treatment - i.e. moving revenues to where they are taxed at lower rates and expenses to where they are relieved at higher rates. n phishing loopholes in CFC rules, n making recommendations to limit base erosion via interest deductions; n amending transfer pricing guidelines to prevent profit shifting by relocating intangibles or contractually transferring risks and capital within the group etc. As mentioned above, multinationals are not breaking the rules. The issue is with the design of the current tax regulations and the arms' length standards, and not the conduct of multinational companies. Recent years have witnessed globalization and liberalization at a pace unprecedented. Free movement of capital and labor, shift of manufacturing bases from high-cost to low-cost locations, removal of trade barriers, technological and telecom developments, and increasing importance of risk management and IPR have resulted in a shift from country-specific operating models to global models. BEPS strategically takes advantage of the gaps in tax rules or tax arrangements between different countries such that it results in: while others more generic, like: n revisiting disclosure requirements by taxpayers - of their tax planning schemes as well as within the transfer pricing documentation; n making the dispute resolution mechanism more effective; n establishing methodologies to collect and analyze data on BEPS etc. Though changes may be expected to be brought about to the OECD Model Tax Convention and new guidelines are expected to be introduced, the same may not be directly effective since bilateral tax treaties will need to be amended. If undertaken on a treaty-by-treaty basis, the sheer number of treaties in effect may make the process very lengthy. The OECD therefore suggests developing a multilateral instrument which can be signed by various countries and the tax treaties of such signatory countries would stand amended accordingly. n minimizing tax in a foreign operating or source country by shifting gross profits via trading structures or reducing net profit by maximizing deductions for the payer; nor no tax withholding at source; low nor no tax for the recipient; and low The OECD has also outlined the deadlines for carrying out these actions, depending upon the nature thereof and the likely effort involved. Once the detailed work is carried out (last deadline set for December 2015), its effectiveness would really depend upon acceptance, adoption and implementation by various countries. n of the low-taxed profits at the ultimate parent no tax level. Therefore, it is difficult for a particular country to address this issue single-handedly. The OECD Reports suggest tax reforms in the form of a comprehensive internationally coordinated solution to successfully ( Views expressed in the article are those of the authors and not necessarily of CII.) 17 SEPTEMBER-OCTOBER 2013
    • SECTOR IN FOCUS Food Processing Food Processing Sector - Status and Characteristics India is at an inflection point of food consumption with the domestic demand likely to grow at 4 per cent per annum in the next 15-20 years. This growth could be even higher across high value food items like animal products, fruits & vegetables, and processed food. Vast opportunities, thus, exist for the food processing sector in India that needs to be tapped with right set of policies aimed at unlocking the supply potential of the sector. F ood processing (FP) is an emerging sector of the Indian economy. Driven by factors such as growing per capita income, large availability of raw materials, changing lifestyles, and conducive government policies, the sector has shown robust growth performance in the recent years. Connecting agriculture to manufacturing, this sector plays a critical role in value addition to the agriculture produce and creating income, employment and exports earnings in the process. The sector also contributes in reducing the waste of agricultural produce, enhancing the shelf life of agricultural products, and stimulating the nutritive capacity of food items. The FP sector in India, however, has yet to go a long way in realizing its full potential, which in turn will also help in ensuring remunerative prices to farmers and affordable prices to consumers, thereby resulting in a win-win situation to both. Providing food security to large and growing population and managing food inflation are other critical components attached with the healthy performance of the sector. ECONOMY MATTERS The growth and contribution of food processing sector has been encouraging in recent years, thus setting the tone for an improved performance of the sector going forward. As compared to the average overall GDP growth of 8 per cent during 2007-08 to 2011-12, FP sector has expanded by an average of 8.6 per cent per annum during the period. Its growth stayed far ahead of manufacturing and agricultural GDP, indicating the rising prominence of the sector in overall economy. Around 65 per cent production of FP sector comes from the organized segment. Unorganized segment, on the other hand, contributes significantly in term of employment generation with 3/4th of the total persons engaged in the industry (64.6 lakh persons) belonging to 18
    • this segment alone. Organized FP industry in India registered an average growth of 11 per cent per annum during 2007-08 to 2011-12, much higher than 4 per cent registered by unorganized segment. Showing FP's vulnerability to economic slowdown and high inflation, the sector's growth as per the IIP (Index of Industrial Production) stood at mere 2.6 per cent in the last fiscal. Average GDP Growth (%) during 2007-08 to 2011-12 8.6 8.0 7.7 3.8 GDP GDP Agri GDP Manuf. GDP-FP Source: Ministry of Food Processing Industry Average Share of FP(%) in Broad GDP Aggregates during 2007-08 to 2011-12 10.4 8.9 3.7 1.4 Agriculture Manufacturing Industry Overall GDP Source: Ministry of Food Processing Industry Share of Registered and Unregistered FP IIP growth (y-o-y%) 15.4 Un Regd FP 35.4% 8.6 Regd FP 64.6% 8.2 7.0 3.0 2.9 2.6 1.3 2010-11 2011-12 FPI (72.8) Source: Source: Ministry of Food Processing Industry Manf (755.3) 2012-13 General (1000) Note: Numbers in brackets indicate the weights 19 SEPTEMBER-OCTOBER 2013 1.1
    • Exports of FP sector have been growing at an annual growth of 20.4 per cent for five years ending 2012-13. With US$36 billion of exports in 2012-13, the sector contributed 12 per cent to India's total exports. However, export basket of the sector is concentrated in just a few products. Guargum constitutes the largest share (10.9 per cent), followed by rice Basmati (9.9 per cent), Marine products (9.6 per cent), Meat & preparations (9.1 per cent), Oil meals (8.1 per cent), Spices (7.8 per cent), Non-Basmati rice (7.3 per cent), and Wheat (5.4 per cent). access stems from three reasons - lack of adequate farm gate infrastructure (such as storage centres and primary processing centres), fragmented land holdings which makes it difficult for companies to source enough produce of consistent quality, and restrictive policies that limit farm gate access. The lack of adequate infrastructure for processing, cold storage, etc limit the benefits of organized play from reaching the consumers. Showing growing business interest, investment in FP sector grew by an average rate of 21.7 per cent per annum between 2006-07 to 2010-11. The sector accounts for around 5 per cent of the total bank credit outstanding to all industries. The FDI inflow in the sector, which is permissible for all the processed food products up to 100 per cent on automatic route except for items reserved for Micro and Small Enterprises (MSEs), has grown