ECONOMY MATTERS 2
US economy is slowly but steadily limping towards recovery. Growth in economic activity 
has rebounded in recent months. L...
3 JULY - AUGUST 2014
5 
EXECUTIVE SUMMARY 
JULY - AUGUST 2014 
Global Trends 
The US economy rebounded with a growth rate of 2.4 
per cent on a...
GLOBAL TRENDS 
Sliver of Hope amidst Concerns for US 
The US economy rebounded with a growth rate of 
2.4 per cent on a ye...
7 
GLOBAL TRENDS 
JULY - AUGUST 2014 
federal expenditure and hence the net government ex-penditure 
continued to see a co...
ECONOMY MATTERS 8 
GLOBAL TRENDS 
Labor markets witnessed a rosy scenario as the total 
nonfarm payroll employment increas...
9 
GLOBAL TRENDS 
JULY - AUGUST 2014 
While the Federal Reserve has acknowledged that 
growth has rebounded, it has made c...
China on Crossroads between Growth and Reforms 
ECONOMY MATTERS 10 
GLOBAL TRENDS 
In the first six months, the growth in ...
11 
GLOBAL TRENDS 
JULY - AUGUST 2014 
In July 2014, China’s manufacturing purchasing man-agers 
index (PMI) stood at 51.7...
ECONOMY MATTERS 12 
GLOBAL TRENDS 
Residents’ income continued to increase. In the first 
half year, the per capita cash i...
13 
DOMESTIC TRENDS 
India’s Oil Economy 
JULY - AUGUST 2014 
India’s significant dependence on oil makes it the 
fourth l...
ECONOMY MATTERS 14 
DOMESTIC TRENDS 
Recent Geo-Political Tensions have 
Raised Concerns 
India’s dependence on oil import...
15 
DOMESTIC TRENDS 
JULY - AUGUST 2014 
Any change in price of oil impacts domestic economy 
through multiple channels as...
ECONOMY MATTERS 16 
DOMESTIC TRENDS 
• Impact on Inflation 
In the event of an increase in international crude 
prices, if...
High Fiscal Deficit in 1QFY15 Raises Worries 
17 
DOMESTIC TRENDS 
JULY - AUGUST 2014 
The fiscal deficit in the first qua...
ECONOMY MATTERS 18 
DOMESTIC TRENDS 
The deficit crossed more than 50 per cent of its annual 
target in the first quarter ...
19 
DOMESTIC TRENDS 
JULY - AUGUST 2014 
Expenditure rose by 8.2 per cent to Rs 4.14 lakh crore 
during April-June 2014. T...
Industrial Output Decelerates in June 2014 
ECONOMY MATTERS 20 
DOMESTIC TRENDS 
After growing at a modest pace in the las...
21 
DOMESTIC TRENDS 
JULY - AUGUST 2014 
On the sectoral front, output of the manufacturing sec-tor, 
which constitutes ov...
Outlook 
Growth in industrial production, which has been on the ascendant for the last two months, has shown a modera-tion...
23 
DOMESTIC TRENDS 
JULY - AUGUST 2014 
Primary inflation remained stable at 6.8 per cent in July 
2014 from the previous...
Outlook 
Bulk of the upside pressure on CPI inflation was due to high food prices. However, going ahead, we do not expect ...
25 
DOMESTIC TRENDS 
JULY - AUGUST 2014 
On inflation, the RBI mentioned that it remains commit-ted 
to the disinflationar...
ECONOMY MATTERS 26 
DOMESTIC TRENDS 
The high cost of capital has been dissuading industry from undertaking capacity expan...
Provisional Results of the Sixth Economic Census 
Released 
27 
DOMESTIC TRENDS 
JULY - AUGUST 2014 
Ministry of Statistic...
ECONOMY MATTERS 28 
DOMESTIC TRENDS 
Highlights of Prime Minister Shri Narendra Modi’s Maiden 
Independence Day Speech 
Pr...
Other Economic Developments of the Month 
- Government approved the constitution of an Expenditure Management Commission (...
CORPORATE PERFORMANCE 
Net Sales Foretell a Recovery 
Indian firms posted an impressive performance in the 
first quarter ...
31 
CORPORATE PERFORMANCE 
JULY - AUGUST 2014 
The net sales of services sector in the first quarter 
though moderated to ...
SECTOR IN FOCUS 
Jobless Growth and its Implications 
As India progresses on its demographic ‘sweet 
spot’, the imperative...
33 
SECTOR IN FOCUS 
JULY - AUGUST 2014 
education, rise in incomes, and other factors. 
Three, the country is seeing a sh...
ECONOMY MATTERS 34 
SECTOR IN FOCUS 
ii. The Employment Imperative 
In order to take advantage of India’s demographic divi...
35 
SECTOR IN FOCUS 
JULY - AUGUST 2014 
23.9 million. The Planning Commission is projecting that 
by the end of the 12th ...
ECONOMY MATTERS 36 
SECTOR IN FOCUS 
to note that only 29 million out of a workforce of 472 
million are employed in the o...
37 
SECTOR IN FOCUS 
JULY - AUGUST 2014 
In the ultimate analysis, job creation is a matter of hu-man 
rights as has been ...
III. Some Innovative Ideas to Push Employment 
ECONOMY MATTERS 38 
SECTOR IN FOCUS 
5. Investments: Rejuvenating investmen...
39 
SECTOR IN FOCUS 
JULY - AUGUST 2014 
appropriate training. Some top services sectors with 
huge employment potential a...
FOCUS OF THE MONTH 
Rejuvenating the Textiles Sector 
Textiles is one of the most important sectors of In-dian 
economy, i...
The Indian Textiles Industry: Pivotal in 
Increasing the Share of Manufacturing in GDP 
41 
FOCUS OF THE MONTH 
JULY - AUG...
ECONOMY MATTERS 42 
FOCUS OF THE MONTH 
level at all levels, fragmentation, smaller capacities, 
etc. Since the industry’s...
Tiruppur – An Industry with Great Growth 
Potential 
43 
FOCUS OF THE MONTH 
JULY - AUGUST 2014 
Tiruppur is a major texti...
Economy Matters - July-August 2014
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Economy Matters - July-August 2014

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In the July-August 2014 Issue of Economy Matters, we track the economic developments in US and China in Global Trends. In the section on Domestic Trends, we discuss the trends emanating out of the recent releases on IIP, Inflation, Fiscal, Trade & Monetary Policy. The Sectoral spotlight for this issue is on the Implications of Jobless Growth. In Focus of the Month, the spotlight is on Textiles Sector. Special Feature discusses the importance of Hospitality Sector in India.

