Economy Matters February 2016

1
FOREWORD
FEB-MAR 2016
T
he Finance Minister presented a well-rounded package of reforms and growth-oriented meas-
ures in the Union Budget 2016-17. The Budget proposals addressed issues in nine critical ar-
eas ranging from agriculture and the rural sector to financial sector and banking. Given the
current global context of slowing growth and threat of financial turbulence, the Budget needs to
be commended for giving a boost to growth and investment without disturbing the path for fiscal
consolidation.
In line with recommendations made by CII, the Budget has announced critical interventions in areas
such as agriculture, infrastructure, education and skills. Financial sector reforms have been taken
forward including a plan for revitalising public sector banks. A lot of emphasis has been given to ac-
celerated implementation of direct benefits transfer through the widespread use of JAM trinity, so
that subsidies reach the intended beneficiaries.
Budget 2016-17 has undertaken several key initiatives for job creation in the formal sector, which
have been taken up consistently by CII. Contribution of EPF for new employees for three years, en-
trepreneurship development courses, changes in the transport sector, and so on would encourage
job generation. Low-cost housing will be a huge demand multiplier, and CII welcomes the many ini-
tiatives on this. CII also welcomes the measures to revive infrastructure investment such as the new
credit rating system and the commitment to issue guidelines for renegotiation of PPPs.
Industry had been facing some issues in tax administration and is therefore happy with the emphasis
given to the dispute resolution mechanism. Further, in order to speed up the settlement of disputes,
11 new benches of Customs, Excise and Service Tax Appellate Tribunal shall be set up.
Budget 2016-17 has many tax and spending measures that will go a long way in promoting investment
and growth. The well-thought out interventions presented in the Budget make it a growth and
development oriented Budget as a result it will be appreciated by all sections of society. Finally, the
RBI will perceive the government’s attempt to maintain its fiscal path as a positive. It is hoped it will
agree to reduce its policy rate.
Chandrajit Banerjee
Director General, CII

5
EXECUTIVE SUMMARY
FEB-MAR 2016
Global Trends
In the largest emerging markets—the heterogeneous
group of BRICS (Brazil, Russia, India, China, and South
Africa)— growth has slowed from almost 9 per cent in
2010 to about 4 per cent in 2015, on average, with India
being a notable exception. This slowdown reflects both
easing growth in China, persistent weakness in South
Africa, and steep recessions in Russia since 2014 and in
Brazil since 2015. Low global oil prices have also contrib-
uted to providing a fillip to BRIC economies growth in
the last year. Global oil supply growth is plunging as an
extended period of low prices takes its toll, the Interna-
tional Energy Agency (IEA) said in its annual Medium-
Term Oil Market Report released in February 2016. How-
ever, the report points to the risk of an oil price spike in
the later part of the outlook period arising from insuf-
ficient investment.
Domestic Trends
As per the advance estimates released by Central Statis-
tical Organisation (CSO), GDP growth is expected to rise
to 7.6 per cent in FY16 as compared with the revised es-
timates of 7.2 per cent in the previous year, aided large-
ly by growth in the manufacturing sector. If the new
projection materialises, India will be the fastest grow-
ing major economy in the world, overtaking China. On
the inflation front, it is heartening to note that the Janu-
ary 2016 CPI print came 30 basis points (bps) lower than
the RBI’s target of 6.0 per cent. Inflation pressures are
expected to remain benign as global commodity prices
are anticipated to remain subdued in the year ahead.
On the external front, merchandise exports in January
2016 fell 13.6 per cent from a year earlier to US$21.07
billion - declining for the 14th consecutive month - while
a contraction in imports narrowed the trade gap to an
11-month low.
CorporatePerformanceinQ3FY16
The corporate results at the end of the third quarter of
current fiscal continued to remain subdued as the finan-
cial performance of Indian companies, especially manu-
facturing sector firms, came lower. While the growth
in expenditure costs stood somewhat curbed, fading
growth of net sales as well as decline in PAT added to
the prevalent despair. Net sales on an aggregate basis
decelerated steeply to 1.2 per cent at the end of the
third quarter of 2015-16. While moderation in growth of
expenditure has to some extent mitigated the impact
of the current bout of economic crisis characterized
by falling growth in net sales, the reduction was not
large enough to provide cushion to the bottom-line of
the corporate. Over the past nine quarters, while net
sales and expenditure has mostly followed a downward
trend, profitability has displayed wide fluctuations.
Focus of the Month: Union Budg-
et 2016-17
The Finance Minister has presented a bold, pragmatic
and growth-driven Budget which has attempted a cred-
ible balancing act of scripting a blueprint for sustaining
the growth momentum in the Indian economy in the
coming year on the one hand while taking up issues of
social inclusion on the other. Fiscal prudence has been
a cornerstone of the budget strategy with the deficit
pegged at 3.9 per cent and 3.5 per cent of GDP for FY16
and FY17 respectively without compromising the devel-
opmental agenda. The adherence to the fiscal deficit
target would help open up access to funds for other
sectors to spend, maintain a level of confidence in mac-
roeconomic management and contain inflation within
the desired band. It is also heartening to note that the
Budget has a plan for social inclusion. A package of
measures including a broad agriculture thrust and social
security measures, which seek to address rural stress.
In this month’s Focus of the month, we provide a de-
tailed analysis of the Union Budget: 2016-17 through the
eyes of the experts.

ECONOMY MATTERS 6
GLOBAL TRENDS
Economic Prospects of BRICS Economies: How do the
Current Numbers Stack up and Looking Ahead in 2016
G
lobal growth again fell short of expectations in
2015, slowing to 2.4 per cent from 2.6 per cent
in 2014. The disappointing performance was
mainly due to a continued deceleration of economic
activity in emerging and developing economies amid
weakening commodity prices, global trade, and capi-
tal flows. Going forward, global growth is projected to
edge up, according to the January 2016 edition of the
Global Economic Prospects by the World Bank, reach-
ing 2.9 per cent in 2016 and 3.1 per cent in 2017-18. In
developing countries, growth in 2015 is estimated at a
post-crisis low of 4.3 per cent, down from 4.9 per cent
in 2014. The economic rebalancing in China is continuing
and accompanied by slowing growth. Brazil and Rus-
sia have been going through severe adjustments in the
face of external and domestic challenges. In the largest
emerging markets—the heterogeneous group of BRICS
(Brazil, Russia, India, China, and South Africa)— growth
has slowed from almost 9 per cent in 2010 to about 4
per cent in 2015, on average, with India being a notable
exception. This slowdown reflects both easing growth
in China, persistent weakness in South Africa, and steep
recessions in Russia since 2014 and in Brazil since 2015.

7
GLOBAL TRENDS
FEB-MAR 2016
The real GDP in Russia is estimated to contract by 3.8
per cent in 2015. The de-growth is forecasted to persist
in 2016 to the tune of 0.7 per cent. It is only in 2017 that
the numbers are forecasted to creep into the positive
territory. For a long time now, the growth bubble of
China has been expected to burst. Reflecting the sen-
timent, the growth projections of China have been un-
ambitiously set at 6.7 per cent for 2016 and 6.5 per cent
for the two years thereafter. Severe contraction to the
tune of 2.5 per cent is forecasted for Brazil in 2016. In
2017 and 2018 however, the growth is expected to climb
back to 1.4 per cent and 1.5 per cent respectively. India

ECONOMY MATTERS 8
GLOBAL TRENDS
has the most ambitious forecasts amongst all the BRICS
countries. Growth in GDP in 2016 is expected to be 7.8
per cent, even as 7.5 per cent growth has been estimat-
ed in 2015. In 2017 and 2018, the growth is forecasted at
7.9 per cent. Growth in GDP in South Africa is expected
to improve to 1.4 per cent in 2016, and further to 1.6 per
cent in the two years thereafter.
A growth slowdown in BRICS could have global reper-
cussions. A sustained 1 per cent decline in growth in the
BRICS would reduce growth in other emerging and de-
veloping economies by around 0.8 per centand global
growth by 0.4 per cent.Growth shocks in Russia would
reverberate across the East and Central Asian(ECA) re-
gion, reducing ECA growth almost one-for-one. In con-
trast, the international spillovers from growth shocks
in Brazil, India, and South Africa are not likely to be
widespread. In the event of acute stress in any of the
BRICS, confidence in emerging market assets more
broadly could suffer from contagion effects, in which
case spillovers could be considerably larger. China is
deeply integrated into supply chains in East Asia and
the Pacific, and constitutes a large export market for
commodity-exporting countries in Sub-Saharan Africa
and Latin America. Brazil trades significantly with neigh-
boring Latin American countries, partly as a result of
regional free trade agreements. Remittances from Rus-
sia account for more than 10 per cent of GDP in several
countries in the Caucasus and Central Asia. India is an
important source of FDI and official development assis-
tance for neighboring countries.
BRICS growth has been slowing since 2010, increasingly
because of moderating potential growth. Until 2013,
the slowdown was predominantly driven by external
factors, but the role of domestic factors has increased
since 2014. Among the most important external fac-
tors are weak global trade, a steady decline in com-
modity prices since 2011, and tightening global financial
conditions.A steady decline in commodity prices has set
back growth in commodity-exporting BRICS (Russia,
Brazil, and South Africa). Prices of oil and metals have
declined by 50-60 per cent from their 2011 peaks and are
expected to remain low for the next decade. Agricultur-
al prices are about 30 per cent below their 2011 peaks.
This has sharply worsened the terms of trade of Brazil,
Russia, and South Africa. Slowing growth in commodity-
importing BRICS (China, India) itself contributes to sof-
tening commodity prices.
Net capital flows to BRICS have undergone bouts of
volatility, culminating in sharp and sustained capital
outflows in the first half of 2015. The decline in net capi-
tal flows largely reflected developments in China: in the
first half of 2015, portfolio outflows from China rose ten-
fold and net other investment inflows fell by four-fifths
from the second half of 2014. Remittance inflows to
BRICS have also slowed sharply, from a rate of increase
of 15.4 per cent in 2010 to under 3 per cent in 2015. The
volatility of capital flows to BRICS has weighed on in-
vestment. Since 2010, investment growth in BRICS has
slowed from 16 per cent in 2010 to 5 per cent in 2014.
A series of country-specific factors have contributed
to this, including political and geopolitical uncertainty,
structural bottlenecks and uncertainty about major re-
form initiatives. The slowdown in remittances may di-
rectly impact consumption in these economies.Domes-
tic factors include a sustained productivity slowdown
and bouts of policy uncertainty. Since 2014 these have
overtaken external factors as the main contributors to
decelerating BRICS output.Deceleration in productiv-
ity growth suggests that a return to pre-global crisis
rates of BRICS growth is unlikely. While the productivity
growth was slightly above 4 per cent in 2010 and around
1.5 per cent in 2013, it softened further to slightly below
the 1 per cent mark in 2014. While it averaged 2 per cent
over 1990-08, the average improved to around 4.5 per
cent in 2003-08.
The growth slowdown in BRICS has been part cyclical
decline from the immediate post-crisis rebound in 2010,
part structural slowdown. Hence, a mix of counter -cy-
clical fiscal or monetary policy stimulus and structural
reforms could be used to support activity. A renewed
structural reform push could help lift growth prospects
and, to the extent it encourages investment, support
domestic demand, as well as help improve investor sen-
timent and capital flows. This would be especially useful
for countries that have limited room for expansionary
fiscal and monetary policies. Since the crisis, the fiscal
positionsof BRICS have deteriorated considerably. On
average, their fiscal balance has weakened from near-
balance in2007 to minus 4 per cent of GDP in 2014. In
South Africa, debthas increased by about 19 percentage