nearly 6 times from a figure of US$70 million in 2007-08 to US$401.5 million in 2012-13. India has made good progress in exports, going from Rs 90,000 crore in 2006 to Rs 1.35 lakh crore in 2012. However, import dependency on critical items such as pulses and edible oils remains high. This is despite the fact that India is the third largest producer of food after China and USA and has a sizeable presence in several crops that are relevant to both the export market and the industry. It is also close to some of the largest food importing regions, eg., the Middle East, China, and South East Asia. Low yield and poor infrastructure limit competitiveness, particularly from farm gate to markets and ports. Exports have suffered due to the lack of active support and sponsorship. Poor infrastructure for primary processing, packing, grading, and inadequate cold chain storage have further held back Indian exports. Unfulfilled export potential Issues Facing the Food Processing Sector Unrealized potential in food processing Food processing industry GDP in India accounts for 10 per cent of agricultural GDP. The size of food processing industry in India in 2010 was just Rs 66,000 crore (at 2004-05 prices), which much below the potential. Under-performance of the sector can primarily be attributed to factors like low demand created for processed food and poor investment in infrastructure. Slowing down of yield improvement While the overall yield in agriculture continues to improve, there has been no scalable success story of substantial yield improvement. The few successes have been small, sporadic, and led by the private sector. In fact, yield increase has actually slowed down across crops over the past few decades, which is a cause for concern since yields for these crops have still not attained their optimum. Low presence in high value categories The level of participation of private players in the food and agriculture sector has been low in India. Despite shifting consumer preferences, the sector is hardly present in high value categories. Overall industry participation in the sector remains low, with few large companies and limited participation from international players. Very few instances of corporate participation have shown their ability to create win-win solutions for all stakeholders by transforming value chains, improving yield and reducing wastage. These successful pilots have failed to achieve scale. The lack of scale is primarily due to structural barriers in farm gate access and the lack of infrastructure to link the benefits of the value addition to the consumers. Systematic difficulties in farm gate ECONOMY MATTERS There are several possible reasons for this lackluster yield performance. First, the quality of research in this area has been inadequate. Second, insufficient technology has been used. Third, extension services to the farmers are not entirely effective. These have translated into a lack of adoption of best practices method among the farmers, which in turn has adversely affected yields. For example, a recent Planning Commission report estimated that of the one million extension workers required, India has an extension workforce of just 1000,00 (10 per cent). The other main cause is the use of outdated practices and inputs. A large number of Indian farmers still depend 20
    • on the monsoon season for irrigation. Only 35 to 40 per cent of cultivated land in India is irrigated and there is minimal penetration of new water saving technologies like drip irrigation. Outdated chemicals continue to be used for fertilizer and pesticides. A paucity of investment in seed technology affects the supply of good quality seeds. as an agriculture and high value food powerhouse: A new vision for 2030", published in April 2013. 1. Accelerate sustainable yield improvement In order to improve the yield on sustainable basis, two new initiatives are necessary. First, instituting a "National Agricultural Technology Mission" and for thatIndia needs a focused programme to create high yielding, disease resistant varieties of seeds across crops, well marketed farmer education and distribution programmme to encourage them to adopt high quality seeds; promote relevant mechanism and modern irrigation practices; catalyze the development of modern technology; align farming techniques to best practices and encourage private participation in ensuring world class farming practices. Second, instituting a "National Agricultural Sustainability Mission" - Objective of this mission should be to dissolve the supply side barriers and provide farmers with seamless linkages to scientific inputs and best practices to realize the true potential of agriculture. Low farmer-industry interactions Farmer-industry interactions in India continue to be low due to restrictive policies and general hesitance of the companies to engage with the farmers. Strengthening the Food Processing Sector In order to transform the food processing sector to meet its true potential and also achieve the vision of converting India into a global food and agricultural powerhouse, we present the summary of 5 points agenda suggested by CII-McKinsey report titled "India Yield Increases (%) Across Crops have Slowed Down 39 30 27 26 24 15 12 11 9 2 Wheat Rice Soyabean 1990-99 Potato Maize 2000-10 Source: CII-McKinsey Report (2013) government should promote organized agri-input retail, which can deliver suitable technologies and farm inputs to the farmers. Third, the government may also consider enabling other land aggregating measures such as long term leases for select crops, which will help in promoting long term investment. Fourth, the government could encourage corporate farming in select high value agriculture areas, particularly for exports. 2. Promote win-win farmer-industry interaction There are various emerging models of successful interactions. The first is funding the growth of Farmer Producer Organisation and Farmer Producer Companies that allow small farmers to use collective strength and increase their competiveness by offering them easier access to credit and technology, reducing cost of distribution and providing greater marketing power and negotiations capacity. Second, the 21 SEPTEMBER-OCTOBER 2013
    • For promoting farmer industry interactions, there is also need for instituting a favorable policy regime that improves agricultural marketing mechanism. An overall policy regime should enable farmers to decide to whom and where they can sell their produce. the development of the pan India infrastructure. The new authority will create a national blueprint for viable agricultural infrastructure that will reduce operating costs for agricultural and foods products and then either build it themselves, or oversee the creation of this infrastructure through the appropriate contracting and Special Purpose Vehicle (SPV) model. 3. Scale up food processing exports To promote large scale production of food items, demand (domestic as well as exports) potential needs to be harnessed by creating new segments of branded food. This can be done by promotions, campaigns and advertisements to illustrate how consumers could benefit. Additionally, "Mega Demand Servicing and Export Hubs" could be created that will allow companies to procure, store, process, and export from a single location. Such hubs will help put in place the necessary forward and backward linkages, along with the storage infrastructure and provide for end-to-end facilities across the value chain. To promote exports, the government could launch a "National Agricultural and Food Export Mission" in select categories. The Mission, set up by the government in association with private players, could enable (a) identifying the right products and markets; (b) investing in market creation; (c) updating evacuation and access infrastructure such as cold chains and ports; (d) adhering to internationally acclaimed benchmarks for quality standards. 