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Economy Matters - July-August 2014

  1. 1. ECONOMY MATTERS 2
  2. 2. US economy is slowly but steadily limping towards recovery. Growth in economic activity has rebounded in recent months. Labor market indicators have generally shown further im-provement. Household spending appears to be rising moderately and business fixed invest-ment has resumed its advance, while the recovery in the housing sector has remained slow. Despite acknowledging the rebound in growth, the US Federal Reserve has made it amply clear that it has no plans to raise interest rates anytime soon though it announced a further reduction to the amount of money it is injecting into the economy through monthly bond purchases. The other major ‘mover & shaker’ of the world economy- China, has been caught on the crossroads of growth and reforms. The second quarter GDP growth witnessed a mar-ginal uptick, though problems concerning the asset quality of the banks have kept the poli-cymakers 1 FOREWORD JULY - AUGUST 2014 worried. On the domestic front, a string of poor economic data has raised the concerns on durability of the economic recovery. IIP growth slowed to 3.4 per cent in June compared to an average 4.2 per cent growth in the previous two months.However, its overall performance in Q1FY15 is signaling a gradual recovery. Retail inflation rose in July driven by a faster price rise in food articles, especially vegetables, fruits, and pulses. However, in some good news, upside risks to inflation from a sub-normal monsoon has moderated with rainfall deficiency narrowing sharply. Moreover, the latest round of RBI inflation expectations survey (Q1FY15) indicates that the number of respondents expecting an increase in inflation over the coming three months as well as one year has declined. This, we feel, should give RBI the necessary leg-room to cut rates, going forward. Textiles have an overwhelming presence in the socio-economic scenario in India. The sector contributes about 14 per cent to industrial production, 4 per cent to the gross domestic prod-uct (GDP), and 17 per cent to the country’s export earnings. It provides direct employment to over 35 million people. The textiles sector is the second largest provider of employment after agriculture. Thus, the growth and all round development of this industry has a direct bear-ing on the improvement of the economy of the nation. However, this age-old industry in the country is facing many challenges for its survival and sustainability too. In this context, we cover this crucial sector in this month’s ‘Focus of the Month’, providing an in-depth analysis of the sector by experts. Chandrajit Banerjee Director General, CII
  3. 3. 3 JULY - AUGUST 2014
  4. 4. 5 EXECUTIVE SUMMARY JULY - AUGUST 2014 Global Trends The US economy rebounded with a growth rate of 2.4 per cent on a yearly basis, in the second quarter of the current fiscal year, as compared to 1.8 per cent in the same quarter in the previous year, sending out posi-tive signals to the rest of the world. The surge reflected positive contributions from personal consumption ex-penditures, private inventory investment, exports, non-residential fixed investment, state government spend-ing, and residential fixed investment. In another major developed economy, China, the gross domestic product witnessed a marginal improvement to 7.5 per cent in the second quarter of the current year, compared with 7.4 per cent in the first quarter. While agricultural pro-duction showed good momentum, industrial produc-tion grew steadily. Domestic Trends The fiscal deficit in the first quarter of 2014-15 (1QFY15 henceforth) stood at Rs 2.97 lakh crore which translates into 56.1 per cent of the budgeted figure for the entire financial year. The jump in fiscal deficit in the 1QFY15 was underpinned by rise in expenditure growth and con-traction in revenue growth during the said quarter. In some more sombre news for the economy, after grow-ing at a modest pace in the last two months, industrial production growth eased to 3.4 per cent in June 2014. WPI based inflation, however provided some cheer as it slowed down to a five-month low of 5.2 per cent in July 2014 from 5.4 per cent in the previous month, at a time when retail inflation (as measured by CPI) accelerated. Reserve Bank of India (RBI) kept the key policy rates un-changed in its third bi-monthly monetary policy review held on August 5, 2014, citing the upward risks still hov-ering over inflation in the wake of sub-par monsoons. Corporate Performance in 1QFY15 Indian firms posted an impressive performance in the first quarter of the current fiscal (1QFY15), as net sales and profit rose at the fastest pace in seven quarters, spurring investor optimism that the worst is over for corporate earnings. The net sales of companies (manu-facturing plus services) in the first quarter expanded by 10.0 per cent on a y-o-y basis, up from 5.7 per cent in the comparable period last year. Our analysis is based on the financial performance of 1613 companies (840 Manufacturing and 773 Services and excluding oil & gas companies), using a balanced panel, extracted from the Ace Equity database. On an aggregate basis, growth in PAT improved significantly to 25.4 per cent in the first quarter as compared to contraction to the tune of 4.5 per cent in the same quarter of last year. This was driv-en by sharp improvement in PAT growth of both manu-facturing and services sector. Sector in Focus: Jobless Growth and its Implications With almost 270 million people below the poverty line, India confronts the huge task of reviving growth and raising incomes. Its best asset is its human talent, but to effectively deploy this will require concerted effort at creating jobs and building productivity levels. India’s demographic dividend is a historic opportunity for de-velopment. A number of areas would need to be ad-dressed to create adequate and productive jobs for the expected growth in workforce, estimated at 10 million annually. The key would be to boost growth to 8 per cent plus growth trajectory and revive investments. Above all, it is important to re-examine labour laws and regulations, many of which are misaligned with the cur-rent economic environment and discourage the growth of employment in the organised sector. Focus of the Month: Rejuvenat-ing the Textiles Sector Textiles is one of the most important sectors of Indian economy, in terms of, its contribution to industrial out-put, employment generation, and the export earnings of the country. India’s dominance in global textiles can be gauged from the fact that the country is second larg-est producer of fibre in the world. It is also counted among the leading textile industries in the world. Abun-dant availability of raw materials such as cotton, wool, silk and jute and skilled workforce has made India a ma-jor sourcing hub. The textile industry in India tradition-ally, after agriculture, is the only industry that has gen-erated huge employment for both skilled and unskilled labor in textiles. The textile industry continues to be the second largest employment generating sector in India. Going forward, the Indian textile industry is poised for strong growth, given the strong domestic consump-tion as well as export demand. However, this age-old industry in the country is facing many challenges for its survival and sustainability too. In this context, we cover this crucial sector in this month’s ‘Focus of the Month’, providing an in-depth analysis of the sector by sectoral experts.
  5. 5. GLOBAL TRENDS Sliver of Hope amidst Concerns for US The US economy rebounded with a growth rate of 2.4 per cent on a yearly basis, in the second quarter of the current fiscal year, as compared to 1.8 per cent in the same quarter in the previous year, sending out positive signals to the rest of the world. On a quarterly basis, the headline figure which stood at 4.0 per cent growth came as a breather after a contraction of 2.1 per cent in the previous quarter this year, even more so since, the latest batch of disappointing news from East to West has reinforced the view of sluggish global growth and increased the risk weighing on the U.S. re-covery. The surge in GDP in the second quarter reflect-ed positive contributions from personal consumption expenditures, private inventory investment, exports, non-residential fixed investment and state government spending. Growth in real personal consumption expenditures stood at 2.3 per cent in the second quarter, remaining at same levels as in the second quarter of 2013. Expendi-ture on durables witnessed softening of growth to 6.9 per cent, as against 7.5 per cent in the same quarter last year. Non-durables showed positive improvement in ECONOMY MATTERS 6 growth of expenditure to 2.0 per cent, compared with an increase of 1.4 in the second quarter previous year. Expenditure on services witnessed a slight moderation in growth to 1.7 per cent compared with a growth of 1.8 per cent previously. Growth in real non-residential fixed investment im-proved hugely to 5.7 per cent in the second quarter, compared with a growth of 1.9 per cent in the second quarter last year. This was largely led by investment in structures which grew massively by 8.0 per cent, com-pared with a contraction of 3.3 per cent previously. In-vestment in equipment too rose by 6.1 per cent, in con-trast to a growth of 3.8 per cent in the second quarter in 2013. Real residential fixed investment witnessed a colossal drop, as the growth stood at a meager 0.9 per cent, in contrast to a growth of 15.2 per cent previously. While the federal government consumption expendi-tures and gross investment growth improved in com-parison on a yearly basis, it continued to witness a con-traction standing at -3.2 per cent as compared to -5.0 per cent previously. Both defense and non-defense components added to this de-growth. The improve-ment in growth of state and local government con-sumption expenditures and gross investment to 0.9 per cent, as compared with 0.4 per cent in the same quar-ter last year, could only partially offset the deficiency in
  6. 6. 7 GLOBAL TRENDS JULY - AUGUST 2014 federal expenditure and hence the net government ex-penditure continued to see a contraction. The marginal increase in growth of exports of goods and services to 3.5 per cent in the second quarter on a yearly basis, on the back of increase in export of in-dustrial supplies and consumer goods, in contrast to a growth of 2.2 per cent in the second quarter of 2013, was however counterpoised by imports, whose growth stood at 3.9 per cent, with major contributions from food and capital goods, as compared to growth of 1.0 per cent previously.