9
GLOBAL TRENDS
FEB-MAR 2016
Global oil supply growth is plunging as an extended pe-
riod of low prices takes its toll, the International Energy
Agency (IEA) said in its annual Medium-Term Oil Market
Report released in February 2016. While U.S. light, tight
oil (LTO) output is falling steeply for now, the market
will begin rebalancing in 2017 – and by 2021 the US and
Iran are seen leading production gains among non-OPEC
and OPEC countries, respectively. The report notes that
while oil prices should start to rise gradually once the
market begins rebalancing, the availability of resources
that can be easily and quickly tapped will limit the scope
of rallies – at least in the near term. However, the report
points to the risk of an oil price spike in the later part of
the outlook period arising from insufficient investment.
Tracking the Dynamics of Oil Price Movement:
Current Trends and Way Forward
points of GDP since2007, and Brazil and India’s debt lev-
els are in excess of 60 per cent of GDP. Monetary policy
space has divergedbetween commodity exporters and
importers. In Braziland Russia, monetary policy is con-
strained by above-target inflation, partly as a result of
depreciation. In contrast, low oil prices have reduced
inflation and increased room forrate cuts in China and
India. However, this room may diminish if inflation re-
bounds once oil prices stabilize.
The appropriate policy response also depends onthe
source of the external shock. A growth shockmay be
more appropriately addressed with fiscalpolicy and
structural reforms whereas a financialshock may be
more effectively mitigated bymonetary, exchange
rate, or financial policies. Theboundaries between
these shocks and policies,however, may at times be
blurred. This argues,again, for a policy mix of fiscal,
monetary, andexchange rate policy coupled with struc-
turalreforms.The BRICS slowdown mayturn out to be a
sustained, structural decline ingrowth potential rather
than a temporary cyclicaldownturn. Structural reforms
have collateral benefits ofbuttressing investor confi-
dence and liftingdomestic demand—whether in the
event ofcyclical or structural external shocks.
Over the next few years, growth in BRICS is likely to face
persistent headwinds from low commodity prices, weak
trade, and higher borrowing costs. Meanwhile, produc-
tivity growth is likely to remain weak as populations age
in large emerging markets, and investment weakness
slows the adoption of new technologies. A weaker ex-
ternal environment, and slowing growth, may further
erode policy buffers and constrain the use of counter-
cyclical stimulus to support activity. The strengthen-
ing recovery in advanced markets is expected to only
partially offset these risks. Continued weakness or a
further slowdown in BRICS growth could add to the
challenges faced by emerging and frontier markets
from a deteriorating external environment. Activity in
close trading partners of BRICS and in commodity ex-
porters would be particularly susceptible to a setback.
If, instead of the projected pickup, BRICS growth slows
further—by as much as the average growth disappoint-
ment over 2010-14—and if financial conditions tight-
ened moderately—such as during the financial market
turmoil of the summer of 2015—global growth could be
cut by one-third in 2016. Policy makers in emerging mar-
kets may need to support activity with fiscal and policy
stimulus, at least where policy buffers are sufficient. In
all cases, countries could derive substantial gains from
well-designed, credible structural reforms that retain
investor confidence and capital flows in the short-run,
and that lift growth prospects for the long-run.

ECONOMY MATTERS 10
GLOBAL TRENDS
The report sees 4.1 million barrels a day (mb/d) being
added to global oil supply between 2015 and 2021, down
sharply from the total growth of 11 mb/d in the period
2009-2015. The drop in supply growth comes as up-
stream investment dries up in response to the current
glut that is pressuring prices. Global oil exploration and
production capital expenditures are expected to fall 17
per cent in 2016, following a 24 per cent cut in 2015 –
which would be the first time since 1986 that upstream
investment has fallen for two consecutive years. The
US remains the largest contributor to supply growth
during the forecast period, accounting for more than
two-thirds of the net non-OPEC increase. Freed from
sanctions, Iran leads OPEC gains. Global oil demand has
been forecasted to grow at an average rate of 1.2 mb/d
through 2021, crossing the symbolic 100 mb/d mark
towards the end of the decade before reaching 101.6
mb/d by 2021. Indian consumption races ahead as more
motorists take to the roads, while Chinese demand
growth cools in tandem with the economy. Global oil
trade continues its pivot towards Asia. Having peaked,
at a five-year high of 1.6 million barrels per day (mb/d) in
2015, global oil demand growth is forecast to ease back
considerably in 2016, to 1.2 mb/d, pulled down by nota-
ble slowdowns in Europe, China and the US.
In early 2016 crude oil prices for WTI and Brent fell
below US$30/bbl for the first time since 2003, having
halved in just a few months. In a departure from the
past four decades, producers continue to produce and
sell what they can, letting the market set the price. Low
prices are a major short-term benefit to consumers
and will provide a boost to demand growth. But if low
prices persist, investments in new supply are cut back
– as has been demonstrated recently by a succession
of announcements from major companies. Unless the
heavily oversupplied oil market can return to balance
and high levels of stocks start to diminish, oil prices can-
not rise to the levels necessary to support investments
in the higher cost resources that must be developed to
meet rising oil demand. The result could be a sharp rise
in oil prices that risks curtailing economic growth.
The key factors impacting the supply and demand for
oil from today out to 2021 include: high-cost supply re-
silience from light, tight oil producers in the US; the lift-
ing of nuclear sanctions on Iran; the impact on demand
of lower oil prices – including recent subsidy changes
in the Middle East; and the timing of the oil market’s
return to balance.
In attempting to understand how the oil market will
look during the next five years, some certainties in the
past are now not so certain at all: that oil prices falling to
twelve-year lows will lead to a strong demand growth
spurt, a mass shut-in of so-called high cost oil produc-
tion and output cut by the largest group of producing
countries to stabilise oil prices. A year ago it was widely
believed that the market would return to balance by the
end of 2015 but that view has proved to be very wide of
the mark. In 2014 and 2015 supply exceeded demand by
massive margins, 0.9 mb/d and 2 mb/d respectively, and
for 2016 a further build of 1.1 mb/d is expected. Only in
2017 will we finally see oil supply and demand aligned
but the enormous stocks being accumulated will act as
a dampener on the pace of recovery in oil prices when
the market, having balanced, then starts to draw down
those stocks. Unless we see an even larger than expect-
ed fall in non-OPEC oil production in 2016 and/or a major
demand growth spurt it is hard to see oil prices recover-
ing significantly in the short term from the low levels

11
GLOBAL TRENDS
FEB-MAR 2016
prevailing. It is very tempting, but also very dangerous,
to declare that we are in a new era of lower oil prices.
Further, it is becoming even more obvious that the
prevailing wisdom of just a few years ago that “peak
oil supply” would cause oil prices to rise relentlessly as
output struggled to keep pace with ever-rising demand
was wrong. Today we are seeing not just an abundance
of resources in the ground but also tremendous tech-
nical innovation that enables companies to bring oil to
the market.
According to the IEA, it is in Asia where most of the 5.3
mb/d of global spare refining capacity will be found. Al-
though products demand will continue to grow, it will
not keep pace with the expected increase in investment
in new plant. The Middle East will consolidate its place
as a major refining centre and products exports will
grow at a rate exceeded only by the US which will pro-
cess rising volumes of domestic crude over the period
of the forecast as a whole. Elsewhere, the determina-
tion of members of the OPEC to maintain and expand
their market share has clearly been shown by the fact
that at two ministerial meetings following the historic
November 2014 decision not to cut production to sup-
port oil prices, ministers have resisted any temptation
to change course. In mid-February some OPEC mem-
bers and Russia agreed to freeze production and they
indicated that further policy initiatives may follow. Ris-
ing oil production in 2015, notably from Iraq and Saudi
Arabia, will now be joined by Iran, freed from nuclear
sanctions. Not much increase is expected in the produc-
tion capacity of either Iran or Iraq due to political uncer-
tainties. Massive economic retrenchment in countries
such as Algeria, Nigeria and Venezuela will reduce their
ability to invest in the oil sector. For OPEC, as a whole oil
export revenues slumped from a peak of US$1.2 trillion
in 2012 to US$500 billion in 2015 and, if oil prices remain
at current levels, this will fall in 2016 to approximately
USD$320 billion. Another downside to low oil prices is
the impact on investment. The IEA has regularly warned
of the potential consequences of the 24 per cent fall in
investment seen in 2015 and the expected 17 per cent
fall in 2016.
In today’s oil market there is hardly any spare produc-
tion capacity other than in Saudi Arabia and Iran and
significant investment is required just to maintain exist-
ing production before we move on to provide the new
capacity needed to meet rising oil demand. The risk of
a sharp oil price rise towards the later part of the IEA
forecast arising from insufficient investment is as poten-
tially de-stabilising as the sharp oil price fall has proved
to be. However interesting and important oil demand
trends are, the major focus in the next few months will
be on the supply side of the balance. By far the most sig-
nificant has been the resilience of high cost oil produc-
tion in the US. As oil prices cascaded down from more
than US$100/bbl it was widely predicted at various mile-
stones that the extraordinary growth in total US crude
oil production would grind to a halt and move rapidly
into reverse. Growth certainly ceased in mid-2015 but
the intervening period has seen a relatively modest pull-
back and total US crude oil production in early February
2016 was still high, aided by expanding production in
the Gulf of Mexico.

ECONOMY MATTERS 12
DOMESTIC TRENDS
GDP Growth Seen Accelerating to 7.6%
in FY16
A
s per the advance estimates released by Central
Statistical Organisation (CSO), GDP growth is
expected to rise to 7.6 per cent in FY16 as com-
pared with the revised estimates of 7.2 per cent in the
previous year, aided largely by growth in the manufac-
turing sector. If the new projection materialises, India
will be the fastest growing major economy in the world,
overtaking China. The latest projection is a shade bet-
ter than the finance ministry’s earlier estimate of seven
to 7.5 per cent. The acceleration in the manufacturing
sector shows that the government’s policy direction is
bearing fruit. The Make in India campaign with its objec-
tive of raising the growth rate in the manufacturing sec-
tor has begun to make an impact. Policy measures need
to focus on a revival in project execution in manufactur-
ing, real estate and infrastructure.
The Economic Survey FY16 which was released recently
has enunciated that in a weak global scenario, India’s
growth has been largely positive on the back of con-
sumption. Industry growth is estimated to have accel-
erated while services growth remained robust. Growth
in agricultural slackened due to two successive years
of below average monsoon.As per the Survey, GDP
growth is expected to reach 7.0-7.75 per cent (GDP at
market prices) inFY2017, lower than its potential GDP
growth of 8.0-10.0 per cent, on the assumption of a fa-
vourable monsoon and possible boost to consumption
from implementation of 7th Pay Commission. However,
weakness in global demand and drag on consumption
from a rise in oil prices were cited as key risks to this
outlook.
Looking ahead, the macro-economic prospects for the
Indian economy have improved considerably in the last
few quarters. The International Monetary Fund (IMF)
in January 2016 kept its growth forecast for India un-
changed at 7.5 per cent in 2016-17 while it lowered its
global growth projection in an update to the World
Economic Outlook released in October.India’s economy
is buoyant in the global context, but from a domestic
perspective, it may require some support to revive rural
demand and rejuvenate public sector banks.