5. Nurture the next generation of agri-business technocrats and entrepreneurs In this regard, it is necessary to scale up agricultural extension services through private participation and new infrastructure creation. Initiatives such as introducing PPP in extension services, encouraging private sector to participate in farmer training, and creating dedicated institutes providing vocational training in extension services would greatly help. Attracting 'private capital and world class expertise" would also be critical. Global food majors can be attracted to India though targeted campaigns, such as road shows, and by creating a conducive investment environment. There is also a need for creating a network of four to five new world class food and agricultural universities and research laboratories to stimulate agriculture research, and they can be branded as the "Indian Institute of Agriculture and Technology". 4. Invest selectively in infrastructure with private participation Further, setting up agri-business focused angel and venture capital funds as a PPP initiative between central and state governments and private capital providers will go a long way in creating a generation of agri entrepreneurs who will lead the next wave of growth. Among other critical measures, there is a need for creating a "National Farm Gate to Market Infrastructure Authority" (similar to the National Highway Authority of India) that will have the authority and be accountable for Conclusion Given the huge unexploited potential of agriculture in the country and rapidly growing per capita income leading to ever expanding demand for agriculture and processed food products, not only is India capable of fulfilling its own food demand, it has vast potential to become top five food exporters over the next two decades. This in turn, will also make the Indian food business an exciting investment destination for global players. The need of the hour is to trigger the process of transformation in the sector towards realizing its full potential in meeting the growing demand and thus in the process creating income, employment and, export earnings for the country. ECONOMY MATTERS 22
    • SPECIAL ARTICLE Food Inflation in India This persistence in food inflation is a matter of concern for the policy makers as it affects the common man most profusely. In this article, we analyse the various aspects of food inflation- trying to answer the how's and why's coupled with the required policy prescription to tame the same. I ndia has been facing high and persistent inflation in the last five years except in the intervening year of 2009-10. High growth during this period facilitated a steep rise in incomes, which in turn pushed up the purchasing power of the population. The surge in demand triggered inflationary pressures, particularly in sectors where supply lagged behind. WPI inflation averaged 7.5 per cent in the five year period, which is way higher than the RBI's comfort threshold of 5 per cent. One of the main drivers of inflation during this period has been the high food prices. Total food inflation (primary and manufacturing, henceforth referred to as food inflation in the article) has averaged 10.3 per cent during the period under consideration. To be sure, in the current fiscal, even though overall WPI inflation has averaged 5.3 per cent in the first five months (AprilAugust), food inflation has remained high at 9 per cent. Trends in Food Inflation Food inflation in India started spiralling-up since mid2009 onwards, reaching a peak in February 2010. The spill-over effects were visible in other sectors too and 2010-11 witnessed overall inflation rate crossing the psychological threshold of 10 per cent for five months in a row. Further, food inflation has remained above the psychological 10 per cent mark in 26 months out of 60 months in the last five years, while it has remained above 9 per cent mark for more than two-thirds of the period. Moreover, food inflation has remained higher than overall WPI inflation for most periods during the last five years, except for only two intervening periods from April 08- October 08 and February 11- February 12.This clearly highlights the fact that food inflation in the past few years has remained not only high, but persistent as well. 23 SEPTEMBER-OCTOBER 2013
    • Trends in Overall and Food Inflation (y-o-y%) 22 18 14 10 6 Wholesale Price Index: Avg Jun-13 Aug-13 Feb-13 Apr-13 Oct-12 Dec-12 Jun-12 Aug-12 Feb-12 Apr-12 Oct-11 Dec-11 Jun-11 Aug-11 Feb-11 Apr-11 Oct-10 Dec-10 Jun-10 Aug-10 Feb-10 Apr-10 Oct-09 Dec-09 Jun-09 Aug-09 Feb-09 Apr-09 Oct-08 Dec-08 Apr-08 -2 Jun-08 Aug-08 2 Total Food (Prim + Manu) Source: Office of Economic Advisor and CII calculations Food component is present in both primary articles and manufactured products. Together, primary food articles and manufactured food products account for about 24 per cent weight in overall WPI. As we can see from the below graph, the main drivers of food inflation in the last five years have been mainly primary food articles. The inflation rate has been high in manufactured food products too (see table), but given their relatively low contribution to overall food inflation, we dwell on only inflation in primary food articles in our analysis. Amongst food articles, inflation in food grains (cereals & pulses), fruits & vegetables, milk and eggs, meat & fish has been at the forefront. Drivers of Food Inflation 100% Others Salt 80% Tea & Coffee Processing (TC) Oil Cakes 60% Edible Oils 40% Sugar, Khandsari and Gur Bakery Products 20% Grain Mill Products Canned, Preserved & Processed Food 0% Dairy Products 2008-09 2009-10 2010-11 2011-12 -20% Source: Office of Economic Advisor and CII calculations ECONOMY MATTERS 24 2012-13 Apr-Aug FY14 Condiments & Spices
    • Break-Up of Food Inflation Weight Average inflation (2008-09 to 2012-13) Average Inflation April-August FY14 Primary Food Articles 14.33 11.4 11.0 Food Grains 4.09 9.7 12.6 Fruits & Vegetables 3.84 9.8 13.9 Milk 3.24 12.8 4.1 Egg, Meat & Fish 2.41 16.2 12.9 Condiments & Spices 0.57 9.1 13.6 Others 0.18 13.5 -0.2 Manufacturing Food Products 9.97 8.2 5.4 Dairy Products 0.57 8.7 0.4 Canned, Preserved & Processed Food 0.36 6.6 7.6 Grain Mill Products 1.34 4.6 11.7 Bakery Products 0.44 4.3 6.9 Sugar, Khandsari and Gur 2.09 16.7 4.0 Edible Oils 3.04 5.2 -0.7 Oil Cakes 0.49 11.8 13.1 Tea & Coffee Processing (TC) 0.71 8.6 15.1 Salt 0.05 5.8 1.8 Others 0.88 8.9 8.0 Total Food (Primary + Manufacturing) 24.31 10.3 9.0 Source: Office of Economic Advisor (i). Cereals: Inflation in food grains has remained high in the last five years and also in the current fiscal. The two sub-categories of food grains are cereals and pulses. Inflation in cereals has averaged 9.4 per cent in the last five years and stood at a high of 16.3 per cent in the first five months of the current fiscal. One of the main reasons behind this is the rapid increase in procurement price for cereals, above the rise in the cost of production. Over the last five years, the procurement price of cereals has increased over cost of production by almost 15-60 per cent for a cumulative differential of around 150 per cent over a five-year period. Amongst the various subcategories of cereals, rice and wheat have been the main drivers of inflation, with inflation in rice averaging a high of 19.5 per cent and wheat at 12.1 per cent in the current year so far. High inflation in these two key staples affects the common man most profusely. Inflation rate in coarse cereals such as bajra, ragi has remained high too, but given its relatively low weight in cereals inflation, its impact on overall inflation has remained subdued. As per the recently released first advance estimates for the kharif 2013 season, rice and coarse cereals output has been pegged higher as compared to last year's estimates. This is expected to dampen inflation in these categories going forward. 25 SEPTEMBER-OCTOBER 2013