  7. 7. ECONOMY MATTERS 8 GLOBAL TRENDS Labor markets witnessed a rosy scenario as the total nonfarm payroll employment increased by 209,000 in July 2014. Job gains occurred in professional and busi-ness services, manufacturing, retail trade, and construc-tion. The unemployment rate stood at 6.2 per cent in July 2014. Over the past 12 months, the unemployment rate and the number of unemployed persons have de-clined by 1.1 per cent and 1.7 million, respectively. The employment-population ratio, at 59.0 per cent, has edged up by 0.3 per cent over the past 12 months. Professional and business services added 47,000 jobs in July 2014 and 648,000 jobs over the past 12 months. Manufacturing added 28,000 jobs in July 2014. Job gains occurred in motor vehicles and parts (+15,000) and in furniture and related products (+3,000). Over the prior 12 months, manufacturing have added an average of 12,000 jobs per month, primarily in durable goods in-dustries. In July 2014, retail trade employment rose by 27,000. Over the past year, retail trade has added 298,000 jobs. Employment continued to trend up in au-tomobile dealers, food and beverage stores, and gen-eral merchandise stores. Employment in construction increased by 22,000 in July 2014. Within the industry, employment continued to trend up in residential building and in residential spe-cialty trade contractors. Over the year, construction has added 211,000 jobs. Social assistance added 18,000 jobs over the month and 110,000 over the year. Mining added 8,000 jobs in July 2014, with the bulk of the increase occurring in support activities for min-ing (+6,000). Over the year, mining employment has risen by 46,000. Employment in leisure and hospitality changed little in July 2014 but has added 375,000 jobs over the year, primarily in food services and drinking places. Employment in other major industries, including wholesale trade, transportation and warehousing, in-formation, financial activities, and government, showed little change in July.
  8. 8. 9 GLOBAL TRENDS JULY - AUGUST 2014 While the Federal Reserve has acknowledged that growth has rebounded, it has made clear that it has no plans to raise interest rates anytime soon. It described the chances of faster growth as roughly even with the chances that the expansion would slow down. The U.S. Central Bank announced a further reduction to the amount of money it is injecting into the economy through monthly bond purchases. The Federal Reserve too has said it would continue to ease back on its stimu-lus efforts. Growth in economic activity has rebounded in recent months. Labor market indicators have generally showed further improvement. The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the hous-ing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. The FOMC intends to take a balanced ap-proach consistent with its longer-run goals of maximum employment and inflation of 2 per cent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. While concerns abound, the latest growth figures are a positive signal. As the Euro-zone and Asian econo-mies struggle with dismal growth statistics, the United States seems steady enough to be at helm and ferry the rest of the world to recovery.
  9. 9. China on Crossroads between Growth and Reforms ECONOMY MATTERS 10 GLOBAL TRENDS In the first six months, the growth in investment in fixed assets (excluding rural households) softened as the in-crease of 16.3 per cent was 0.3 per cent lesser than that in the first quarter. Specifically, the investment in the state-owned and state holding enterprises saw a rise of 14.8 per cent; growth in private investment improved to 20.1 per cent, accounting for 65.1 per cent of the total investment. The investment in the primary industry was up by 24.1 per cent; in the secondary industry by 14.3 per cent; and the tertiary industry saw a growth in invest-ment of 19.5 per cent. While the economic situation in China has sent out encouraging signals, complicated external and inter-nal conditions have made stabilization of economic growth, reforms and restructuring major concerns for the Chinese government lately. The gross domestic product of China witnessed a mar-ginally improved year-on-year growth of 7.5 per cent in the second quarter of the current year, compared with 7.4 per cent in the first quarter. While agricultural pro-duction showed good momentum, industrial produc-tion grew steadily.
  10. 10. 11 GLOBAL TRENDS JULY - AUGUST 2014 In July 2014, China’s manufacturing purchasing man-agers index (PMI) stood at 51.7 per cent, 0.7 per cent higher over last month, increasing for 5 consecutive months, indicating continued momentum of growth in China’s manufacturing sector. The PMI of large-sized enterprises was 52.6 per cent, an increase of 1.1 per cent month-on-month; that of medium-sized enterprises was 50.1 per cent, a slight moderation by 1.0 per cent month-on- month; that of small-sized enterprises was 50.1 per cent, up by 1.7 per cent month-on-month. Production index stood at 54.2 per cent rising to a high point of this year, with an increase of 1.2 per cent month-on-month. New orders index was 53.6 per cent, which increased 0.8 per cent month-on-month. New export orders in-dex was 50.8 per cent, which went up by 0.5 per cent month-on-month. Production and business activities expectation index was 55.3 per cent, witnessing an in-crease of 0.5 per cent month-on-month. Sales in domestic markets enjoyed a steady growth. In the first half year, the total retail sales of consumer goods saw a growth of 10.8 per cent, 0.1 per cent faster than that in the first quarter. Imports and exports reversed to positive growth. Ex-ports in July 2014 jumped 14.5 per cent from a year earli-er - the fastest pace in 15 months, doubling from 7.2 per cent in June and roundly beating market expectations. However, imports contracted 1.6 per cent year-on-year, indicating soft domestic demand and a downward pres-sure on growth. In the first half year, the total value of exports was up by 0.9 per cent; the total value of im-ports saw an increase of 1.5 per cent. The trade balance was 630.6 billion yuan or 102.9 billion dollars. The growth of consumer price remained stable. In July 2014, the consumer price index went up by 2.3 per cent year-on-year. The prices grew by 2.3 per cent in cities and 2.1 per cent in rural areas. The food prices went up by 3.6 per cent, while the non-food prices increased 1.6 per cent. The prices of consumer goods went up by 2.2 per cent and the prices of services grew by 2.5 per cent. On average from January to July, the overall consumer prices were up by 2.3 per cent over the same period of the previous year. The month-on-month change of con-sumer prices was up by 0.1 per cent, of which, prices increased 0.1 per cent in cities and remained at the same level in rural areas. The food prices went down by 0.1 per cent, while the non-food prices went up by 0.1 per cent. The prices of consumer goods decreased 0.1 per cent, and the prices of services went up by 0.5 per cent.