13
DOMESTIC TRENDS
FEB-MAR 2016
On a quarterly basis, GDP growth for the third quarter of
this financial year slowed to a four-quarter low at 7.3 per
cent. In the second quarter, it had grown by 7.7 per cent.
Gross value added at basic prices too decelerated to 7.1
in the third quarter as compared to 7.5 per cent in the
previous month. On the supply-side, agriculture growth
slipped into negative territory and can be attributed to
two consecutive years of drought. The sector’s growth
contracted by 1.0 per cent in 3QFY16 as compared to 2.0
per cent growth in the previous quarter. The prospects
for the next year have also not significantly improved
yet and this may significantly impact the rural sector.
Going by this trend, the data print for the fourth quar-
ter will be weak too as Rabi sowing is below par. In this
context, it is pivotal for the government to provide im-
mediate relief measures for the beleaguered rural sec-
tor in the form of rise in MSPs, widening the agricultural
insurance net, amongst other measures.
On the brighter side, manufacturing growth came in at
a robust 12.6 per cent in 3QFY16 as compared to 9.0 per
cent in the previous quarter. The average IIP for Octo-
ber- November stood at 3.3 per cent.The healthy perfor-
mance of the manufacturing sector could be ascribed to
the significant fall in inputs costs following the collapse
of global commodity prices.On the back of healthy
growth in the manufacturing sector, overall industry
growth rate came higher at 9.0 per cent in 3QFY16 as
compared to 6.4 per cent in the quarter before. Servic-
es sector growth remained unchanged at 9.4 per cent
in the 3QFY16 from the previous quarter and was driven
by robust growth in its ‘Trade, Hotels, Transport and
Communication services’ sector.

ECONOMY MATTERS 14
DOMESTIC TRENDS
Industrial production growth contracted by 1.5 per
cent in January 2016 – its third consecutive month of
de-growth. Weaker financial market sentiment, slower
investment revival, vulnerable external demand and dis-
ruption in production on account of Chennai rains were
the key factors impacting production. Sector-wise, man-
ufacturing, capital goods and consumer non-durable
were the key drag on the IIP print during the month. On
a cumulative basis, IIP growth remained steady at 2.7
per cent during April-January FY16 period. In FY16, we
expect industrial production to grow at a higher rate as
compared to the previous fiscal on the back of policy
aided domestic upturn and lower commodity prices.
Outlook
Significant improvement anticipated in GDP growth which is expected to go up to 7.6 per cent in 2015-16 as against
7.2 per cent in the corresponding period last year is noteworthy & indicates that Indian economy is at the threshold
of a cyclical upturn. Economic conditions would improve in the coming quarters and the new growth opportunities
would emerge once reform initiatives announced by the government take root. CII looks forward to a reform-
centric budget which would put in place bold measures to remove supply bottlenecks and in turn spark a virtuous
cycle of investment and growth.
Industrial Production Continues to Remain in Red
At market prices,private consumption expenditure has
not shown signs of any significant distress and showed a
sharp uptick to 6.4 per cent in 3QFY16 from 5.6 per cent
in the previous quarter. While lower inflation and some
stimulus from the 7th
Pay Commission due this year is
expected to continue to support consumption demand
but meaningful recovery can happen only on the back
of a sustained increase in income levels and a good har-
vest. Government spending component growth came
higher at 4.7 per cent in 3QFY16 as compared to 4.3
per cent in the previous quarter. The subdued growth
Going forward, in the short-run, growth will receive a
boost from the cumulative impact of economic reforms
and improved inflationary expectations. Therefore,
in FY16, CII is projecting a base case of 7.6 per cent
growth, which broadly conforms to the advance esti-
rate posted by the gross fixed capital investment com-
ponent was indeed disheartening as for the economic
recovery to gain full momentum, it is important for this
component to grow at a higher rate. In the 3QFY16, in-
vestment spending moderated sharply to 2.8 per cent
as compared to relatively healthy 7.6 per cent growth in
the quarter before.The external sector continued to re-
main a matter of concern as exports growth contacted
by 9.4 per cent in 3QFY16 from -4.3 per cent in the previ-
ous quarter mainly on account of a slowdown in global
trade flows and a sharp decline in commodity prices.
mates figure released by CSO. However, risks to growth
in FY16 remain in the form of - 1) second consecutive
year of weak monsoons, 2) further fall in exports if glob-
al growth remains weak, and 3) reversal of the fall in oil
prices.

15
DOMESTIC TRENDS
FEB-MAR 2016
In contrast to the dismal performance of overall indus-
trial sector, output of the eight core industries rose by
2.9 per cent in January 2016 compared to 0.9 per cent in
the previous month. Five out of eight sectors recorded
growth in their outputs. Core sector output grew be-
tween 1.1-3.2 per cent during July-October 2015, only to
fall by 1.3 per cent in November 2015. The cumulative
growth of core sectors in April-Januaryperiod of 2015-16
came in at 2.0 per cent, lower than 5.3 per cent in the
first ten months of the last financial year
Total electricity generation in India grew by a healthy
6.0 per cent during January 2016. This was much high-
er than the 2.7 per cent growth recorded in the previ-
ous month. The rise in output during January was due
to growth in thermal power generation. Total thermal
power generation, which accounts for 80 per cent of
total generation, grew by 8.2 per cent in January 2016.
This was mainly due to higher availability of coal. Coal-
based power generation grew by 9.1 per cent. Produc-
tion by Coal India Ltd (CIL), which accounts for around
80 per cent of India’s overall coal output, rose by 13.4
per cent in January 2016.
Refinery throughput grew by 4.8 per cent in January
2016. Output of fertilizers grew by just 6.2 per cent in
January 2016. For the past five months fertilizers has re-
corded double-digit growth in output. In contrast, out-
put of steel fell by 2.8 per cent in January 2016. This is
the seventh consecutive month of fall. The fall in Janu-
ary was partly due to a shutdown of JSW’s three blast
furnaces at different locations.
On the sectoral front, growth of manufacturing sec-
tor, which constitutes over 75 per cent of the index,
declined to -2.8 per cent in January 2016 as compared
with -2.2 per cent growth in the previous month. This
is the third consecutive month when industrial output
has contracted. In terms of industries, ten out of the
twenty two industry groups (as per 2- digit NIC-2004)
in the manufacturing sector showed negative growth
during the month of January 2016 as compared to the
corresponding month of the previous year. The indus-

ECONOMY MATTERS 16
DOMESTIC TRENDS
Outlook
Industrial production, which had drifted into the negative terrain in November 2015, continued to remain in con-
tractionary zone in January 2016 as well, mainly on account of the steep slide in the growth of manufacturing and
capital goods sectors. However, going forward, we hope that growth would pick up in the coming months as pro-
active reform initiatives taken by the government in recent months would make a positive impact on investment
decisions and spur a turnaround in demand. In FY16, we expect industrial production to grow at a higher rate as
compared to the previous fiscal on the back of improving global conditions and policy aided domestic upturn.
try group ‘Electrical machinery & apparatus n.e.c.’ had
the highest negative growth of (-) 50.3 per cent, fol-
lowed by (-) 12.7 per cent in ‘Publishing, printing & re-
production of recorded media’ and (-) 11.5 per cent in
‘Medical, precision & optical instruments, watches and
clocks’. On the other hand, the industry group ‘Office,
accounting & computing machinery’ showed the high-
est positive growth of 41.0 per cent, followed by 22.4
per cent in ‘Radio, TV and communication equipment &
apparatus’ and 16.3 per cent in ‘Furniture; manufactur-
ing n.e.c.’. Mining output growth also decelerated to 1.2
per cent from 2.7 per cent in the previous month. The
recent auction of coal mines by the government could
provide some impetus to coal production in the months
to come.
Among the use-based classification, capital goods out-
put, which is a volatile component continued to remain
in negative territory for the third consecutive month.
It contracted by 20.4 per cent in January 2016 as com-
pared to -19.1 per cent in the previous month. The dis-
mal performance of capital goods sector shows that
private capex continues to remain weak in the economy
and hence the Government’s role in capital expenditure
becomes crucial to support growth recovery.Union
Budget 2016-17 has outlined a series of steps in order to
provide a boost to investment in the country.
Consumer durables have been on a strong footing for
quite a few months now, but January 2016 reading
showed a deceleration in its output growth. The sectors
outputslippedto5.8percentfromdouble-digitsgrowth
to the tune of 16.4 per cent in December 2015. This com-
ponent has remained positive for six months in a row
now and has been aided by continuous improvement
in sectors such as passenger cars. The weak growth
in consumer durables pulled down overall consumer
goodsgrowth sector to flat (0.0 per cent) during the
month. Consumer goods have been positive for a while
now but the sectors performance has mostly been tep-
id on account of weakness in consumer non-durables.
For the month of January 2016, the non-durables sector
registered negative growth for the third consecutive
month to the tune of -3.1 per cent. The weak growth of
consumer non-durables is also reflective of the cumula-
tive impact of two consecutive years of drought and the
growing distress in the rural economy.