    • Drivers of Inflation in Cereals Inflation in Cereals at a Glance (y-o-y%) 100% Ragi 80% 60% Weight Barley Maize Average Inflation April-August FY14 9.4 16.3 - Rice 1.79 9.7 19.5 1.12 7.9 12.1 Bajra - Bajra 0.10 13.0 20.3 Rice 0% - Wheat Wheat 20% - Jowar 0.12 10.4 4.9 12.5 13.1 0.02 8.9 1.4 - Ragi FY 14 0.22 - Barley Ap r-A ug 20 11 -1 2 20 12 -1 3 20 10 -11 - Maize 20 08 -0 9 20 09 -1 0 -20% 3.37 Jowar 40% Cereals Average inflation (2008-09 to 2012-13) 0.02 18.4 49.1 Source: Office of Economic Advisor and CII calculations (ii). Pulses: Inflation in pulses in the current year has remained in the negative territory, while the average inflation in last five years stood at 11.0 per cent. Amongst cereals, gram has been the main contributor in the last three years, while arhar was the key contributor in 200809 and 2009-10. Given its higher weight in overall pulses, deflation in gram in the current year has pushed overall pulses inflation also in the negative territory, even as inflation in its other categories has remained high. In pulses, the average production touched a low in 1990s and has improved recently in 2000s. Even in 2000s, the annual growth in pulses is highly volatile and does not show consistent growth. According to the first advance estimates, pulse production is estimated at 6.01 million tonnes in the current kharif season, representing an increase of 1.6 per cent over the last year. Drivers of Inflation in Pulses Inflation in Pulses at a Glance (y-o-y%) 100% 80% Weight Average inflation (2008-09 to 2012-13) Average Inflation April-August FY14 60% -Urad 0.72 11.0 -1.4 40% -Masur - Gram 0.33 13.5 -11.9 20% -Moong - Arhar 0.14 11.4 10.1 -Arhar - Moong 0.08 15.0 14.8 -Gram - Masur 0.06 7.8 14.3 - Urad 0.10 9.0 2.6 0% -20% Pulses -40% -60% 8 200 -09 3 0 1 2 0-1 2-1 9-1 1-1 201 201 201 200 4 Y1 gF -Au r Ap Source: Office of Economic Advisor and CII calculations (iii). Vegetables: Notably, in the current fiscal, vegetables have been the main drivers of food inflation, averaging a high of 26.9 per cent- which is way higher than its last five year's average of 9.2 per cent. In the last four years, onions have been the main contributor to overall vegetables inflation, while the contribution of brinjal has increased in the last two years. In the current year, inflation in onions (145 per cent), ginger (244 per ECONOMY MATTERS cent), tapioca (85 per cent), and brinjal (41.7 per cent) have recorded the maximum jump, coupled with wide fluctuations and increasing margins between wholesale and retail prices. It's pertinent to note here that most of the jumps in vegetable prices in the current fiscal have come in the last two months (July & August), accounted by the spurt in stockists demand ahead of the festival season. 26
    • Inflation in Vegetables at a Glance (y-o-y%) Drivers of Inflation in Vegetables 100% Weight Average inflation (2008-09 to 2012-13) 1.74 9.2 26.9 Cabbage 80% 60% 40% Okra Vegetables 20% Average Inflation April-August FY14 - Potatoes Apr-Aug FY14 2012-13 2011-12 2010-11 2009-10 2008-09 -40% 16.9 -6.6 0.02 6.7 1.2 - Onions Brinjal -20% 0.20 - Sweet Potatoes 0% 0.18 8.0 145.0 - Tapioca 0.07 17.6 84.9 - Ginger 0.05 12.0 243.7 - Brinjal Ginger 0.30 7.6 41.7 - Okra Source: Office of Economic Advisor and CII calculations 0.13 14.2 -17.6 - Cabbage Tapioca 0.19 13.2 -8.6 Note: Tomato, Green Peas & Cauliflower have been excluded as data was not available for all periods (iv). Fruits: Inflation in fruits in the last five years has averaged 10.7 per cent, while in the first five months of the current fiscal, it has remained subdued at 1.0 per cent. Amongst fruits, the main drivers of inflation have been mainly banana and cashewnut. With rising affluence, people tend to consume more of nutritious food articles such as fruits. In the current year, inflation in bananas has increased sharply followed by coconut and guava. Drivers of Inflation in Fruits Inflation in Fruits at a Glance (y-o-y%) 100% Weight Average inflation (2008-09 to 2012-13) 2.11 10.7 Sapota 80% Lemon 60% Average Inflation April-August FY14 11.9 13.5 - Oranges 0.13 15.7 -10.3 -20% Papaya - Cashewnuts 0.16 12.8 5.1 -40% Coconut - Coconut 0.24 7.5 18.9 Cashewnuts - Papaya 0.09 6.6 18.3 - Pineapple 0.05 15.1 8.8 Apr-Aug FY14 0.34 Pineapple 2012-13 - Banana 0% 2011-12 Pineapple 2010-11 20% 2009-10 Guava 2008-09 40% Fruits Ornages 1.0 0.04 0.8 33.7 0.07 3.0 -21.0 - Sapota Source: Office of Economic Advisor and CII calculations - Guava - Lemon 0.04 14.0 -2.2 Note: Mango, Apples, Litchi & Grapes have been excluded as data was not available for all periods 27 SEPTEMBER-OCTOBER 2013
    • (v). Milk, Eggs, Meat & Fish (MEM&F): This coterie has shown high inflation in the last five years and in the current year too, inflation has averaged 12.9 per cent. In the last five years, inland and marine fish have contributed the most to the overall MEM&F inflation. Incomes have risen in India thanks to its high growth phase since 2003. The higher incomes in turn have led people to demand and consume more nutritious protein based food items like milk, eggs and meat products. As supplies of these items have not risen in line with demand, the end result has been persistent inflation in these food items. Drivers of Inflation in EM&F Inflation in MEM&F at a Glance (y-o-y%) Weight Average inflation (2008-09 to 2012-13) 2.41 16.2 12.9 0.19 10.4 5.7 100% Pork 80% 60% Egg, Meat and Fish (EM) Poultry Chicken - Egg 40% - Inland Fish Apr-Aug FY14 2012-13 2011-12 2010-11 2008-09 2009-10 Mutton 25.6 23.5 0.72 17.7 7.1 - Mutton 0% 0.57 - Marine Fish Beef & Buffalo Meat 20% -20% Average Inflation April-August FY14 0.35 12.2 11.7 - Beef & Buffalo Meat 11.6 -0.1 0.41 8.6 15.8 - Pork Marine Fish 0.12 - Poultry Chicken 0.06 9.4 4.6 3.24 12.8 4.1 Milk Source: Office of Economic Advisor and CII calculations Both demand and supply-side factors are responsible for driving up the food inflation. Supply of the primary food articles have remained more-or-less stagnant due to declining productivity and yield levels. In order to ease the supply constraints, it is important to increase investments and productivity across the entire agriculture sector. This would entail improving agriculture productivity and yields through adoption of ECONOMY MATTERS modern farm technology along with reducing the dependence on rainfall. Next, we present view points of sector experts on the reasons behind the recent spurt in food inflation coupled with policy prescriptions to bring down the same. In the first piece, Mr S. Sivakumar, Chairman, CII National Council on Agriculture and Chief Executive ABD, ITC Ltd presents his views followed by Dr. Ashok Gulati & Ms. Shweta Saini and Dr. C.S.C. Sekhar. 28