  11. 11. ECONOMY MATTERS 12 GLOBAL TRENDS Residents’ income continued to increase. In the first half year, the per capita cash income of rural and urban residents went up by 9.8 and 7.1 per cent respectively. The national per capita disposable income stood at 10,025 yuan, rising by 8.3 per cent. Structural adjustment has achieved stable progress. The industrial structure continued to be optimized. In the first half year, the value of the tertiary industry ac-counted for 46.6 per cent of GDP, 1.3 per cent higher than the same period last year, 0.6 per cent higher than that of the secondary industry. The structure of domes-tic demand was further improved. In ¬the first half year, the final consumption expenditure accounted for 52.4 per cent of GDP, 0.2 per cent point higher than the same period last year. The income gap between urban and ru-ral households was further narrowed. In the first half year, the real growth of the per capita cash income of rural households was 2.7 per cent higher than the per capita disposable income of urban households. The per capita income of urban households was 2.77 times of the rural households, 0.06 less than that of the same period last year. Energy conservation and consumption reduction continued to make new achievements. In the first half year, the energy consumption per 10,000 yuan of GDP decreased by 4.2 per cent. Money supply maintained a steady growth. By the end of June, the balance of broad money saw a year-on-year growth of 14.7 per cent; the balance of narrow money was up by 8.9 per cent; and the balance of cash in cir-culation saw a rise of 5.3 per cent. To revitalize a slow-ing economy, Beijing in recent months has adopted “mini-stimulus” measures such as loosening credit for rural banks, expanding loans to smaller borrowers and reducing fees and taxes for businesses. China’s rapid growth has been sustained by heavy reli-ance on capital spending and credit and, while this has provided a welcome lift to the global economy, growth prospects are now threatened by declining efficiency of investment, a significant build-up of debt, income inequality and environmental costs. The challenge is to shift gears, reduce the vulnerabilities that have built up, and transition to a more sustainable growth path. Key reforms include further strengthening regulation and supervision, freeing up bank deposit interest rates, in-creasing reliance on interest rates as an instrument of monetary policy, and eliminating implicit guarantees across the financial and corporate landscape China’s economic stature, its newly accumulated eco-nomic assets and its transition to middle-income eco-nomic status are real. The achievement is also now a reality that Chinese policymakers have to face as they struggle to stay on course in guiding the economy through middle-income to OECD advanced country liv-ing standards over the next two decades or so. With a GDP growth rate that has slipped below the average 10 per cent at which the economy barrelled along for more than three decades, China faces more and more questions about how its leadership and policymaking authorities should manage the next phase of the coun-try’s economic development. Three problems currently plague the Chinese economy. The first is the slow global recovery and negative ef-fects of previous stimulus policies that generated over-investment and capacity. The second is a growth model that no longer attacks the burning problems of the time, such as over-investment and income inequality. The third is steering a way through the middle-income trap challenge. Only the first of these is cyclical in character. The second two are structural and underline the chal-lenge of maintaining higher growth potential through lifting productivity as the supply of cheap labour dries up. Long-term growth cannot occur via fiscal stimulus, which will create more zombie firms, inhibit productiv-ity, profitability and job creation in viable firms and de-liver white elephant public investment projects.
  12. 12. 13 DOMESTIC TRENDS India’s Oil Economy JULY - AUGUST 2014 India’s significant dependence on oil makes it the fourth largest oil consumer in the world. However, India is not self sufficient in oil production and relies heavily on imports. At present India imports about 80 percent of its oil needs. In the first quarter of the cur-rent fiscal year, India has already imported 48 million tons of crude oil worth US$36.4 billion as compared to total oil imports of 189 million tons in fiscal year 2013- 14. From the chart below, we can see that over the last few years, the quantity of crude oil imports as well as the oil import bill has stabilized a bit because of some stability in the international crude oil prices. However, any supply disruption in any country or any global risk that tends to raise international crude prices creates ex-treme repercussions for India.
  13. 13. ECONOMY MATTERS 14 DOMESTIC TRENDS Recent Geo-Political Tensions have Raised Concerns India’s dependence on oil imports is markedly skewed towards the Middle East, as India imports more than 60 per cent of total oil import from this region. The recent geo-political tensions in Iraq raised concerns regarding the continuity of economic recovery in India as Iraq accounts for about 12 per cent of India’s total oil imports and historically the Indian economy has been Impact of Oil Prices on the Economy The Indian economy is so heavily dependent on oil that any change in global oil prices creates significant policy implications for the economy. It is evident from the ta-ble below that the slowdown in India’s growth in the last three years has also coincided with an increase in in-ternational crude oil prices. This has also been associat-highly sensitive to any changes in oil prices. As of mid- June, militants had seized an important oil field in the northern region of Iraq, and were slowly progressing towards the major oil fields in the southern region- caus-ing oil prices to shoot up to US$115 per barrel. However over time, with no apparent risks to the southern Iraq oil fields and resumption of oil supplies from Libyan oil fields, oil prices steadily declined to US$104 per barrel, before witnessing renewed volatility on recent news re-garding US airstrike on Iraq. ed with higher inflation, higher fiscal deficit (on account of higher subsidies) and higher current account deficit. In the event of a rise in fuel prices, the government can choose to either pass on the burden to the consumer or bear the burden itself through an increase in subsidy expenses. However, no matter who shoulders the bur-den, when global oil prices increase, there is definitely a negative impact on the economy.
  14. 14. 15 DOMESTIC TRENDS JULY - AUGUST 2014 Any change in price of oil impacts domestic economy through multiple channels as highlighted below: • Impact on Current Account Deficit (CAD) Any change in oil prices leads to a subsequent change in our import bill as oil imports account for about 30 per cent of our total imports. As per our calculations, for every US$5 per barrel increase in international crude oil price, there is a subsequent US$7.3 billion increase in our import bill for that par-ticular year. If we assume a constant exchange rate, this would imply that our oil import bill would in-crease from US$144.7 billion in 2013-14 to US$159.6 billion in 2014-15. Typically, when there is upward pressure on the trade and current account deficits, the domestic currency tends to weaken and foreign investment inflows recede, leading to further pressure on the balance of payments. Currency depreciation could pose further problems for the fiscal deficit and for the under-recoveries borne by the public sector Oil Marketing Companies (OMCs). On similar lines, any decline in international crude oil prices would be beneficial for our import bill hence will mean lower stress on our current ac-count deficit, domestic currency and fiscal deficit. • Impact on Fiscal Deficit (FD) Higher oil prices also impact the government fi-nances as fuels such as diesel, LPG and kerosene are sold at fixed rates by public sector OMCs. If oil prices increase internationally, the govern-ment can either raise retail prices and pass the entire burden onto the consumer or keeps the retail prices fixed and share the losses from OMC under-recoveries. If the government decides to keep the retail prices of diesel, LPG and Kerosene unchanged, then public sector OMC’s will suffer losses from selling these fuels at a subsidized rate. To make up for the losses of the OMC’s, the under-recoveries are shared among the OMC’s, upstream oil companies – ONGC, Oil India Limited (OIL) and GAIL – and the government in such a way that the government and upstream oil marketing compa-nies bear a significant proportion of these losses (under-recoveries). Usually each year, the govern-ment contributes more than 40 per cent and the upstream companies share more than 30 per cent, with the rest being borne by the OMC’s. According to PPAC estimates, for every US$1 per barrel increase in crude oil prices, the government has to shell out an extra US$733 million in the form of under-recoveries. This burden of under-recov-eries puts an upward pressure on the fiscal deficit as oil subsidies constitute ~32 per cent of the total subsidy bill. The Petroleum Planning and Analysis Cell (PPAC) has also estimated that for every INR 1 per USD de-preciation in the rupee, there is an INR 8,000 crore (US$1.3 billion) increase in our under-recoveries. To counter this huge build-up in under-recoveries the government is steadily moving towards de-regulating diesel prices as well, after deregulating petrol prices in 2002. From the table below we can see that diesel forms a big chunk in the total under-recoveries and to counter this, the government has progressively raised diesel prices each month by about 60 paise, based on the recommendations of Kirit Parekh committee. It is expected that by the end of this year diesel prices will be at their interna-tional level, thus generating no under recoveries, if crude prices remain stable. Additionally, from the below table, we can expect that OMC under-recoveries in FY 2014-15 will be lower than the previous year levels, even if crude oil prices average at US$110 per barrel through the year. The table shows that till Q1: 2014-15, the total under-recovery bill was INR 286 billion and diesel under-recoveries had declined considerably com-pared to last year. Hence, the continuous decline in diesel under-recoveries due to an increase in retail prices would help us achieve a lower fuel subsidy bill this year, even if global oil prices average at US$110 per barrel in FY 2014-15.