17
DOMESTIC TRENDS
FEB-MAR 2016
CPI Inflation 30 bps Lower than RBI’s Target of 6%
for Jan 2016
Wholesale Price Index (WPI)-based inflation print
showed that the current deflationary spell has extend-
ed by yet another month. Wholesale price inflation
turned negative in November 2014, after falling continu-
ously for a year. The rate of deflation stood at 0.9 per
cent in January 2016 as compared to -0.7 per cent in the
previous month. This marks the 15th consecutive month
of year-on-year fall in wholesale prices. Also, this is the
most prolonged deflationary phase the country has
witnessed in at least the last three decades. Deflation
in fuel and manufacturing groups were the key drivers
behind the negative WPI print in the month of January
2016. Going ahead, we expect WPI to remain in negative
zone till atleast Q1FY17 as crude oil prices still remain be-
nign and demand pressures remain subdued. Sustained
decline in WPI is however good news for corporate as
WPI is input price for manufacturing process.
Meanwhile, CPI based inflation, the one which the Cen-
tral Bank tracks in taking its monetary policy decisions
remained sticky at 5.7 per cent in January 2016 as com-
Inflation in primary article prices fell to 4.6 per cent in
January 2016 from 5.5 per cent in the previous month.
This was on account of a fall in inflation in food articles.
The deceleration in primary food articles inflation was
in contrast with the rise in CPI food inflation seen dur-
ing the month. It is normally observed that CPI food
pared to 5.6 per cent in the previous month. It is heart-
ening to note that the January 2016 print is 30 basis
points (bps) lower than the RBI’s target of 6.0 per cent.
However, the sequential momentum of CPI inflation
edged up to 0.2 per cent on a month-on-month basis
as compared to -0.4 per cent on month-on-month basis
posted in the previous month. The main driver behind
CPI inflation during the month was food inflation, which
rose to 6.8 per cent as compared to 6.4 per cent posted
in December 2015. However, in some good news, pulses
inflation fell for the first time in 13 months, but still high
at 43.3 per cent. Two consecutive years of draught and
untimely rainfall last year have raised the upside risks
for food inflation going forward as well. Core inflation
came at 5.2 per cent in January 2016 as compared to
5.4 per cent in the previous month. Going ahead, the
subdued domestic demand coupled with weak interna-
tional crude prices are likely to support core inflation,
which we expect to stay below 5 per cent in the coming
months.
prices start reflecting the trend in WPI food articles
prices with a lag of 2-3 months.Prices of primary food
articles witnessed an inflation to the tune of 6 per cent
during January 2016 as compared to high of 8.2 per cent
witnessed in the last month. The primary drivers of fall
in primary food inflation were deceleration in prices of

ECONOMY MATTERS 18
DOMESTIC TRENDS
items like foodgrains, fruits, vegetables and milk seen
during the month.Inflation in prices of foodgrains fell to
9.5 per cent in January 2016 from 11.4 per cent in the
previous month. This was on the back of fall in prices of
cereals like rice and pulses due to rise in production and
imports. As per the second advance estimates for Kharif
2015-16 released by the Ministry of Agriculture, produc-
tion of cereals rose 0.5 per cent and that of rice rose
by 1.2 per cent. Imports of pulses during April-October
2015 rose by 17.4 per cent to 2.7 billion kgs. Further, veg-
etable prices too witnessed moderation in inflation to
12.5 per cent from 20.6 per cent in the previous month.
This was due to fall in price of onions, tomatoes and
cauliflowers. Inflation in milk prices fell to 1.4 per cent in
January 2016 from 1.8 per cent in the preceding month.
In contrast to slowing of inflation in food category, in-
flation for non-food articles firmed up to 8.2 per cent in
January 2016 from 7.7 per cent in December 2015, while
minerals category recorded deflation during the report-
ing month for the 18th consecutive month.
Deflation in the fuel group remained unchanged at 9.2
per cent in January 2016 from the previous month. The
deflationary trend in the group continued for the 15th
consecutive month due to a fall in mineral oil prices.
Prices of mineral oils within the group dropped by 15.9
per cent in January 2016. This was on the back of price
cuts in petrol and diesel announced during the month.
Prices of petrol fell by Rs.1 per litre in Delhi and Mum-
bai during the month. Diesel prices fell by Rs.1.2 per litre
in Delhi and Rs.1.3 per litre in Mumbai. These price cuts
were a result of the fall in global crude oil prices dur-
ing the month. With global crude oil prices expected to
stay suppressed in the next few months owing to weak
global demand conditions, we can expect fuel category
to remain in deflation as well.
Manufactured products group recorded a deflation for
the 11th straight month in January 2016. However, the
rate of deflation came down to 1.2 per cent from 1.4
per cent in the previous month. Inflation in food prod-
ucts rose to 2.8 per cent from 2.0 per cent in the previ-
ous month. Non-food manufacturing or core inflation,
which is widely regarded as the proxy for demand-side
pressures in the economy remained flat at -2.0 per cent
during the month.

19
DOMESTIC TRENDS
FEB-MAR 2016
Merchandise exports in January 2016 fell 13.6 per cent
from a year earlier to US$21.07 billion - declining for the
14th consecutive month - while a contraction in imports
narrowed the trade gap to an 11-month low. Contrac-
tion remained widespread, with petroleum products,
iron ore, engineering goods, oil seeds and cereals post-
ing the steepest declines (on a year-on-year basis).
Meanwhile, tea, jute manufactures, drugs and pharma-
ceuticals recorded positive growth. The weak exports
performance reflects weakness in global demand envi-
ronment as well as steep decline in commodity prices.
On a cumulative basis, cumulative exports contracted
by 17.5 per cent to US$218 billion as against US$264 bil-
lion during the same period last year.
Exports of drugs and pharmaceuticals (22.05 per cent),
chemicals (8.03 per cent), electronic goods 16.49 per
cent), gems and jewellery (12.33 per cent) increased in
January 2016, while exports of leather & leather prod-
ucts (-5.0 per cent), engineering goods (-21.76 per cent)
and petroleum products (-29.94 per cent) contracted.
Given the recent trend, exports are likely to fall below
US$300 billion mark, for the first time since FY11.This is
certainly not good news as India aims to take exports
Merchandise trade deficit narrowed to US$7.6 billion in
January 2016 as against the prior reading of US$ 11.7 bil-
lion deficit and the lowest since February 2015. Both
exports and imports contracted during the month. On a
cumulative basis, the trade deficit for April-January FY16
is lower at US$ 106.85 billion as compared to US$119.6
of goods and services to US$900 billion by 2020 and
raise the country’s share in world exports to 3.5 per
cent from 2 per cent now. Exports in the past four fiscal
years have been hovering at around US$300 billion.
Worried by the continuous decline in exports, the gov-
ernment has raised duty drawback rates for exporters
and implemented the interest stabilization scheme in
November 2015. While the increase in duty drawback
rates will help exporters recover higher input tax outgo
that they pay during the process of making the final
product, the interest stabilization scheme will allow ex-
porters to receive bank loans at a lower rate of inter-
est.
Imports too contracted by 11.1 per cent in January 2016
as against contraction of 3.7 per cent posted in Decem-
ber 2015. During April-January FY16, India’s cumulative
imports were US$324.5 billion. This is a 15 per cent drop
from US$383.8 billion, the cumulative figure for the
same period last year. Oil imports dropped 39.0 per
cent to US$5.02 billion while non-oil imports declined
1.4 per cent to US$23.68 billion. Non-oil, non-gold im-
ports, seen as a measure of domestic demand, fell 7.4
per cent to US$20.78 billion during the month.
billion in the same period last fiscal year. Though im-
proving domestic competitiveness through structural
reforms is crucial to improve exports performance, we
believe that can only materialize in the medium-term. In
the near-term, a weaker Rupee can act as a catalyst to
revive competitiveness.
Trade Deficit Narrows in January 2016

ECONOMY MATTERS 20
DOMESTIC TRENDS
RBI in its policy document mentioned that in keeping
with the Government’s Start-up India initiative, it will
take steps to ease doing business and contribute to an
ecosystem that is conducive for growth of start-ups.
These measures will create an enabling framework for
receiving foreign venture capital, differing contractual
structures embedded in investment instruments, defer-
ring receipt of considerations for transfer of ownership,
facilities for escrow arrangements and simplification of
documentation and reporting procedures.
On the growth front, RBI noted that for 2016-17,
“Growth is expected to strengthen gradually, not-
withstanding significant headwinds. Expectations of a
normal monsoon after two consecutive years of rain-
fall deficiency, the large positive terms of trade gain,
improving real incomes of households and lower input
In its sixth bi-monthly monetary policy review held on
2nd February, 2016, RBI maintained status-quo on all
key rates, awaiting clarity from the Union Budget. Repo
rate was kept unchanged at 6.75 per cent; marginal
standing facility (MSF) at 7.75 per cent. Consequently,
the reverse repo rate under the LAF will remain un-
changed at 5.75 per cent, and the marginal standing
facility (MSF) rate and the Bank Rate at 7.75 per cent.
However, the Central Bank revised upwards its infla-
tion projections for FY17 to 5.0 per cent as compared to
4.8 per cent projected earlier, without considering the
costs of firms should contribute to strengthening the
growth momentum. Yet, still weak domestic private
investment demand in a phase of balance sheet adjust-
ments, re-emergence of concerns relating to stalled
projects, excess capacity in industry, sluggish external
demand conditions dampening export growth could
act as headwinds. Based on an assessment of the bal-
ance of risks, gross value added (GVA) growth for 2016-
17 is projected at 7.6 per cent”.
On the inflation front, RBI noted that benign prices
pressures (amid correction in fruits and vegetables
prices, and current crude oil prices) is expected to keep
inflation ‘inertial’ and be around 5 per cent by March
FY2017. However, the implementation of 7th
Pay Com-
mission (7PC) award has not been included as part of
inflation projection andadjustments to the CPI guidance
implementation of seventh pay commission, while it re-
tained its inflation projections of 6 per cent for January
2016.
RBI’s policy statement highlighted that the structural
reforms by the Government while sticking to fiscal con-
solidation objective could facilitate more rate cuts. In
fact, the Governor asserted that the RBI awaits FY17
Budget in order to assess the impact of implementation
of the 7th
Pay Commission on the fiscal dynamics along
with the inflation trajectory.
RBI Keeps Rates Unchanged

21
DOMESTIC TRENDS
FEB-MAR 2016
will be made once clarity on the seventh pay commis-
sion emerges.The Central Bank will adjust its forecast
path as and when more clarity emerges on the timing
of implementation. Vagaries in the spatial and temporal
The Economic Survey 2015-16 which was tabled in the
Parliament on 26th February, 2016, pointed out the
positives which are there in the current Indian situation,
despite the challenges posed by the global economic
slowdown. CII has often highlighted the need for spe-
cial attention to the impaired financial positions of Pub-
lic Sector Banks, and some corporate houses and happy
to see a significant portion of the commentary in the
Economic Survey being dedicated to that problem. It is
key to set up the National Asset Management Company
which would be able to wipe the toxic assets off the
books of banks.
The Economic Survey quoted twin balance sheet
(TBS) challenge (i.e., the impaired financial positions
of the Public Sector Banks (PSBs) and some large cor-
porate houses) as a critical impediment to private
investment and full-fledged recovery in the Indian
economy. The Survey enunciated that for solving this
challenge would require the 4 Rs: Recognition (valu-
ing assets as close to their true value as possible),
Recapitalization(safeguarding capital positions via say,
infusion of equity), Resolution (selling/rehabilitating
stressed assets), and Reform(setting incentives to pre-
vent future repetition of the problem).
Further on the growth front, the Survey projected gross
domestic product (GDP) growth of 7.0-7.75 per cent in
2016-17 at a time the Central Statistics Office has esti-
mated economic growth at 7.6 per cent for 2015-16,
signalling the economy may either slow or is unlikely
distribution of the monsoon and the impact of adverse
geo-political events on commodity prices and financial
markets add additional uncertainty to the baseline fore-
cast.
to see any significant acceleration next year. “With
global slowdown likely to persist, the chances of In-
dia’s growth rate in 2016-17 increasing significantly be-
yond 2015-16 levels are not very high. The wider range
in the forecast this time reflects the range of possibili-
ties for exogenous developments, from a rebound in
agriculture to a full-fledged international crisis; it also
reflects uncertainty arising from the divergence be-
tween growth in nominal and real aggregates of eco-
nomic activity,” it said. The Survey mentioned that the
correlation between India’s growth rate and that of the
world has risen sharply to reasonably high levels in re-
cent years.
On the inflation front, the Economic Survey emphasised
that the hike in the pay of government employees due
to the implementation of the 7th Pay Commission will
have negligible impact on inflation as the wage increas-
es are unlikely to spill over to the private sector. The sur-
vey projected retail inflation to remain between 4.5-5.0
per cent in 2016-17, implying that the RBI will be able to
achieve its 5 per cent CPI inflation target by March 2017.
This would allow RBI to ease liquidity conditions and
further lower the policy rate, consistent with meeting
the inflation target, the survey said.Uncertainty regard-
ing China, impending Iranian oil supply and moderation
in demand from the rest of the world are likely to keep
oil prices in check.However, supply side constraints on
pulses, vegetables and edible oils are likely to cause an
uptick in inflation.
Outlook
RBI’s monetary policy announcement focuses more on reining in inflationary expectations. Although the policy
statement does hint at opening the space for easing interest rates in the near future, the Central Bank has chosen
to make it conditional on fiscal tightening and implementation of structural reforms by the government. A rate
cut would have been spot on for rejuvenating the investment cycle. CII hopes that the RBI would resume the rate
cutting cycle in the subsequent monetary policy, soon after the Union Budget, to complement the government’s
efforts to revive private investments and bring the economy back to the path of sustained growth.
Economic Survey FY16 Emphasises on Growth