    • CII View Point The Building Blocks Towards Food Price Stability Mr S. Sivakumar Chairman, CII National Council on Agriculture Chief Executive - ABD, ITC Limited Q1. What are the emerging trends in the current food inflation scenario and why do you think it is a cause of concern for India? fact that an average household in India still spends almost half of its expenditure on food, with the poor spending as much as 60 per cent. Such price spikes adversely impacts the household budget allocation for food and non-food items. The challenge gets compounded with India being home to a large number of poor people, who cannot hedge against food inflation. India's food security is threatened by frequent fluctuations in prices. With the National Food Security Act on the anvil, it will be ever more important to rein in food inflation. Ans: The Indian economy has been witnessing rising food inflation since mid-2009 with some signs of relief during mid-2011 to early 2012. While India was successful in containing domestic price spikes when global prices were reining high in 2007 2008, the situation worsened since mid-2009. Inflation in food articles averaged 10 per cent during 2008-09 to December 2012. A closer look at inflationary trends reveals that food inflation in mid-2009 was primarily driven by cereals (particularly wheat), pulses, and high value manufactured products. However, current food inflation is largely driven by vegetables (77.8 per cent increase in wholesale price index in August 2013 over August 2012) fruits, rice, egg, meat and fish. Wholesale price indices of all these commodities except fruits increased manifold since August 2011. In the vegetable category, spiraling prices of onion (at 244.6 per cent dearer) has been a major cause of concern not only for consumers but also for the government. Prices of other key vegetables like tomatoes, ginger and eggplant have also skyrocketed in the recent past coupled with wide fluctuations and increasing margins between wholesale and retail prices. These are commodities, which form an integral part of the common man's diet and demand for the same is rising. Q2. What according to you are the key drivers of the current food inflation situation? Ans: While several reasons have been cited for triggering food inflation, demand outpacing supply is definitely a key cause. In the case of certain crops, particularly vegetables, adverse weather conditions resulting in crop damage, and supply chain issues (broken chains, increasing cost of transportation) have contributed to rising prices. It has also been observed that rising Minimum Support Prices for certain key crops have fuelled price inflation. With the introduction of the Mahatma Gandhi National Rural Employment Guarantee Act, agricultural wages have risen as a result of labour shortage, contributing to rising costs of production. These are largely supply side issues. On the demand side, enhanced levels of income and changing lifestyles and aspirations continue to spur the demand for food items, especially high value commodities such as fruits, vegetables, milk The concerns over food inflation are driven by the 29 SEPTEMBER-OCTOBER 2013
    • and milk products, egg, fish, meat, both fresh and processed. Per capita consumption of many of these commodities is way below that of other countries and hence given a low base, the scope for expanding per capita consumption is quite large. This is likely to create substantial demand pressures. Given this scenario, it will become crucial to ensure that supply meets rising demand for food. transformation in India and although the results are a mixed bag, there is scope for further progress. Developing efficient supply chains that ensure smooth availability of quality produce is critical for strengthening retail operations. Efficient agri-businesses will merit investments in supply chains right from the farming stage to procurement, storage and marketing and in effect streamline the otherwise long supply chains in India crowded by undesirable intermediation. It is indeed ironical that despite high food prices, farmers have not benefitted as huge margins between the farm-gate and retail prices have been lost in intermediation. Entry of big businesses (domestic or multinational) will ensure scalability and the right margins for the farmer, which creates a win-win situation. It would be important to enable a balanced and pragmatic policy framework that attracts private sector investments in agri-value chains in India. The issue of post-harvest losses that account for 30-50 per cent of the produce, particularly of perishable products can be addressed to a large extent through advanced and competitive value chains. Q3. What are the key measures important to contain food inflation in India? Ans: Several recommendations have been put forth towards addressing the challenge of food price inflation. Efforts to liberalise agricultural markets and trade have yielded positive results in certain cases. However implementation of relevant policy as well as institutional reforms would go a long way in stemming rising food inflation. The need of the hour is to address the structural factors that impact food inflation and ease bottlenecks in supply chains. I would summarize the key measures as the building blocks towards food price stability which are as follows: Liberalise Agricultural Markets: The merits and demerits of liberalising agricultural markets with respect to amending the APMC Act and allowing farmers the freedom to sell outside the market yards has been a subject of discussion in various fora. Implementation of the model APMC Act which allows farmers the freedom to market their produce and the scope to establish direct linkages with private buyers will undoubtedly enhance farmer incomes and also ensure availability of food at affordable prices. The ease of doing business will incentivise private players to invest in backward linkages with farmers, which are critical for development of on-farm activities and services. States will also have to play a progressive role in ensuring that the amended Act is implemented in the true spirit and the bottlenecks with regard to private sector participation are streamlined. Taxes and fees need to be calibrated to the kind of services that are being provided to the buyer and seller and not levied on an ad-hoc basis. Develop Integrated Agri-Intelligence Hubs: Going forward, it will be critical to develop agri intelligence hubs that capture and disseminate price signals in advance, and critical market information to enable the government take appropriate measures (in terms of opening up imports or controlling exports) to avoid price spikes. Information about weather conditions can also help farmers plan crop management so that losses can be avoided. These hubs can provide onfarm extension services and market linkages to farmers to help them improve farm productivity and earn higher returns. The private sector has been involved in a big way in providing some of these critical services, through unique interventions like the ITC e-Choupal, Choupal Sagar, Tata Kisan Kendras and others. There is an opportunity to integrate these services and create an integrated hub for delivery of agri-extension services. Q4. Do you see the Food Processing sector playing an important role in containing price spikes? Develop Advanced Supply Chains: The format of agriculture retailing has undergone a ECONOMY MATTERS 30