  15. 15. ECONOMY MATTERS 16 DOMESTIC TRENDS • Impact on Inflation In the event of an increase in international crude prices, if the government decides to pass on the burden onto the consumers then higher oil prices feed into inflation through both, a direct increase in fuel prices and an indirect increase in prices of vari-ous other commodities, via an increase in transpor-tation cost. Even if it decides to bear the burden it-self, persistently higher subsidies and fiscal deficits can be inflationary. As per RBI’s estimates, a US$10 per barrel increase in crude oil price, if sustained, can push up inflation by 1 per cent directly, and by up to 2 per cent if indirect effects are taken into ac-count. On the contrary, if international crude oil prices fall, then government transmits this to the consumers in the form of a cut in fuel prices, thus reducing in-flationary pressures directly. Also, the fuel subsidy bill shrinks, which translates into lower fiscal deficit and aides indirectly in inflation management. • Impact on Growth Inflationary pressures play a major role in direct-ing an economy’s growth trajectory. High inflation can force the country’s Central Bank to tighten its monetary policy thus squeezing both consumer demand and investment demand, hence impact-ing economic growth. While on the other hand low inflation, gives the Central Bank the freedom to pursue pro-growth policies thus generating invest-ment demand. Outlook is Mixed With the domestic economy on the path of recovery and oil prices receding in recent weeks (owing to uninter-rupted oil supplies from southern Iraq and restoration of oil production in Libya’s largest oil field, El Shahara) there are no immediate concerns to the domestic growth. However, given the volatile nature of the global oil prices and the historical performance of the domestic economy in times of sudden increases in international crude prices, it is very difficult to define the outlook for the country. It is important to shield the economy from any such crisis in the future and this would require reducing our dependence on oil imports. In the short term, oil importing companies would have to diversify the source of crude away from the Middle East while in the medium term it is imperative that we expedite the exploration of newer oil fields to support domestic production of crude oil and natural gas. (Contributed by: Ms. Bidisha Ganguly, Principal Economist, CII)
  16. 16. High Fiscal Deficit in 1QFY15 Raises Worries 17 DOMESTIC TRENDS JULY - AUGUST 2014 The fiscal deficit in the first quarter of 2014-15 (1QFY15 henceforth) stood at Rs 2.97 lakh crore which translates into 56.1 per cent of the budgeted figure for the entire financial year. The jump in fiscal deficit in the 1QFY15 was underpinned by rise in expenditure growth and contrac-tion in revenue growth during the said quarter. In y-o-y terms, fiscal deficit recorded a growth of 13.3 per cent in the 1QFY15 as compared to 38 per cent growth in the same quarter last year. To be sure, while presenting the It is interesting to see how the monthly fiscal numbers in the current year stack up as compared to the situation in the last year. In the below graph, it becomes amply clear that fiscal deficit in the first three months of 2014- 15 has been on the higher side as compared to the last year. And if the trend observed last year, wherein the fiscal deficit was progressively increased in the subse-quent months of the year, is repeated this year, the 4.1 first budget of the newly elected NDA government in July 2014, Finance Minster (FM), Mr Arun Jaitley had laid stress on fiscal prudence, lowering the fiscal deficit tar-get of 4.1 per cent of GDP for 2014-15 as compared to 4.6 per cent in 2013-14. However, given the situation of the government finances in the 1QFY15, it would be an uphill task for the FM to meet these ambitious targets of the current fiscal. per cent of GDP target for fiscal deficit is clearly under threat. The only silver lining appears to be the proposed disinvestment programme of the government, which is slated to begin in October 2014. To start the ball rolling, government stake in SAIL and Coal India is expected to be disinvested first, followed by a dozen other PSUs identified by the Finance Ministry (see below table).
  17. 17. ECONOMY MATTERS 18 DOMESTIC TRENDS The deficit crossed more than 50 per cent of its annual target in the first quarter of the year itself mainly be-cause of weakness in revenues. Total receipts declined by 3.1 per cent to Rs 1.15 lakh crore during April-June 2014, which translates into only 6.4 per cent of the budgeted estimates for the full year. This was due to the fact that revenue receipts collection remained weak during the first two months of the current year due to huge refunds. Mirroring the sluggish economic scenar-io, gross tax revenues growth too remained anemic at 3.4 per cent as compared to a healthy 11.2 per cent in the last quarter and 4.2 per cent in the same quarter last year. Income and service tax were the star performers in boosting the government coffers in the first quarter. Non-tax revenue growth remained dismal in the report-ing quarter as well.
  18. 18. 19 DOMESTIC TRENDS JULY - AUGUST 2014 Expenditure rose by 8.2 per cent to Rs 4.14 lakh crore during April-June 2014. This translates into 23 per cent of the budgeted targets for the current year. The non-plan spend rose by 12.9 per cent in the 1QFY15, as the The government reduced its reliance on market bor-rowings to finance fiscal deficit in the 1QFY15. Net mar-ket borrowings declined by 3.2 per cent to Rs 1.71 trillion The performance of the government finances was not up to the mark in 1QFY15. It would need to tighten its purse strings and boost revenue growth in order to meet the fiscal deficit target for 2014-15. To be sure, in order to lower the fiscal deficit to 4.1 per cent of GDP in 2014-15, the government is betting on both revenue and expenditure growth of 12.9 per cent as compared former UPA government tried to clear its subsidy ar-rears in the first two months of the year. However, plan expenditure was kept on a tight leash as it declined by 2.6 per cent to Rs 1.12 trillion in 1QFY15. during April-June 2014. These financed 57.3 per cent of the fiscal deficit as compared to 67.1 per cent a year ago. to the revised estimates for 2013-14. In order to achieve the revenue growth target, tax revenues, which form around 80 per cent of total revenues, need to prop up. Moreover the nature of expenditure compression needs to be kept in mind as trimming of capital expendi-ture will further slow down the economic recovery pro-cess
  19. 19. Industrial Output Decelerates in June 2014 ECONOMY MATTERS 20 DOMESTIC TRENDS After growing at a modest pace in the last two months, industrial production growth eased to 3.4 per cent in June 2014, raising doubts about the depth of recovery in the sector. Notably, the deceleration came on the back of a low base of last year. Moreover, reading was below expectations with a negative surprise provided by the consumer goods segments that contracted by 10 per cent, its worst performance since February 2009. To be sure, growth in consumer goods sector had moved into the positive territory after seven consecutive months of contraction in May 2014. The sequential momentum as indicated by the movement in the seasonally-adjusted month-on-month series also showed that industrial out-put growth declined in June 2014 (from -0.4 per cent in Notwithstanding the moderation in IIP growth in June 2014, the output of eight core industries, having a com-bined weight of 37.90 per cent in the IIP, recorded an increase of 7.3 per cent in June 2014, highest since Sep-tember 2013 when it recorded a growth of 8 per cent. The output has shown an increase of 4.6 per cent for May 2014 to -1.7 per cent in June 2014). However, the fact that the April-June 2014 average IIP growth still stands at a respectable 3.9 per cent is encouraging. This clearly shows that the nascent signs of a revival in manufacturing growth are very much evident on the horizon. As per CII ASCON Survey, as high as 24 industry segments registered a growth rate of more than 10 per cent in the 1st quarter (April-June 2014) and 58 indus-try segments continued to be in the growth trajectory of 0-10 per cent. We expect the pace of recovery to in-crease going forward, on the back of significant deci-sions announced in the budget to boost manufacturing sector. April-June 2014. Coal production increased by 8.1 per cent, while the electricity generation increased sharply to 15.7 per cent in June 2014. However, the production of natural gas and fertilizer declined by 1.7 and 1.0 per cent respectively in June 2014.