ECONOMY MATTERS 22
DOMESTIC TRENDS
On the external risks, the Survey said foreign demand
for India’s goods and services will remain weak in the
short run, forcing the country to find and activate do-
mestic sources of demand to prevent the growth mo-
mentum from weakening. “At the very least, a tail risk
event would require Indian monetary and fiscal policy
not to add to the deflationary impulses from abroad.
The consolation would be that weaker oil and com-
modity prices would help keep inflation and the twin
deficits in check,” it said. India’s merchandise exports
contracted for 14 consecutive months till January due
to declining demand from its key markets and softening
crude oil prices.
On the fiscal side, while the Survey indicated that the
current fiscal target 3.9 per cent of GDP remains com-
fortable, it suggested that the Government should stick
to its FY17 fiscal deficit, thereby reinforcing its credibil-
ity. The high debt-to-GDP ratio of the consolidated Gov-
ernment strengthens the case for the same. The Survey
highlighted 2 key risks to the fiscal arithmetic: imple-
mentation of the 7th
Pay Commission and increased pub-
lic spending to meet pressing infrastructure needs.It
also said aggressive fiscal consolidation was a risk to de-
Presenting his second Railway Budget, Honorable Rail-
way Minister, Shri Suresh Prabhuemphasised the key
focus areas in the budget as - improving customer sat-
isfaction, improving operational efficiency, broadening
the scope of capex for the sector and use of innovative
means of financing the capex.The broad theme of Budg-
et was ‘Overcoming challenges - Reorganize, Restruc-
ture Rejuvenate Indian Railways: ‘Chalo, MilkarKuch-
Naya Karen’. As far as the fiscal situation of the railways
is concerned, the Railway Budget has had to execute a
fine balancing act between shrinking traffic receipts and
keeping its growth oriented focus intact. In this regard,
the savings generated to offset some revenue shortfall
and the adoption of alternative sources of financing in-
dicates that the Ministry remains cognizant of budget
targets.
The budget highlighted that the operating ratio for the
current fiscal came in at 90 per cent but is targeted at
mand revival, warning that the magnitude of the drag
on demand and output will be largely equal to the size
of consolidation. However, the survey said despite the
decline in nominal GDP growth relative to the budget
assumption (11.5 per cent in budget 2015-16 vis-à-vis 8.6
per cent in the advance estimates), the central govern-
ment will meet its fiscal deficit target of 3.9 per cent
of GDP, continuing the commitment to fiscal consolida-
tion.
On future prospects, the Survey highlighted that India
should adopt a three-pronged strategy to achieve its
long-term potential growth rate of around 8.0-10.0 per
cent by promoting competition and investing in health
and education, while not neglecting agriculture. First,
would be to create a more competitive environment for
the markets. Second, in order to fully exploit the demo-
graphic dividend, the Survey said India needed to invest
more on health and education, including in human capi-
tal, maternal health and early life interventions. Third,
the Survey said the agriculture sector needed urgent
focus as smaller farmers and landless labourers espe-
cially were highly vulnerable to productivity, weather
and market shocks that affect their incomes.
92 per cent for next fiscal on account of 7th Pay Com-
mission commitments. Fare receipts showed a marked
slowdown and FY16 budgeted targets were not met and
gross traffic receipts fell short by over Rs 15000 crores
for FY16. Growth budgeted for traffic receipts for FY17
is 10 per cent over RE and almost flat over BE. If this
weakness in traffic earnings were to persist then next
fiscal’s receipts could come under pressure. The plan
outlay has been increased to Rs 1.21 trillion for FY2017
as compared to Rs 1 trillion in FY16 revised estimates,
which will be implemented through joint ventures with
states, developing new frameworks for PPP, etc.
Following were recognised as the key thrust areas of
the Railway Budget:
Resource mobilization:
• Tap international markets for rupee bonds
• Secured funding from LIC at favourable terms; LIC
Highlights of the Railway Budget 2016-17

23
DOMESTIC TRENDS
FEB-MAR 2016
to invest Rs 1.5 trillion over a period of 5 years
• Partnership with SAIL, NTPC, coal ministry on fund-
ing
• Encourage multilateral financing for station devel-
opment
• Finalise standard document for undertaking work
via EPC mode
• Examining feasibility for a holding company to
monetise assets
Revival of freight traffic:
• Need to revive freight traffic through tariff rational-
ization, focus on last minute connectivity, expand-
ing the freight basket, and signing long term freight
rate contracts with big customers
• To allow existing terminal sheds to access contain-
er traffic
• To set up rail auto hub in Chennai
• To start timetable-based container trains this year
• To permit container freight operators to offer par-
cel service
• To capture incremental freight traffic of 50 million
tonnes in FY17
Enhancing Customer Experience:
• Railway Budget spared passengers and goods
movement from any increase in tariffs
• Railways intend to commence sale of tickets
through hand held terminals for the benefit of the
suburban and short distance travellers
• Overnight double-decker, Utkrisht Double Decker
Air-conditioned Yatri (UDAY) Express will be intro-
duced on the busiest routes
• Railways will install information boards in trains
enumerating the onboard services and also GPS
based digital displays inside coaches to provide real
time information regarding upcoming halts
• Introduce ‘Clean my Coach’ service on Pan-India ba-
sis, where a passenger can request cleaning of his/
her coach/toilets on demand through SMS
• To minimize the financial loss to passengers from
untoward incidents, Railways is working with insur-
ance companies to offer optional travel insurance
for rail journeys at the time of booking.
• There are plans to progressively ensure CCTV cover-
age at tatkaal counters
• Tejas railway service will showcase the future of
train travel in India. Operating at speeds of 130
kmph and above, it will offer onboard services such
as entertainment, local cuisine, Wi-Fi, etc. through
one service provider for ensuring accountability
and improved customer satisfaction.
• For the unreserved passenger, Antyodaya Express
and DeenDayalu coaches will be introduced on the
busiest routes.

ECONOMY MATTERS 24
CORPORATE PERFORMANCE
Corporate Performance in Q3FY16
T
he corporate results at the end of the third
quarter of current fiscal continued to remain
subdued as the financial performance of Indian
companies, especially manufacturing sector firms,came
lower. The subdued performance of manufacturing sec-
tor is in tandem with the deceleration in GDP growth to
7.3 per cent in the quarter ended December 2015 from
7.7 per cent in the previous quarter. While the growth
in expenditure costs stood somewhat curbed, fading
growth of net sales as well as decline in PAT stood out.
The analysis factors in the financial performance during
the third quarter of 2015-16 of a balanced panel of 1168
manufacturing companies (excluding oil and gas com-
panies) and 608 service firms extracted from the Ace
Equity database.
Net sales on an aggregate basis deceleratedto 1.2 per
cent at the end of the thirdquarter of 2015-16, as com-
pared to a growth of 6.8 per cent in the same quarter
a year ago. In fact the growth in net sales has been de-
cliningnow for the past seven quarters straight now.
The net sales for manufacturing firms showed contrac-
tion by 1.4per cent during the quarter as compared to a
growth of 3.8 per cent in the same quarter a year ago.
Firms in the service sector showed moderate drop in
their net sales to4.6 per cent in the third quarter of cur-
rent fiscal as compared to a growth of 11.1 per cent in
the same quarter in the previous year. The low net sales
of firms were reflective of the lack of ample demand in
the economy, a scenario that has been persistent for
quite some time now. The slowing demand in the exter-
nal markets has been doing no good either.

25
FEB-MAR 2016
On an aggregate basis, total expenditure contractedby
1.2 per cent in the reporting quarteras against a growth
of 7.1 cent in the corresponding period of 2014-15. This
was mostly led by a contraction in the cost of services
and raw materials. While costs for the manufactur-
ing sector contracted by 7.2 per cent as compared to
a growth of 5.2 per cent in the same quarter a year
ago, growth in expenditure in the service sector too
dropped to 7.9 per cent as compared to 10.0 per cent in
the third quarter of 2014-15. This came as a breather and
fairly cushioned the severe impact of lower net sales
growth during the quarter. Amongst the various com-
ponents of total expenditure on an aggregate basis, the
While moderation in growth of expenditure has to
some extent mitigated the impact of the current bout
of economic crisis characterized by falling growth in net
sales, the reduction was not large enough to provide
cushion to the bottom-line of the corporate. Conse-
growth in wages and salaries stood at 10.1 per cent in
the thirdquarter of current fiscal as compared to 9.73
per cent recorded in the corresponding period of 2014-
15. Encouragingly, growth in interest costs decelerated
to 5.3 per cent in the reporting quarter as against 9.5
per cent in the same quarter of 2014-15. This mirrors the
reduction in the interest rates by the RBI in the recent
months. The brightest spot for the companies came
from the fact that growth in raw material cost contract-
ed by as high as 8.9 per cent in the reporting quarter as
compared to a positive growth of 4.9 per cent seen in
the same quarter of 2014-15.Since, raw material cost has
the largest share in total expenditure cost, its decline is
indeed a good news for the firms.
quently, there was contractionwitnessed in profit after
tax (PAT) in the thirdquarter of 2015-16 on an aggregate
basis as PAT contracted by 0.02 per cent in the October-
December quarter of 2015 as compared to acontraction
of 8.3 per cent in the thirdquarter of 2014-15.PAT actu-