    • Ans: Incentives to scale up food processing will be an effective means of curbing food inflation by helping overcome seasonality issues, post-harvest losses and boosting value addition in primary produce. Despite India being a leading producer of several high value agricultural commodities, processing levels are quite low compared to other countries and this provides an opportunity to scale up processing to meet the growing demand for high value commodities. This will require investment in the right pre and post-harvest technology that ensures food safety and quality. Rationalizing taxes and custom duties levied on the food processing sector will go a long way in attracting large scale private investments in technology, value chains and capacity building of farmers and people involved in food processing activities. Food processing can help generate higher incomes for farmers through value addition opportunities going beyond the market for fresh. Q5. Lastly, what is your opinion about public private partnerships in the context of food inflation? Ans: While the government will continue to play a pivotal role through enabling policies and institutions towards achieving higher and sustainable agricultural growth, the private sector can make a meaningful contribution through the delivery of best practices. Agriculture which has so far largely been subsidy driven, needs to be more investment led (both public and private), particularly in areas like agri R&D, technology, infrastructure and markets. These investments will generate larger benefits in terms of ensuring enhanced availability and moving towards food price stability. Public private partnership will continue to be important and in the current context of food inflation, it will be ever more important to strengthen the existing partnerships and venture further. 31 SEPTEMBER-OCTOBER 2013
    • Taming Food Inflation Dr. Ashok Gulati Ms. Shweta Saini Chairman Commission for Agricultural Costs and Prices Consultant ICRIER High food inflation is the worst form of hidden tax often inflicted on poor people. The reason: an average household in India still spends almost half of its expenditure on food, and poor spend about 60 percent on food. No wonder, runaway food prices bite them badly adversely impacting their nutrition and hunger levels. food products) in August 2013 over August 2012 suggest a rate of 12 per cent, with food articles price index going up by 18 percent and food products by only 1.7 per cent. Within food articles, cereals are up by 14 per cent, led by rice at 20 per cent, fruits and vegetables up by 42 per cent, vegetables alone by 78 per cent led by onions at 244 per cent, and eggs, meat and fish by 19 per cent. Composition, Trends and Spread Diagnostics Food inflation comprises of two components: food articles and food products. Food articles (such as cereals, pulses, fruits and vegetables, milk, eggs, meat and fish, etc) largely contain fresh and unprocessed (or rudimentary first stage processed) food items, having a weight of 14.33 per cent in the WPI of all commodities. Food products are basically processed food items ranging from milled grain products (atta, maida, suji, etc), sugar, khadsari, gur, edible oils, milk products, etc. They have a weight of 9.97 per cent in overall WPI of all commodities. Together, food articles and food products, therefore account for about 24 per cent weight in overall WPI. This trend and spread of food inflation, sudden acceleration from 2008-09, and higher in vitamins and protein products, raises a fundamental question of diagnostics. What led to this situation that we are in now? Is it the supply shocks? Not at all. The production of almost all food items has been growing much faster than population growth. But the fact that their prices have risen much faster only reflects that their demand is pacing faster than supplies. And the demand has been accelerating partly from higher GDP growth during 2008-09 to 2012-13, but primarily from loose fiscal policy. India's fiscal deficit suddenly more than doubled in a single year in 2008-09 over 2007-08, and since then has remained at unacceptably high levels. It is worth recalling that this was result of an orchestrated global fiscal stimulus that was given by G8 plus 5 countries in the aftermath of global financial crisis in 2008. It suited the ruling government as it came just before the last elections. Remember loan waiver of about Rs 72,000 crores, massive expansion of MNREGA, massive fuel, fertilizer and food subsidies, and so on, on top of the generous Sixth Pay Commission.Unfortunately, there is no free lunch in the economy. It has come back to haunt the policy makers, wherein now high food inflation has Temporally, since 2000-01, food inflation has been under reasonable control from 2000-01 to 2007-08 with an average rate of 3.7 per cent, with a peak in 2006-07 at 7.9 per cent and trough in 2000-01 at 0.4 per cent. It is commendable to see when the world food prices erupted in 2007-08, Indian food inflation was still 5.6 per cent. But things changed drastically thereafter. The average food inflation during 2008-09 to 2012-13 is 10.2 per cent, which is continuing unabated in 2013-14 too. The latest numbers on food inflation (food articles plus ECONOMY MATTERS 32
    • cent (Centre and states combined fiscal deficit is above 8 percent). Obviously, the damage that has been done on the fiscal front over the last five years cannot be corrected in a single year, and certainly not in an election year. It will take at least 3-4 years before it can be brought down to acceptable levels. Till then we may have to live with higher rates of food inflation. Nevertheless, certain structural reforms can help bring down the food prices. Massive overhaul of APMC Act, open policy to welcome organized retail in food, incentivizing them to invest at the back end to build efficient food value chains, higher priority to food processing, liquidating the massive hoarding of grains by the government, rationalizing and drastically pruning the fuel, fertilizer and food subsidies, moving towards cash transfers in case of food and fertilizer subsides, are some of the policy measures that can bring down food inflation. Will the policy makers have the courage to do this in an election year? Only time will tell. become a grave threat to growth itself. Similarly the Global fiscal stimulus (by US of about USD$600 billion, by China of about US$586 billion and by EU of 200 billion Euros) had created huge liquidity raising all commodity prices globally. The high global prices of food also then percolated to the Indian economy through imports and exports. Interestingly, one more reason in the Indian context has been the cost push factor coming from rising farm wages, which have been rising at 18 percent per annum since 2008-09. This rising cost feeds into high procurement prices, which then fan out in the entire economy. Policy Solutions So, what's the way out now? First and foremost, fiscal deficit by the Centre needs to be brought down to 3 per cent of GDP from its current levels of more than 5 per ( Views are personal) 33 SEPTEMBER-OCTOBER 2013
    • High MSPs Driving Inflation in Cereals Dr. C.S.C Sekhar Associate Professor Institute of Economic Growth, Delhi Persistent food inflation has been a worry for Indian policymakers in the recent times. As per the CSO estimates, the food and beverages inflation rate based on CPI, stood at 11 per cent in August 2013. The corresponding figures for cereals and vegetables are 14 per cent and 26 per cent respectively. This short note attempts to identify the composition and possible underlying factors of this inflation. increases have been 15 per cent, 6 per cent and 5 per cent respectively. These increases have led to large procurement in food grains, resulting in more than 30 per cent of the production being procured in the last few years. Correspondingly, the market availability of cereals declined, leading to sharp rise in prices. It is the reduced supply in the market place and not any shortfall in production that has resulted in the price rise. There has been a bumper production of cereals in the last seven years, except 2009, which was a drought year. The international prices (of cereals) have also been declining in real terms in general since 2009 and more so for more than a year now as per the