  20. 20. 21 DOMESTIC TRENDS JULY - AUGUST 2014 On the sectoral front, output of the manufacturing sec-tor, which constitutes over 75 per cent of the index, moderated sharply to 1.8 per cent in June 2014 as com-pared to a healthy 5.1 per cent in the previous month, inspite of a supportive base of last year. In terms of in-dustries, fifteen (15) out of the twenty two (22) industry groups (as per 2-digit NIC-2004) in the manufacturing sector showed positive growth during the month of June 2014 as compared to the corresponding month of the previous year. The industry group ‘Electrical ma-chinery & apparatus n.e.c.’ showed the highest positive growth of 69.2 per cent, followed by 10.3 per cent in ‘Luggage, handbags, saddlery, harness & footwear; tan-ning and dressing of leather products’ and 9.8 per cent in ‘Other non-metallic mineral products’. On the other hand, the industry group ‘Radio, TV and communication equipment & apparatus’ showed the highest negative growth of (-) 62.9 per cent, followed by (-) 60.5 per cent in ‘Office, accounting & computing machinery’ and (-) 13.4 per cent in ‘Furniture; manufacturing n.e.c. Min-ing sector, which had turned the corner in the last cou-ple of months, continued to post healthy growth rate, growing by 4.3 per cent in June 2014 as compared to 2.9 per cent growth in the previous month. In line with the core sector data, electricity sector output growth grew at a brisk pace of 15.7 per cent in the reporting month as compared to a healthy 6.7 per cent in the previous month. Amongst the use-based sectors, capital goods grew at a robust pace of 23 per cent in June 2014 as compared to 4.3 per cent in the previous month. The performance of the volatile sector this year has been good as it has grown at an average rate of 13.9 per cent as compared to contraction to the tune of 3.7 per cent in the same period last year. Intermediate goods, which registered steady growth for most part of last fiscal, continued its good performance in June 2014 too, growing by 2.7 per cent, albeit a moderation from the previous month. In contrast, basic goods growth galloped to 9.0 per cent in June 2014 from 6.4 per cent in the previous month. Consumer goods sector growth collapsed to -10.0 per cent, pulled down by both poor showing in both its sub-components of durables and non-durables. Consumer durable growth declined by a sharp 23.4 per cent, while non-durables growth stood at an anaemic 0.1 per cent during the month. With the improvement in the cover-age of monsoons, consumer non-durables sector is ex-pected to do well, going forward.
  21. 21. Outlook Growth in industrial production, which has been on the ascendant for the last two months, has shown a modera-tion in June 2014 on the back of sluggish performance of the manufacturing sector. However, we would like to see this as an aberration, as CII’s own Business Outlook Survey and the ASCON survey are showing early signs of an in-dustrial turnaround. With proper interventions in the areas of land, labour and environment norms, manufacturing can post a quick revival. We are already seeing a lot of pro active reforms being brought about by the government in the labour space. Industry also looks forward to change in the areas of land acquisition and other factors that could promote ease of doing business. WPI Inflation Moderates, while CPI Inflation Rises in July 2014 ECONOMY MATTERS 22 DOMESTIC TRENDS WPI based inflation slowed down to a five-month low of 5.2 per cent in July 2014 from 5.4 per cent in the previ-ous month, at a time when retail inflation (as measured by CPI) accelerated. The fall in WPI inflation was mainly due to a moderation in fuel prices, which slowed to 7.4 per cent in July 2014 from 9.0 per cent a month ago. However, total food inflation (primary and manufactur-ing) accelerated to 7.0 per cent from 6.2 per cent. In con-trast to slowing WPI inflation, retail inflation quickened to 7.96 per cent in July 2014 from 7.46 per cent in June 2014. The spike was primarily attributable to an increase in vegetables prices, which rose 17 per cent on month-on- month (m-o-m) basis in July-2014. In some positive news, core CPI decelerated to 7.4 per cent in July 2014 from 7.5 per cent a month ago. However, the rise in mo-mentum to 0.8 per cent on m-o-m basis as compared to last six-month average of 0.5 per cent m-o-m is worry-ing. So far, CPI inflation has remained firm and showed little signs of treading down. However, given that the rise is primarily attributable to a spike in vegetables prices, it is expected to be temporary and wane out as supply hits markets post Diwali. This will help the RBI to reach its inflation glide path of 8 per cent by January 2015 fairly comfortably.
  22. 22. 23 DOMESTIC TRENDS JULY - AUGUST 2014 Primary inflation remained stable at 6.8 per cent in July 2014 from the previous month. Primary food though ac-celerated to 8.4 per cent from 8.1 per cent in the pre-vious month. Amongst primary food prices, the data showed that vegetable prices fell 1.3 per cent from a year ago. However, what’s interesting to note is that to-mato prices were not considered while computing the wholesale price index from April 2014 onwards, which is rather convenient, because everybody knows that to-mato prices have increased sharply recently. That’s not all. Prices of green peas and cauliflower, too, have not been considered. Hence, it’s quite possible, that veg-etable inflation has been underestimated for the month of July 2014. Primary non-food inflation moderated to 3.3 per cent in July 2014 from 3.5 per cent a month ago, led by raw rubber (to -27.1 per cent from -16.9 per cent) and fibres (to -3.2 per cent from 2.8 per cent), and partly offset by oilseeds (to 6.4 per cent from 4.8 per cent). Inflation in minerals continued to decelerate, standing at 2.4 per cent from 4.4 per cent in the previous month. Fuel inflation decelerated sharply to 7.4 per cent in July 2014 as compared to 9.0 per cent in the previous month, benefitting from a favourable base effect, despite a 1.1 per cent increase in the index level in m-o-m terms. The mineral oil sub-index rose to 237.7 in July 2014 from 233.8 in June 2014, reflecting a relatively broad-based increase in rise in the subcomponents, including the in-crease in the price of diesel by Rs. 0.5/litre and petrol by Rs. 1.69/litre in July 2014. Under-recoveries on the retail sale of diesel eased to Rs. 1.33/litre for the fortnight be-ginning August 1, 2014 from Rs. 3.4/litre for the fortnight beginning July 1, 2014, indicating a decline in the sup-pressed inflationary pressures in the Indian economy. Manufacturing inflation increased marginally to 3.7 per cent in July 2014 as compared to 3.6 per cent in the pre-vious month. Encouragingly, non-food manufacturing or core inflation, which is widely regarded as the proxy for demand-side pressures in the economy, eased to 3.6 per cent during the month as compared to 3.9 per cent in June 2014. In the coming months, we expect core WPI to hover around 3.0-3.5 per cent, RBI’s comfort level for this inflation measure. Manufacturing food in-flation showed a sharp uptick during the month, led by tea & coffee (to 10.1 per cent from 1.3 per cent), salt (to 6.4 per cent from 3.7 per cent) and dairy products (to 8.2 per cent from 6.6 per cent).