ECONOMY MATTERS 26
ally improved for manufacturing firms by 21.7 cent in the
thirdquarter of current fiscal as compared to a contrac-
tion of 37.1 per cent in the same quarter of last year. This
was led by sharp contraction in the cost of services and
raw materials in the sector to the tune of 7.2 per cent.
The service sectoralso lagged behind as PAT witnessed
de-growth by 8.6 per cent in the reporting quarter as
against a growth of 17.4 per cent seen in the corre-
sponding quarter of last year. Operating profits (PBDIT)
too followed fairly similar trends and on an aggregate
Our analysis shows that both net and gross margins
did not witness major falls, and even improved in some
cases across sectors and on an aggregate basis. This
does not appropriately mirror the contraction in oper-
ating profits and decelerating profitability because of
the denominator effect in play. While PAT and PBDIT
fell, the fall in net sales was even larger, and the main-
Over the past nine quarters, while net sales and expend-
iture has mostly followed a downward trend, profitabil-
ity has displayed wide fluctuations. A period of positive
growth which lasted four quarters saw PAT growing to
as much as 30.0 per cent in the first quarter of previous
fiscal year, only to drop in the negative territory where-
level, decelerationwas witnessed in the growth of op-
erating profits to the tune of3.1 per cent in the third
quarter of 2015-16 against a growth of 8.5 per cent over
the corresponding period of 2014-15. The figures were
worse for the manufacturing sector, wherein, operat-
ing profits contracted by 6.2 per cent as compared to a
positive growth of 2.0 per cent a year ago. For the ser-
vice sector, operating profits witnessed asoftening of
growth to 8.1 per cent as compared to 12.4 per cent in
the same quarter in 2014-15
tained margins is thus attributed to the denominator ef-
fect. Falling profitability is still a cause of worry. For the
thirdquarter in the current fiscal, while the net margin
stood at 8.6 per cent on an aggregate basis, almost the
same as 8.8 percent the previous period in year on year
terms, for manufacturing and services, it stood at 5.4
per cent and 12.6 per cent respectively.
in it has been hovering in double-digit negative figures
for the next severalquarters, much to the concern of
the industry. While the bottom-line has been trying to
creep back into the positive domain, meagre growth is
still a worry.

27
FEB-MAR 2016
Struck with uninspiring demand in the economy, dwin-
dling balance of trade, weak sales and ever moribund
profitability, the Indian companies are trying hard to
clutch a straw of hope. Efforts are in force by firms to
improve their own production efficiencies and employ
cost effective measures to tide over the current difficult
times. Simultaneously, there are also expectations of
some serious economic reforms, some of which have
already come in form of necessary rate cuts by the RBI,
that would elevate the economy, help pick up sales and
raise the profitability for the Indian corporate in the
months to come.

ECONOMY MATTERS 28
FOCUS OF THE MONTH
Union Budget: 2016-17
T
he Finance Minister has presented a bold, prag-
matic and growth-driven Budget which has at-
tempted a credible balancing act of scripting a
blueprint for sustaining the growth momentum in the
Indian economy in the coming year on the one hand
while taking up issues of social inclusion on the other.
At the current growth pivot point, addressing the fiscal
deficit was top of the macroeconomic agenda and the
Budget has addressed this with customary sagacity and
vision. Fiscal prudence has been a cornerstone of the
budget strategy with the deficit pegged at 3.9 per cent
and 3.5 per cent of GDP for FY16 and FY17 respectively
without compromising the developmental agenda. The
adherence to the fiscal deficit target would help open
up access to funds for other sectors to spend, maintain
a level of confidence in macroeconomic management
and contain inflation within the desired band. Besides,
closer adherence to the path of fiscal rectitude would
meet the expectations of rating agencies.
The Budget has done much to reignite the investment
cycle by enhancing allocations for the infrastructure
sector. Reducing the infrastructure gap is critical to ac-
celerate manufacturing growth and attract foreign in-
vestment. While augmenting the allocation on roads,
railways, ports and airports is significant, the Budget
has rightly announced measures to revitalise public-
private partnership (PPP) through the introduction of
Public Utility (Resolution of Disputes) Bill, formulating
guidelines for renegotiation of PPP Concession Agree-
ments and introducing a new credit rating system for
infrastructure projects.
It is also heartening to note that the Budget has a plan
for social inclusion. A package of measures including a
broad agriculture thrust and social security measures,
which seek to address rural stress on account of two
consecutive droughts, is timely. The Budget has come
out with a package of measures to boost farm produc-
tivity, reduce costs, facilitate greater access to credit,
reform agriculture marketing and, most importantly,
generate more employment in the rural economy. With
suitable provisions announced for flagship campaigns
such as ‘Make in India’ ‘Startup India’, ‘Digital India’ and
‘Skill India’ among others, the Budget would go a long
way to boost manufacturing, foster innovation, attract
investment, nurture entrepreneurship and create jobs.
In this month’s Focus of the month, we provide a de-
tailed analysis of the Union Budget: 2016-17 through the
eyes of the experts.

29
FOCUS OF THE MONTH
FEB-MAR 2016
Key Features of the Union Budget 2016-17
Following are the key features of Union Budget 2016-17:
Fiscal Discipline
• Fiscal deficit in RE 2015-16 and BE 2016-17 retained at
3.9 per cent and 3.5 per cent respectively.
• Revenue Deficit target reduced from 2.8 per cent to
2.5 per cent in RE 2015-16
• Total expenditure projected at Rs. 19.78 lakh crore
• Plan expenditure pegged at Rs. 5.50 lakh crore
• Non-Plan expenditure kept at Rs. 14.28 lakh crore
• Mobilisation of additional finances to the extent of
Rs. 31,300 crore by NHAI, PFC, REC, IREDA, NABARD
and Inland Water Authority by raising Bonds.
• Plan / Non-Plan classification to be done away with
from 2017-18.
• Every new scheme sanctioned will have a sunset
date and outcome review.
• Rationalised and restructured more than 1500 Cen-
tral Plan Schemes into about 300 Central Sector
and 30 Centrally Sponsored Schemes.
• Committee to review the implementation of the
FRBM Act.
Agriculture and Farmers’ Welfare
• Allocation for Agriculture and Farmers’ welfare is
Rs. 35,984 crore
• ‘PradhanMantriKrishiSinchaiYojana’ to be imple-
mented in mission mode. 28.5 lakh hectares will be
brought under irrigation.
• Implementation of 89 irrigation projects under
AIBP
• A dedicated Long Term Irrigation Fund will be cre-
ated in NABARD with an initial corpus of about Rs.
20,000 crore
• Programme for sustainable management of ground
water resources with an estimated cost of Rs.
6,000 crore will be implemented through multilat-
eral funding
• 5 lakh farm ponds and dug wells in rain fed areas
and 10 lakh compost pits for production of organic
manure will be taken up under MGNREGA
• Soil Health Card scheme will cover all 14 crore farm
holdings by March 2017
Rural Sector
• Allocation for rural sector – Rs. 87,765 crore.
• Rs. 2.87 lakh crore will be given as Grant in Aid to
Gram Panchayats and Municipalities as per the rec-
ommendations of the 14th
Finance Commission
• Every block under drought and rural distress will be
taken up as an intensive Block under the DeenDay-
alAntyodaya Mission
• A sum of Rs. 38,500 crore allocated for MGNREGS.
• 300 Rurban Clusters will be developed under the
Shyama Prasad Mukherjee Rurban Mission
• 100 per cent village electrification by 1st
May, 2018
Social Sector Including Health Care
• Allocation for social sector including education and
health care – Rs.1,51,581crore.
• Rs. 2,000 crore allocated for initial cost of providing
LPG connections to BPL families.
• New health protection scheme will provide health
cover up to Rs. One lakh per family. For senior citi-
zens an additional top-up package up to Rs. 30,000
will be provided.
• 3,000 Stores under Prime Minister’s Jan Aushadhi-
Yojana will be opened during 2016-17.
• ‘National Dialysis Services Programme’ to be start-
ed under National Health Mission through PPP
mode
Education, Skills and Job Creation
• 62 new NavodayaVidyalayas will be opened
• SarvaShikshaAbhiyan for increasing focus on qual-
ity of education
• Regulatory architecture to be provided to ten pub-
lic and ten private institutions to emerge as world-
class Teaching and Research Institutions

ECONOMY MATTERS 30
FOCUS OF THE MONTH
• Higher Education Financing Agency to be set-up
with initial capital base of Rs. 1000 Crores
• Digital Depository for School Leaving Certificates,
College Degrees, Academic Awards and Mark
sheets to be set-up
• GoI will pay contribution of 8.33 per cent for of all
new employees enrolling in EPFO for the first three
years of their employment. Budget provision of Rs.
1000crore for this scheme
Infrastructure and Investment
• Total investment in the road sector, including PMG-
SY allocation, would be Rs. 97,000 crore during
2016-17
• India’s highest ever kilometres of new highways
were awarded in 2015. Nearly 10,000 kms of Nation-
al Highways to be approved in 2016-17.
• Allocation of Rs. 55,000 crore in the Budget for
Roads. Additional Rs. 15,000 crore to be raised by
NHAI through bonds
• To provide calibrated marketing freedom in order
to incentivise gas production from deep-water, ul-
tra deep-water and high pressure-high temperature
areas
• Comprehensive plan, spanning next 15 to 20 years,
to augment the investment in nuclear power gen-
eration to be drawn up
• Reforms in FDI policy in the areas of Insurance and
Pension, Asset Reconstruction Companies, Stock
Exchanges
• 100 per cent FDI to be allowed through FIPB route
in marketing of food products produced and manu-
factured in India
• A new policy for management of Government in-
vestment in Public Sector Enterprises, including dis-
investment and strategic sale, approved
Financial Sector Reforms
• A comprehensive Code on Resolution of Financial
Firms for insolvency and bankruptcy issues to be in-
troduced
• Statutory basis for a Monetary Policy framework
and a Monetary Policy Committee through the Fi-
nance Bill 2016 to be introduced under committee
based approach for monetary policy
• A Financial Data Management Centre to be set up
• RBI to facilitate retail participation in Government
securities
• New derivative products will be developed by SEBI
in the Commodity Derivatives market
• Amendments in the SARFAESI Act 2002 to enable
the sponsor of an ARC to hold up to 100 per cent
stake in the ARC and permit non institutional inves-
tors to invest in Securitization Receipts
• Allocation of Rs. 25,000 crore towards recapitalisa-
tion of Public Sector Banks
Providing Certainty in Taxation
• Committed to providing a stable and predictable
taxation regime and reduce black money.
• Domestictaxpayerscandeclareundisclosedincome
or such income represented in the form of any as-
set by paying tax at 30 per cent, and surcharge at
7.5 per cent and penalty at 7.5 per cent, which is a
total of 45 per cent of the undisclosed income. De-
clarants will have immunity from prosecution.
• New Dispute Resolution Scheme to be introduced.
No penalty in respect of cases with disputed tax
up to Rs. 10 lakh. Cases with disputed tax exceed-
ing Rs. 10 lakh to be subjected to 25 per cent of the
minimum of the imposable penalty. Any pending
appeal against a penalty order can also be settled
by paying 25 per cent of the minimum of the impos-
able penalty and tax interest on quantum addition.
Simplification and Rationalization of Taxes
• 13 cesses, levied by various Ministries in which rev-
enue collection is less than Rs. 50 crore in a year, to
be abolished.
• For non-residents providing alternative documents
to PAN card, higher TDS not to apply.
• Revision of return extended to Central Excise as-
sesses.
• Additional options to banking companies and fi-
nancial institutions, including NBFCs, for reversal of
input tax credits with respect to non- taxable ser-