FAO statistics. Therefore, the domestic policies, and not the production shortfalls nor external factors, appear to have played the major role in price rise of cereals. The pattern of inflation in India seems to vary quite a bit over time. Few years ago, pulses, milk & milk products, sugar and fruits & vegetables were mainly responsible for food inflation. It was argued that rising incomes were mainly responsible for this kind of inflationary pressure as all these commodities, except pulses, have higher income elasticities than staple foods. However, this seems to have changed in the recent times. The pattern over the last two years suggests that cereals, particularly rice and wheat, appear to contribute more to the current inflationary pressures, alongwith eggs, meat & fish and vegetables. There is a steady improvement in the price situation of milk/milk products, pulses and sugar/sugar products. The role of domestic policy also becomes clear when we look at the pulses sector. The focus on increasing pulses production in the country through various policy initiatives such as National Food Security Mission (NFSM) since 2008, combined with a liberal and stable import policy, appears to have stabilized the pulse prices. As regards vegetables & fruits, and meat, eggs & fish, which are perishable in nature, it is the infrastructure bottlenecks that play a major role. The role of transportation facilities, uninterrupted power supply and cold storage facilities become critical for these perishable commodities. The situation as regards the two staple cereals -rice and wheat -is alarming. The average rate of inflation in 2013 (January-August) based on WPI is 17 per cent for cereals (wheat and rice) -19 per cent for rice and 16 per cent for wheat. The grain mill products consisting of atta, maida and sooji is also showing substantial increase. Domestic policies appear to play a major role in this price rise. Therefore, it is important to make judicious use of price and procurement policies so as not to throttle the markets. Also, it is imperative to develop critical infrastructure such as rural markets, roads, cold storages and power. The minimum support price (MSP) for rice has been increased by 8 per cent, 15 per cent and 5 per cent in the last three years. In case of wheat the corresponding (Views are personal) ECONOMY MATTERS 34
    • SPECIAL FEATURE Impact of Government Moves on Fertilizer Industry Essential Commodities Act empowers the Government to regulate distribution of fertilizers. Currently 50 per cent of urea production and 20 per cent of P&K production/import is under ECA i.e. Government can instruct producer/importer to supply product to place specified by Department of Fertilizers. At state level, normally Agriculture Production Commissioner used to be the nodal officer to coordinate and oversee fertilizer related issues. Mr. P.K. Ghose (Executive Director, and CFO, Tata Chemicals)1 Subsidy Related Policies F With the intention to make available fertilizers at affordable rates every nook and corner of country, different policies have been notified to enable manufacturer/importer to sell fertilizers at much lower rate than their cost of production/import. The difference between cost of production/import and market price is borne by Government of India in the form of subsidy. Currently the following policies are allowing companies to claim subsidy on fertilizes ertilizer industry is one of the most tightly controlled and monitored by Government agencies through different policies directives, rules and regulations. Even after 20 years from the start of liberalisation process initiated by Government of India, it has not yet made much impact on the fertilizer industry. Administration Department of Fertilizers under Ministry of Fertilizers & Chemicals is the administrative ministry for fertilizer subsidy related policies and also looks after distribution and control. Fertilizer Control Order, 1985 defines rules and regulations regarding quality, size, and composition etc. of different grades of fertilizers sold in India. 1 a) Nutrient Based Subsidy (NBS) Policy for P&K Fertilizers - From 1st April, 2010, Government of India introduced Nutrient Based Subsidy Policy for P&K fertilizers. This policy allowed free MRP and uniform subsidy rate for one nutrient in all the products Views expressed in the article are those of the author and necessarily of CII. 35 SEPTEMBER-OCTOBER 2013
    • whether imported or indigenously produced. Policy allowed lump sum subsidy rate to encourage use of Zinc and Boron. This policy encouraged more customization of product basket and introduction of new products considering special needs of an area or crop. Subsidy rates are announced at the beginning of year and companies are allowed to change MRP in case of any change in cost of production/import due to any reason. Unresolved Issues - Government is taking time to announce any decision and list of pending issues keep on piling. Further, many issues like mopping up of subsidy on opening stocks, freight notifications etc. are pending and government is yet to take final decision. So, profitability of companies dealing in P&K fertilizers is always at the mercy of government decisions and on a retrospective basis. Delay in Policy Decision - NBS circular is supposed to be issued around January/February to enable companies to do planning of raw material/finished goods procurement. However, during last two years, this circular is issued in the month of May. Similarly, new policy for existing urea plants is due from April 2010 and Government is not able to evolve final model. b) New Pricing Scheme Stage III for Urea - This policy was introduced from 1st October 2006 and was applicable till 31st March 2010. However, now it has been extended till announcement of new policy which is under discussion. c) Uniform Freight Policy - This policy allows freight payment on urea and was introduced from 1st April 2008. Initially it covered all products but later on P&K products were excluded after introduction of NBS Policy. Insufficient Budget Allocation - Industry is facing cash flow problem due to unpaid subsidy bills. As per one estimate, unpaid subsidy bills as on 1st April 2012 was around Rs. 20,000 crore and same has reached to Rs. 32,000 crore as on 1st April 2013. It is due to insufficient budget allocation by Government. Industry is funding cash requirement from loans and paying interest for the same. But Government is not paying any interest on delayed payment. This is resulting into poor liquidity for the companies. Subsidy payment is always a major problem in third and fourth quarter every year. Government is not making sufficient budgetary provision to solve the problem of carry over amount. Delay in payment of bills is adding avoidable cost and directly impacting the profitability. The cost of delayed subsidy is working out to about Rs 600 crore for the Indian Fertiliser sector as a whole and an additional working capital of about Rs 17000 crore at its peak to about Rs 12000 crore at the end of March 2013. Problems Faced by the Industry Interference by Government At the time of introduction of NBS for P&K fertilizers, MRP was freed and manufacturers/importers were allowed to change MRP on reasonable basis to cover increase in their cost. The basic essence of NBS was to allow fertilizer industry to function in market driven environment and reduce subsidy burden on Government. Government role was presumed to be limited to announcing subsidy rate as well as take care of proper distribution. In reality, the Government continued to control the companies through several restrictions in movements well beyond the quantity