  23. 23. Outlook Bulk of the upside pressure on CPI inflation was due to high food prices. However, going ahead, we do not expect food inflation (with close to 50 per cent weight in CPI) to soar further. Recent monsoon update by the Indian Meteorological Department (IMD) signals 17 per cent below normal rainfall as of August 11, 2014. Moreover, the government has taken proactive measures to cap the rise in food prices due to monsoons. These include keeping a strict check on hoarding activities, urging states to abolish the APMC act, raising the minimum export price of onions, and its willingness to offload excess food grain stocks to meet supply shortages. With core CPI inflation also continuing to decelerate, we expect RBI to reach its goal-post of 8 per cent CPI inflation by January 2015 fairly comfortably. RBI Maintains ‘Status-Quo’ on Interest Rates ECONOMY MATTERS 24 DOMESTIC TRENDS Reserve Bank of India (RBI) kept the key policy rates un-changed in its third bi-monthly monetary policy review held on August 5, 2014, citing the upward risks still hov-ering over inflation in the wake of sub-par monsoons. With this, the repo rate stands at 8 per cent, reverse repo at 7 per cent and marginal standing facility rate at 9 per cent. However, RBI did reduce the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 22.5 per cent to 22.0 per cent of their NDTL with effect from the fortnight beginning Au-gust 9, 2014 and the HTM (Held to Maturity) ceiling to 24 per cent. This reduction in SLR is expected to release liquidity to the tune of approx Rs 40,000 crore into the financial system. This infusion of liquidity is expected to cater to the credit demand of the productive sectors of the economy as when they recover. But, we at CII have been continuously pointing out that this reduction in SLR won’t be able to help the markets in the near-term, given that the commercial banks are already investing in government securities in excess of the mandated SLR requirement (as of May 2014, the actual stood at around 27 per cent). See our note on ‘RBI Reduces SLR- Will it Help the Market Now? in Economy Matters, May 2014 is-sue. Additionally, the Central Bank also announced that it will continue to provide liquidity under overnight re-pos at 0.25 per cent of bank-wise NDTL and liquidity un-der 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system.
  24. 24. 25 DOMESTIC TRENDS JULY - AUGUST 2014 On inflation, the RBI mentioned that it remains commit-ted to the disinflationary path of sustaining CPI inflation below 8 per cent by January 2015. The Central Bank also reiterated its firm commitment to achieve the target of 6 per cent CPI inflation by January 2016. Achieving this target will be a tough challenge as disinflation will have to be sustained over the medium-term, especially when GDP growth and demand is picking up. RBI indi-cated that the risks to the latter are still on the upside and “warrants heightened state of policy prepared-ness if these risks materialise”. On growth front, RBI was reasonably happy with the improving growth pros-pects. As per the RBI, “if the recent pick-up in industrial activity is sustained in an environment conducive to the revival of investment and unlocking of stalled projects, with ongoing fiscal consolidation releasing resources for private enterprise, external demand picking up and international crude prices stabilising, the central esti-mate of real GDP growth of 5.5 per cent within a likely range of 5 to 6 per cent that was set out in the April projection for 2014-15 can be sustained”. As per RBI, liquidity conditions remained broadly sta-ble during the months of June and July 2014, barring episodic tightness on account of movements in the cash balances of the government maintained with the Reserve Bank. While the system’s recourse to liquidity from the LAF, and regular and additional term repos was around 1.0 per cent of the NDTL of banks, access to the MSF has been minimal and temporary. In order to manage transient liquidity pressures associated with tax outflows and sluggish spending by the government, the Reserve Bank injected additional liquidity aggregat-ing over Rs 940 billion through nine special term repos of varying maturities during the months of June and July 2014. Aggregate bank credit growth slowed down to 13.4 per cent y-o-y as on July 11, 2014 from 14.3 per cent as on July 12, 2013, owing to sluggish investment demand and increased risk aversion given the deterioration in the asset quality of public-sector banks (PSBs). To be sure, gross non performing asset (GNPA) stood at 4.0 per cent levels in March 2014 as compared to 3.3 per cent in March 2013. Growth in bank deposits too slowed down to 12.9 per cent as on July 11, 2014, from 13.8 per cent during same period last year as financial savings slowed down. Consequently, the credit deposit (CD) ratio stood at 76.6 per cent as on July 11, 2014. CII Reaction The RBI, in a bid to safeguard against upside risks accruing from inflationary expectations, kept its rate easing cycle on hold, which was as per market expectations. At a time when industrial growth continues to be sluggish, CPI based inflation is moderating and above all, infla-tion risks are gradually abating due to improvement in monsoon conditions, the RBI could have taken this oppor-tunity to effect a cut in interest rates.
  25. 25. ECONOMY MATTERS 26 DOMESTIC TRENDS The high cost of capital has been dissuading industry from undertaking capacity expansion and is causing finan-cial stress among firms where demand is credit driven. What is more, the government’s commitment to adhere to the path of fiscal consolidation and recent steps to ease bottlenecks in the food supply chain would help to alleviate inflationary pressures in the economy while stimulating growth, going forward. All this could have mo-tivated the RBI to give the primacy to growth by effecting a cut in interest rates. A rate cut at this juncture would have positively surprised the market and sent a strong signal that both the fiscal and monetary policies are work-ing in tandem to bring growth back to the economy. Considering the transmission time taken for the impact of monetary policy to be visible, an impetus to growth could have assumed special importance. Trade Deficit Widens on Slowing Exports Pace of exports growth slowed down to 7.3 per cent (US$27.7 billion) in July 2014 as compared to 10.2 per cent in the previous month. Imports growth too slowed down to 4.3 per cent from 8.3 per cent a month ago. However, the trade deficit widened to a year’s high of US$12.2 billion as level of exports moderated at a faster pace than imports. Among the items in exports, sec-tors such as drugs & pharmaceuticals grew at 10.78 per cent, while engineering goods rose 23.89 per cent in July 2014. However, among the major sectors, gems & jewellery exports contracted by 17.2 per cent during the month. Cumulative value of exports for the first four months of the current fiscal (Apr-July) were valued at US$107.8 billion as against US$99.2 billion a year ago, thus registering a year-on-year growth of 8.62 per cent. Going forward, we expect exports growth to improve in consonance with improvement in the global trade conditions. The World Trade Organisation (WTO) ex-pects global trade to grow by 4.7 per cent in 2014 and at a slightly faster rate of 5.3 per cent in 2015. Imports during July 2014 were valued at US$39.9 billion as compared to US$38.3 in same month last month. The rise in level of imports was mostly due to purchase of oil and electronics goods during the month. Oil imports during July, 2014 were valued at US$14.3 billion which was 12.75 per cent higher than oil imports valued at US$12.7 billion in the corresponding period last year. Non-oil imports, which are an indication of the health of the domestic demand, grew only by 0.03 per cent to US$25.6 billion in July 2014. Outlook With the global trade scenario improving with some positive developments in the EU, US and emerging econo-mies, exports should drift upwards in the coming months. However, imports growth would also accelerate as domestic demand recovers, thus posing upside risks for the trade deficit.