31
FOCUS OF THE MONTH
FEB-MAR 2016
vices.
• Customs Act to provide for deferred payment of
customs duties for importers and exporters with
proven track record.
• Customs Single Window Project to be implemented
at major ports and airports starting from beginning
of next financial year.
• Increase in free baggage allowance for internation-
al passengers. Filing of baggage only for those car-
rying dutiable goods.
Summary – Direct Taxes
• Deduction under Section 80JJAA of the Income Tax
Act will be available to all assessees who are subject
to statutory audit under the Act.
• Raise the ceiling of tax rebate under section 87A
from Rs.2000 to Rs.5000 to lessen tax burden on
individuals with income upto Rs.5 lakhs.
• Increase the limit of deduction of rent paid un-
der section 80GG from Rs.24000 per annum to
Rs.60000, to provide relief to those who live in
rented houses.
• Increase the turnover limit under Presumptive taxa-
tion scheme under section 44AD of the Income Tax
Act to Rs.2 crores to bring big relief to a large num-
ber of assessees in the MSME category.
• Extend the presumptive taxation scheme with prof-
it deemed to be 50 per cent, to professionals with
gross receipts up to Rs.50 lakh.
• Accelerated depreciation wherever provided in IT
Act will be limited to maximum 40 per cent from
1.4.2017.
• The weighted deduction under section 35CCD for
skill development will continue up to 1.4.2020.
• New manufacturing companies incorporated on or
after 1.3.2016 to be given an option to be taxed at
25 per cent + surcharge and cess provided they do
not claim profit linked or investment linked deduc-
tions and do not avail of investment allowance and
accelerated depreciation.
• Lower the corporate tax rate for the next financial
year for relatively small enterprises i.e, companies
with turnover not exceeding Rs.5 crores (in the fi-
nancial year ending March 2015), to 29 per cent plus
surcharge and cess.
• 100 per cent deduction of profits for 3 out of 5 years
for start-ups setup during April, 2016 to March,
2019. MAT will apply in such cases.
• 10 per cent rate of tax on income from worldwide
exploitation of patents developed and registered in
India by a resident.
• Determination of residency of foreign company on
the basis of Place of Effective Management (POEM)
is proposed to be deferred by one year.
• Commitment to implement General Anti Avoidance
Rules (GAAR) from 1.4.2017.
• Withdrawal up to 40 per cent of the corpus at the
time of retirement to be tax exempt in the case
of National Pension Scheme (NPS). Annuity fund
which goes to legal heir will not be taxable.
• In case of superannuation funds and recognized
provident funds, including EPF, the same norm of
40 per cent of corpus to be tax free will apply in re-
spect of corpus created out of contributions made
on or from 1.4.2016.
• Limit for contribution of employer in recognized
Provident and Superannuation Fund of Rs.1.5 lakh
per annum for taking tax benefit.
• 100 per cent deduction for profits to an undertak-
ing in housing project for flats upto 30 sq. metres in
four metro cities and 60 sq. metres in other cities
approved during June 2016 to March 2019 and com-
pleted in three years. MAT to apply.
• Surcharge to be raised from 12 per cent to 15 per
cent on persons, other than companies, firms and
cooperative societies having income above Rs.1
crore.
• Tax to be deducted at source at the rate of 1 per
cent on purchase of luxury cars exceeding value of
Rs.10 lakh and purchase of goods and services in
cash exceeding Rs.2 lakh.
• Domestic taxpayers can declare undisclosed income
or such income represented in the form of any asset
by paying tax at 30 per cent, and surcharge at 7.5
per cent and penalty at 7.5 per cent, which is a total
of 45 per cent of the undisclosed income. Declar-

ECONOMY MATTERS 32
FOCUS OF THE MONTH
ants will have immunity from prosecution.
• Surcharge levied at 7.5 per cent of undisclosed in-
come will be called KrishiKalyan surcharge to be
used for agriculture and rural economy.
• New Dispute Resolution Scheme to be introduced.
No penalty in respect of cases with disputed tax
up to Rs.10 lakh. Cases with disputed tax exceed-
ing Rs.10 lakh to be subjected to 25 per cent of the
minimum of the imposable penalty. Any pending
appeal against a penalty order can also be settled
by paying 25 per cent of the minimum of the impos-
able penalty and tax interest on quantum addition.
Summary – Indirect Taxes
• Exemption of service tax on services provided un-
der DeenDayalUpadhyayGrameenKaushalyaYojana
and services provided by Assessing Bodies empan-
elled by Ministry of Skill Development & Entrepre-
neurship.
• Exemption of Service tax on general insurance ser-
vices provided under ‘Niramaya’ Health Insurance
Scheme launched by National Trust for the Welfare
of Persons with Autism, Cerebral Palsy, Mental Re-
tardation and Multiple Disability.
• Basic custom and excise duty on refrigerated con-
tainers reduced to 5 per cent and 6 per cent.
• Changes in customs and excise duty rates on certain
inputs to reduce costs and improve competitive-
ness of domestic industry in sectors like Informa-
tion technology hardware, capital goods, defence
production, textiles, mineral fuels & mineral oils,
chemicals & petrochemicals, paper, paperboard
& newsprint, Maintenance repair and overhauling
[MRO] of aircrafts and ship repair.
• Exemption from service tax for Annuity services
provided by NPS and Services provided by EPFO to
employees.
• Customs Act to provide for deferred payment of
customs duties for importers and exporters with
proven track record.
• Customs Single Window Project to be implemented
at major ports and airports starting from beginning
of next financial year.
• Increase in free baggage allowance for interna-
tional passengers. Filing of baggage only for those
carrying dutiable goods.
Analysis of Fiscal Trends
Fiscal prudence received preference over growth con-
sideration as the government adhered to the fiscal con-
solidation roadmap. The government has also proposed
to set up a panel to review the FRBM Act and shift to
a fiscal deficit target range.The government continued
to follow the path of fiscal consolidation by aiming to
bring down fiscal deficit to 3.5 per cent of GDP in 2016-
17 from 3.9 per cent of GDP in 2015-16. The adherence
to the FRBM targets in the wake of higher revenue ex-
penditure due to higher outgo on account of Seventh
Pay Commission and OROP recommendations and con-
tinued rural stress seems a bit ambitious. However, the
benefit derived from relaxing the FRBM target would
have been not very significant amount.

33
FOCUS OF THE MONTH
FEB-MAR 2016
Budget 2016-17 has projected a realistic nominal GDP
growth target of 11.0 per cent. The gross tax-to-GDP ra-
tio for FY17 has been assumed at 10.8 per cent -- same
as that achieved in FY16. The government has also as-
sumed a modest growth of 11.7 per cent in gross tax
revenues in FY17 after having achieved a growth of
17.2 per cent in the current fiscal as the incremental
benefits, especially on account of excise hike are lim-
As far as the non-tax revenue is concerned, government
has once again set an ambitious target of Rs 565 billion
from disinvestment proceeds in FY17. Previous experi-
ence on this front suggests this would be difficult to
achieve this target as market conditions remain unfa-
vourable. For FY16, compared with the budgeted disin-
ited. In FY16, the direct tax collections were lower than
what was budgeted as both corporate and income tax
growth missed the target - the latter by a substantial
amount. However, the growth in indirect tax collections
at 28.5 per cent far exceeded the target of 18.5 per cent
on account of windfall gain from increased excise duty
on petrol and diesel, which more than made up for the
shortfall in other areas.
vestment target of Rs 695 billion, the government was
able to collect only Rs 253 billion. However, a miss in the
disinvestment target may be made up by higher than
budgeted spectrum revenues. In FY16, government
earned spectrum revenues to the tune of Rs 560 billion,
higher than the budgeted Rs 429 billion.

ECONOMY MATTERS 34
FOCUS OF THE MONTH
On the expenditure side, Union Budget 2015-16 has also
outlined a number of initiatives to increase the alloca-
tive efficiencies of the government expenditure and to
improve operational efficiency of expenditures through
At the same time, government’s subsidy burden con-
tinues to follow a downward path. Particularly, a lower
fuel subsidy bill would help the government’s overall
subsidy burden to come down to 1.6 per cent of GDP in
focus on utilization, targets and outcomes. The govern-
ment has budgeted capital expenditure at Rs 2470 bil-
lion for FY17, an increase 3.9 per cent, which is lower
compared with 20.9 per cent growth achieved in FY16.
FY17 from 1.9 per cent in FY16. This is mainly expected
on the back of lower oil prices. As a result, the govern-
ment’s fuel subsidy bill is budgeted to drop from Rs 300
billion in FY16 to Rs 270 billion in FY17.

35
FOCUS OF THE MONTH
FEB-MAR 2016
Union Budget FY17 Stresses on Reviv-
ing Rural Economy
One of the major thrust areas in the Budget FY16 was re-
vival of the rural sector. The farm sector saw a sharper
increase in Budget spend. There is a 94 per cent year- on-
year increase in spend on agriculture and famers’ wel-
farethatincludes42percentincreaseinirrigationspend,
86 per cent increase in crop insurance allocation, and a
Rs 150 billion provision towards interest subvention on
loans.Following are the key measures announced in the
budgetinordertorevivetheruralsectorwhichwasbeen
reeling under the impact of two consecutive draughts.
- 28.5 lakh hectares will be brought under irrigation
under the PradhanMantriKrishiSinchaiYojana.
- A dedicated Long Term Irrigation Fund will be cre-
ated in NABARD with an initial corpus of about Rs
20,000 crore. To achieve all these, a total provision
of Rs 12,517 crore has been made through budget-
ary support and market borrowings in 2016-17.
- Simultaneously a major programme for sustainable
management of ground water resources has been
prepared with an estimated cost of Rs 6,000 crore
and proposed for multilateral funding.
- At least 5 lakh farm ponds and dug wells in rain fed
areas and 10 lakh compost pits for production of
organic manure will be taken up by making produc-
tive use of the allocations under MGNREGA.
- The Soil Health Card Scheme is now being imple-
mented with greater vigour. Through this, farmers
get information about nutrient level of the soil and
can make judicious use of fertilizers. The target is
to cover all 14 crore farm holdings by March 2017.
Rs 368 crore has been provided for National Project
on Soil Health and Fertility. Besides, 2,000 model re-
tail outlets of Fertilizer companies will be provided
with soil and seed testing facilities during the next
three years.
- To increase crop yields in rain fed areas, which ac-
count for nearly 55 per cent of the country’s arable
land, organic farming is being promoted. Towards
this end, the Government has launched two im-
portant schemes. First, the ‘ParmparagatKrishiVi-
kasYojana’ which will bring 5 lakh acres under or-
ganic farming over a three year period. Second, the
Government has launched a value chain based or-
ganic farming scheme called “Organic Value Chain
Development in North East Region”. The emphasis
is on value addition so that organic produce grown
in these parts find domestic and export markets. A
total provision of Rs 412 crore has been made for
these schemes.
- Rs 500 crores under National Food Security Mission
has been assigned to pulses. The number of dis-
tricts covered has been increased to 622.
- The Government is implementing the Unified Agri-
culture Marketing Scheme which envisages a com-
mon e-market platform that will be deployed in se-
lected 585 regulated wholesale markets.
- Special focus has been given to ensure adequate
and timely flow of credit to the farmers. Against the
target of Rs 8.5 lakh crore in 2015-16, the target for
agricultural credit in 2016-17 will be an all-time high
of Rs 9 lakh crore. To reduce the burden of loan re-
payment on farmers, a provision of Rs 15,000 crore
has been made in the BE 2016-17 towards interest
subvention.
- Special focus has been given to ensure adequate
and timely flow of credit to the farmers. Against the
target of Rs 8.5 lakh crore in 2015-16, the target for
agricultural credit in 2016-17 will be an all-time high
of Rs 9 lakh crore. To reduce the burden of loan re-
payment on farmers, a provision of Rs 15,000 crore
has been made in the BE 2016-17 towards interest
subvention.