covered under the ECA. Several flip-flops in the policy regarding movements have resulted in some companies gaining at the cost of others. From April,13 onwards benchmark MRP has been notified for each product and now Government intends to track every increase in cost as well as MRP. Government has introduced formats to collect certified cost data from companies before release of subsidy. Thus the Government is involving itself in micro management, even for the so called decontrolled fertilisers. This makes it difficult for companies to take long term decisions of raw material tie ups, joint ventures etc. Procedural barriers - Many a times, industry is not able to submit the bills due to delay in updation of software in FMS (portal of DOF). For example, some billing related changes were introduced from November,12 but FMS was updated in March,13 resulting into accumulation of unbilled amount. Similarly, many policy related changes are notified but changes in FMS take lot of time. Similarly, issue of escalation notification of urea takes around 6-8 months after close of the year resulting into delayed billing as well as payment. What Needs to be Done Spirit of Policy should be maintained - Mid way tinkering with the spirit of policy is creating lot of uncertainty among the industry players. For example, NBS was started with the clear intent of free MRP as well as to allow industry to recover full cost of operation. NBS was positioned as a path breaking step towards liberalisation of fertilizer industry. Now it has gone to the other extreme and CAG has been asked to do scrutiny of private sector enterprises which is unheard of. ECONOMY MATTERS 36
    • SPECIAL FEATURE However, now government is trying to control MRP again even though MRP is being termed as "Free" which is totally against the spirit of NBS policy. issue of notifications. This will reduce lot of speculation. Interest on delayed payment - Government charges interest and penal interest on delay in deposit of any recovery from companies. So, number of days required to pay any subsidy bill should be fixed and government should pay interest at stipulated bench mark rate for delay in interest payment. This will offset the cost of company who receives the delayed payment. No Retrospective Changes - Companies are required to maintain their accounts as per laid down standards and norms in time bound manner and any change by government with retrospective effect will make accounts unreliable. Investors will find it difficult to make decisions which in turn will affect the market valuations. Limited intervention and pre-testing - the movement controls have to be restricted to the limits laid down under the ECA with some broad directives for the rest. Procedural changes need to be tested and trials done on a smaller lot before implementing. Time bound notifications - All notification should be issued in time bound manner. Ministry's RFD (Result Frame Document) must specify date wise schedule for Gl bal Tax Summit 2013 CII is organizing a day The topics to be deliberated at the Summit would broadly include: long Global Taxation Summit 2013 on 20 th November, 2013 at Hotel Taj Palace, New Delhi. International & Domestic Tax Developments –Lessons and v Learning for India Key Current and Emerging Transfer Pricing Audit Issues in India v Alternate Dispute Resolution – Challenges & Way Forward v BEPS – Emerging Trends in Developed and Emerging Markets v Indirect Tax Issues including CENVAT, Service Tax and State VAT v Mr. Sumit Bose, Secretary - Revenue, Ministry of Finance, has kindly agreed to be the Chief Guest at the Summit. The Summit would also have the benefit of the views of senior government officers, tax experts from India and abroad and industry. You are invited to participate in the Summit. For registration and Ms. Jessy Rajji Confederation of Indian Industry; 23 Institutional Area; Lodhi Road New Delhi 110 003. Tel : 91-11-24690715 /24629994 – 7; Fax : 91-11-24615693 Email : jessy.rajji@cii.in 37 SEPTEMBER-OCTOBER 2013
    • ECONOMY MATTERS The Facts Keeps readers abreast of global & domestic n economic developments Monthly Journal of top management of 8000 n companies Read n by CII Members, Thought Leaders, Diplomats, Policy Makers, MPs and other decision makers The Coverage Global n Trends Domestic n Trends Corporate n Sector n Performance in Focus Special n Article Special n Feature Economy n Monitor CII invites full-page* Advertisements for this flagship document at an attractive rate of Rs 60,000 per issue and Rs 6 lakh for 12 issues. For more details, Please Contact: Dr. Danish A. Hashim, Director- Economic Research Confederation of Indian Industry The Mantosh Sondhi Centre, 23, Institutional Area, Lodi Road, New Delhi- 110003 (INDIA) Tel : +91-011-24629994-7, Fax: +91-011-24626149; Email: Ecoresearch@cii.in
    • ECONOMY MONITOR GLOBAL GDP (y-o-y%) China GDP Growth Japan GDP Growth Euro Area GDP Growth US GDP Growth 7.4 2.8 2.0 1.3 1.6 3.8 0.3 2Q12 7.9 7.7 7.5 7.8 4Q12 1Q13 2Q13 3Q13 6.6 6.6 4QFY13 1QFY14 3.1 3Q12 4Q12 1Q13 2Q13 -0.5 -1.0 2Q12 2Q12 -0.5 -0.7 3Q12 1Q13 0.3 3Q12 4Q12 1Q13 1.2 2Q13 3Q12 -1.0 4Q12 0.4 2Q13 GDP GROWTH (y-o-y%) Industry Agriculture Overall GDP Services 7.7 5.4 5.2 4.7 4.8 7.6 4.4 6.7 2.9 2.7 1.7 1.8 2QFY13 3QFY13 2.5 1.8 1.4 2.7 1.3 0.2 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 1QFY13 4QFY13 1QFY14 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 1QFY13 2QFY13 3QFY13 WPI INFLATION (y-o-y%) Primary Overall Manufacturing Fuel 13.5 11.3 11.4 11.7 8.8 4.6 May-13 5.2 5.9 6.1 6.5 10.1 9.7 7.3 7.5 5.7 3.3 Jun-13 Jul-13 Aug-13 Sep-13 May-13 Jun-13 Jul-13 Aug-13 May-13 Sep-13 Jun-13 Jul-13 Aug-13 Sep-13 May-13 2.9 2.6 Jun-13 Jul-13 1.9 2.0 Aug-13 Sep-13 INDEX OF INDUSTRIAL PRODUCTION (IIP) (y-o-y%) Electricity Manufacturing General Mining 7.2 6.2 5.2 4.2 3.2 2.8 1.8 1.5 0.6 0.0 -0.2 -0.1 -2.5 -1.8 -1.7 -2.5 -3.2 -3.4 -4.3 -5.9 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Apr-13 39 May-13 Jun-13 Jul-13 Aug-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 SEPTEMBER-OCTOBER 2013
    • EXTERNAL ACCOUNT Exports (%) Imports (%) Current Account Deficit (US$ Bn) Trade Deficit (US$ Bn) 20.1 31.8 12.2 11.6 13.0 Avg Exchange Rate (Rs/US$) 12.3 21.8 21.1 10.9 59.8 55.0 6.8 7.0 58.4 18.2 17.1 11.2 63.8 63.2 0.1 -0.7 -3.3 -5.3 -6.2 -18.1 May-13 Jun-13 Jul-13 Aug-13 Sep-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 May-13 Jun-13 Jul-13 Aug-13 Sep-13 MONETARY VARIABLES (%) Non-Food Credit Growth (y-o-y%) M3Growth (y-o-y%) Repo Rate (%) Cash Reserve Ratio (%) 7.25 15.3 13.7 15.1 16.4 May-13 Jun-13 Jul-13 Aug-13 15.1 Sep-13 13.6 12.8 12.5 12.2 Jun-13 Jul-13 Aug-13 7.25 7.50 May-13 Sep-13 7.25 Jun-13 Jul-13 Aug-13 Sep-13 4.00 4.00 4.00 4.00 4.00 May-13 Jun-13 Jul-13 Aug-13 Sep-13 12.5 May-13 7.25 CAPITAL FLOWS (US$ billion) Net FII Flows (US$ billion) Net FDI Flows (US$ billion) Forex Reserves (US$ billion) ECB flows (US$ billion) 287.9 284.6 277.2 275.5 4.2 276.3 2.8 2.8 5.2 2.0 2.1 1.2 -3.0 Aug-13 1.6 Jul-13 Aug-13 0.5 1.0 1QFY13 2QFY13 0.9 -2.5 Jul-13 1.7 -7.5 May-13 Jun-13 Sep-13 Apr-13 May-13 Jun-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 3QFY13 4QFY13 1QFY14 OTHER IMPORTANT INDICATORS (y-o-y%) Core Sector Growth (y-o-y%) Cement Production Growth (y-o-y%) Steel Production Growth (y-o-y%) Commercial Vehicles Production Growth (y-o-y%) 7.0 2.3 3.1 2.3 3.7 5.5 5.2 2.4 4.0 4.3 3.4 1.9 2.3 0.8 0.1 2.5 -15.4 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 May-13 Jun-13 -17.9 -19.6 Jul-13 Aug-13 Source: RBI, CSO, SEBI, Office of Economic Advisor, Bureau of Economic Analysis, Euro Stat, Bank of Japan, National Bureau of Statistics ECONOMY MATTERS 40 -28.6 Sep-13