ECONOMY MATTERS 36
FOCUS OF THE MONTH
Budget Delivers on all Counts
H
igh GDP growth and macroeconomic stability in
an environment of vulnerable global economic
conditions formed the backdrop for Budget
2016-17. The nine-pronged strategy announced in the
Budget is comprehensive and covers critical growth
drivers for the economy. Industry had called for en-
hanced public expenditure on key sectors such as ag-
riculture, infrastructure, and low-cost housing without
unduly compromising the fiscal deficit target, and this
expectation was largely met in the Budget.
The Budget also included some structural reform meas-
ures. For example, the distinction between Plan and
non-Plan sections will be done away with. The mention
of disinvestment and strategic sale of public sector en-
terprises is also welcome.
Agriculture and the rural economy required a huge
boost after two successive drought years, and a holistic
package has been rolled out in the Budget. It is hearten-
ing to note the increased outlay on irrigation and crea-
tion of an irrigation fund of Rs 20,000 crore which will
contain risks arising out of monsoon deficiencies. Soil
health cards, e-agri markets and interest subvention will
go a long way towards reviving the rural economy and
alleviating vulnerabilities for farmers.
The infrastructure sector has received a huge impetus
in the Budget with roll-out of Rs 2.21 lakh crores for
roads, railways and other facilities. We are particularly
happy to see the high priority accorded to public-pri-
vate partnerships in the infrastructure sector, including
introduction of a bill for dispute resolution, renegotia-
tion of concession agreements, and a new credit rat-
ing system. The various steps for stressed assets and
strengthening asset reconstruction companies would
also help to unclog the investment pipeline.
Employment generation in the formal sector was ex-
plicitly mentioned in Budget 2016-17 through various
means. The contribution of EPFO for new employees,
extension of section 80JJAA to all assessees subject to
statutory audit, and model shops and establishments
Bill are some of the incentives that will encourage new
job creation.
Additionally, several sectors such as housing and trans-
port have received a boost and would contribute to
more employment. The different policies for entrepre-
neurship development such as amendments in Com-
panies Act, entrepreneurship training in colleges and
schools, and relaxation for small enterprises under pre-
sumptive taxation scheme would also aid setting up of
new enterprises that generate jobs.
For healthcare, the extension of cover to Rs 1 lakh per
family and introduction of Jan AushadhiYojana stores
can be life-savers for poor families. Similarly, the initia-
tives on promotion of skill development, setting up of
1500 multiskill training institutes, and a financing agen-
cy for higher education are welcome for building human
capital.
The Budget also continues on the path of simplification
and rationalization of tax administration. The Finance
Minister reiterated his commitment to providing a sta-
ble and predictable tax regime. Dispute resolution is
sought to be strengthened under the Budget through
various means and a time limit has been introduced for
disposing of petitions on interest waiver. The increase

37
FOCUS OF THE MONTH
FEB-MAR 2016
in limits for cases under single-member Benches and
creation of new Benches would also fast-track dispute
resolution.
The Budget has taken care to mention some exemp-
tions proposed to be phased out in synch with lowering
of corporate income tax rates. We were also expecting
more cuts in the corporate tax rate in advance of the
roadmap as enunciated by the Finance Minister in last
year’s Budget, but this was not the right time, given
global risks and added expenditures.
Regarding the regime of indirect taxes, the addition of
cesses and surcharges for infrastructure, rural invest-
ments and the environment appears reasonable and
justified, although it contributes to the complexity of
the tax structure.
In sum, Budget 2016-17 presents a balanced perspective
on the economy which will go a long way towards ce-
menting India’s position as the world’s fastest growing
major economy.
This article appeared in The Hindu dated 1st March 2016. The online version can be accessed from the following
link:http://www.thehindu.com/business/budget/budget-delivers-on-all-counts-sumit-mazumder/article8309610.ece

ECONOMY MATTERS 38
FOCUS OF THE MONTH
Steps that Strike the Right Chord
B
udget 2016-17 has been announced at a time
when the macro-economic milieu continues to
be domestically and globally challenging. Un-
der the circumstances, the finance minister has struck
a right chord by taking steps to provide an impetus to
the economy and industry, reignite investment demand
even while enforcing fiscal prudence and taking steps
to alleviate the plight of the dis-possessed.
The budget has provided a strong agriculture and rural
focus which is understandable considering two succes-
sive years of poor monsoon. The budget has rightly al-
located resources towards bolstering farm productivity
by launching two new schemes to increase crop yields
in rain-fed areas. Incentivising pulses production is also
long overdue considering the huge shortfall in pulses
production in the country. Similarly, an array of welfare
schemes to improve the income security of the rural
populace would be critical for raising consumer de-
mand.
Jaitley has focused on rural infrastructure and rightly
so because 60 per cent of India’s population lives in vil-
lages. Likewise, agro industries and irrigation facilities
in rural India will be enhanced and 100 per cent electri-
fication would be achieved by 2018. A significant push
to augment investments in key projects, particularly in
infrastructure, is commendable. The gross fixed capi-
tal formation is expected to be 30 per cent of GDP in
2015-16 which is much lower than 33.6 per cent in 2011-
12. The allocation on infrastructure at Rs. 2.21 lakh crore
is hence encouraging. This would ‘crowd in’ private in-
vestment and have a cascading effect on growth.
Another takeaway is the accent on affordable housing
which has one of the highest multiplier effects on the
economy as there are over a 150 industry segments di-
rectly linked to the home construction industry. It also
provides the largest number of semi-skilled and un-
skilled jobs. Some of the budget provisions such as 100
per cent profit deduction and service tax deduction on
housing projects of specified size, deductions for first
time home buyers, facilitating investments in REITs and
INVITs, excise duty exemption would go a long way to
incentivise affordable housing.
The government’s approach to tackle the burgeoning
non-performing assets of banks has been noteworthy.
CII welcomes the allocation of Rs 25,000 crore in BE
2016-17 towards recapitalisation of PSU banks. A slew
of financial sector reforms unveiled in the budget are
also credible for imparting efficiency to markets. The
most striking feature of the budget has been the ad-
herence to fiscal roadmap by meeting the fiscal deficit
target of 3.9 per cent and 3.5 per cent of GDP for 2015-
16 and 2016-17, respectively, without compromising the
developmental agenda. What is noteworthy is that the
budget is serious about rationalising non-productive ex-
penditure.
To arrest the current slide in exports, it has widened
and deepened the duty drawback scheme to include
more products and countries. We understand that duty
drawback is the only WTO compliant export incentive
and the finance minister has rightly used the instrument
to support exports. In India, we do not have “zero rat-
ing” of exports and, therefore, the timeliness of this
initiative. To conclude, the budget has displayed a long
term vision to strengthen the foundations of the Indian
economy.
This article appeared in The Telegraph dated 1st March 2016. The online version can be accessed from the following
link:http://www.telegraphindia.com/1160301/jsp/business/story_72170.jsp#.VtmaNPl97IU

39
FOCUS OF THE MONTH
FEB-MAR 2016
Time to Build upon the Good Work
B
udget 2016 aims to accelerate India’s progress to-
wards inclusive economic growth by focussingon
nine distinct pillars ie agriculture and farmers’
welfare, rural employment and infrastructure, social
sector, education, skills and job creation, infrastructure
and investment, financial sector reforms, governance
and ease of doing business, fiscal discipline and tax
reforms. Clearly, the policy proposals appear to be an-
choring the Government’s flagship initiatives like Start-
up India, MakeinIndia, Stand-up India and the Swachh
Bharat mission, and the most recent KrishiKalyan mis-
sion.
For infrastructure, new and clear initiatives have been
announced to reinvigorate the Public Private Partner-
ship (PPP) mode of development. These include intro-
duction of Public Utility (Resolution of Disputes) Bill for
dispute resolution, guidelines for renegotiation of con-
cession agreements and new credit rating system for
infrastructure projects. Interest is being expressed in
exploiting the rich deposit of natural resources (includ-
ing oil and gas) which the country possesses, with an
eye on achieving self–sufficiency through incentivising
gas production from deep water, ultra deep water and
high pressure, high temperature areas.
The financial sector reforms focus on evolving the com-
prehensive code on resolution of financial firms, devel-
oping derivative products, deepening of the corporate
bonds market and amending the RBI and SARFAESI
laws. The emphasis on revitalising the financial sector
is a timely step towards addressing the ‘twin balance
sheet challenge’ of stressed banks and stressed corpo-
rates. To garner the much needed resources for nation
building, the government has to address the exit chal-
lenge, by timely monitoring and monetising the disin-
vestment program. Promise of enacting an Insolvency
and Bankruptcy Code should also help.
On the tax front, the FM has indicated his approach
to achieving a lower tax regime by creating a non-liti-
gious, predictable and stable tax-friendly environment.
While the compliant taxpayers have been assured
of a supportive interface by the department, the tax
evaders will not be spared and rather will be strongly
condemned and countered. The FM has also sought
to grant limited period window for compliance by an-
nouncing an Income Declaration Scheme, 2016 that will
be effective from 1 June 2016. The scheme will enable
non-compliant taxpayers to be complianton payment of
an effective 45 per cent tax, a penalty on undisclosed
income, without any risk of scrutiny and prosecution.
Success on this front can help achieve the objectives
of revenue generation while curbing the menace of a
parallel economy. However, the coverage of eligible de-
clarants has been narrowed to exclude those under as-
sessment or survey.It may be good to consider allowing
such taxpayers as well, as long as the disclosure is in
relation to income which was not the subject matter of
assessment or survey proceedings earlier.
The Budget has proposed a number of measures for
improving the dispute resolution process, including the
introduction of a new dispute resolution scheme. The
new scheme would enable a taxpayer to settle disputes
pending before the first-appellate authority by paying
the disputed tax and interest up to the date of assess-
ment. One will need to wait and watch to see if the pro-
posal motivates taxpayers to settle their disputes under
this scheme. While one needs to guard against arbitrary
settlement of disputes, taxpayers who are confident of
the technical merits of their case may need an incentive
beyond relief from potential penalty and prosecution to
respond favourably to the new scheme. There is anoth-
er proposal to restrict the power of the tax authority
to appeal against the directions of the Dispute Resolu-

Economy Matters February 2016

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