  26. 26. Provisional Results of the Sixth Economic Census Released 27 DOMESTIC TRENDS JULY - AUGUST 2014 Ministry of Statistics and Programme Implementation (MoSPI) on July 30, 2014 released the provisional results of the Sixth Economic Census. The Central Statistics Of-fice (CSO) in the MoSPI conducted the Sixth Economic Census during January, 2013 to April, 2014 in collabora-tion with Directorates of Economics and Statistics in all the States and Union Territories. Economic Census provides detailed information on operational and eco-nomic variables, activity wise, of the establishments of the country including their distribution at all-India, State, district and village/ward levels for comprehensive analysis of the structure of the economy (micro, macro, regional levels) and for benchmark purposes. The data-base also serves as a sampling frame for drawing sam-ples for socio economic surveys by Governments and research organizations. The first Economic Census was conducted in 1977 cov-ering only non-agricultural establishments employing at least one hired worker on a fairly regular basis. The second and third Economic Censuses were conducted in 1980 and 1990 along with house listing operations of 1981 and 1991 Population Censuses respectively. These two Economic Censuses covered all agricultural and non-agricultural establishments excepting those en-gaged in crop production and plantation. The fourth and Fifth Economic Censuses were carried out in 1998 and 2005 respectively with the same coverage. The Sixth Economic Census had also the same coverage as that of Fifth Economic Census. However, establishments engaged in public administration, defence and com-pulsory social security activities have been excluded as data pertaining to them are available with the Govern-ment through administrative records and also due to the difficulties faced in collecting information from such establishments during the Fifth Economic Census. The key provisional results of the Sixth Economic Census are as follows:
  27. 27. ECONOMY MATTERS 28 DOMESTIC TRENDS Highlights of Prime Minister Shri Narendra Modi’s Maiden Independence Day Speech Prime Minister Shri Narendra Modi addressing the nation from the ramparts of Red Fort on the occa-sion of 68th Independence Day 1. BANKING FOR THE POOREST: Taking banking to the poorest, the Pradhanmantri Jan-Dhan Yojana will give each family a bank account with a debit card and an insurance cover of 1 lakh. “Today, there are crores of families that have mobile phones but no bank accounts. We have to change this. Economic development must benefit the poor and it should start from here,” the PM said. Official data puts the number of poor households in India at 6.5 crore. 2. ADOPT A VILLAGE : Using their development funds, MPs will adopt a village in their constituencies and turn it into a model village by 2016. The Sansad Aadharsh Gran Yojana strives to usher improvements in health, sanita-tion, greenery and cordiality 3. ‘MADE IN INDIA’ : Modi invites global manufactures to ‘come, make in India’ and sell it to the world, with an aim to strike a balance between imports and exports and create jobs. “We have the skill, talent, discipline and determination to do something,” he said in his speech. 4. A SKILLED WORKFORCE : The govt’s mission is two-pronged – create a skilled workforce that can be employed anywhere in the world and encourage entrepreneurship to create more jobs at home. And the aim is to do this at a rapid pace. 5. ZERO DEFECT , ZERO EFFECT : ‘Made in India’ must stand for quality products. PM encourages domestic manu-factures to adopt a policy of ‘zero defect, zero effect’ – make top-of-the-line products with no ill effect on the environment. 6. ENTER THE DIGITAL AGE : PM aims to connect every Indian through technology, provide governance via mo-bile phones, have every village on a broadband platform. “E-governance is easy governance, effective govern-ance and economic governance,” he said. 7. CLEAN INDIA CAMPAIGN : No city or village should remain dirty by 2019, when the country observes the 150th birth anniversary of Mahatma Gandhi. The government plans to achieve this with public and private participa-tions. 8. TOILETS IN SCHOOL : Target before next I-Day: a toilet in every school, and a separate one for girls. MPs to take the mission forward. Corporate participation also sought under Corporate Social Responsibility 9. NEW WAY : Planning Commission set up by Nehru on its way out. It will make way for an institution that gives the new direction to the country through creative thinking , public-private partnership and optimum utilization of resources. 10. POVERTY : Taking the war to end poverty to another level, PM calls for all south Asian countries to join India. “Why not get together with all Saarc nations to plan the fight against poverty? Let’s fight together and defeat poverty,” he said.
  28. 28. Other Economic Developments of the Month - Government approved the constitution of an Expenditure Management Commission (EMC) that Finance Min-ister Arun Jaitley had announced in his Budget Speech in July 2014. CII had been recommending the formation of this commission since long. The Commission is expected to recommend major expenditure reforms that will enable the government to lower its fiscal deficit. The Commission will be mandated with the task of suggesting an overhaul for reducing the food, fertiliser and oil subsidies and other ways of controlling India’s fiscal deficit. It is expected to submit its interim report before the presentation of the 2015-16 Budget next February. The final report is expected before the Budget of 2016-17. The Government will shortly issue the terms of reference for the Commission. Former Reserve Bank Governor Bimal Jalan will head the Commission. Members will in-clude former Finance Secretary Sumit Bose and former Reserve Bank Deputy Governor Subir Gokarn. - India refused to sign the Trade Facilitation Agreement (TFA) until the issue of public stockholding for food security is resolved. The trade facilitation pact reached in Bali, Indonesia, last year is meant to simplify customs procedures, facilitate the speedy release of goods from ports and cut transaction costs—measures that could benefit rich nations more than developing countries such as India. At the heart of the problem is a WTO rule that caps subsidies to farmers in developing countries at 10 per cent of the total value of agricultural produc-tion, based on 1986-88 prices. Developing countries are complaining that the base year is now outdated and they need to be given leeway to stock enough foodgrains for food security of millions of their poor. CII is of the view that a great amount of effort have gone into clinching a balanced Bali deal. Hence, it must not be wasted and all efforts must be made to use Bali Ministerial outcomes as springboard to conclude the Doha round, which is into its 13th year of negotiations. - Government approved 49 per cent foreign investment in insurance companies through the FIPB route ensur-ing management control in the hands of Indian promoters. The move would help insurance firms to get much needed capital from overseas partners. The proposal to raise FDI cap has been pending since 2008 when the previous UPA government introduced the Insurance Laws (Amendment) Bill to hike foreign holding in insur-ance 29 DOMESTIC TRENDS JULY - AUGUST 2014 joint ventures to 49 per cent from the existing 26 per cent. - In a similar move, Union Cabinet on August 6, 2014 also cleared the proposal to set the composite cap for foreign investment in the defence sector at 49 per cent, compared with the current 26 per cent foreign direct investment (FDI) ceiling. But the management control of companies receiving these investments must remain in the hands of Indians. The Cabinet also permitted foreign investment in rail operations like dedicated freight lines, high-speed trains and mining & port connectivity, besides allowing FDI in some projects like construction of new lines, gauge conversion, doubling of lines and maintenance projects under the public-private partner-ship model. For joint venture in the area of projects, up to 74 per cent FDI will be allowed. These FDI proposals will be allowed under the automatic route, so these will not require FIPB approval. This decision, too, is an executive one and need not go to Parliament. - The Central Board of Directors of the Reserve Bank of India, approved the transfer of surplus amounting to Rs 526.79 billion for the year ended June 30, 2014 to the Government of India. The amount was Rs 330.10 billion for the year ended June 30, 2013. - The latest round of RBI inflation expectations survey (Q1FY15) indicates that the number of respondents ex-pecting an increase in inflation over the coming three months as well as one –year ahead have declined. This is true both for expectations of food and overall inflation. However, the expected three-month ahead inflation rose while that for a year ahead remained high (unchanged as compared to the Q4FY14). This is in line with the progress of monsoons over this season with rainfall deficiency remaining high for most of the first quarter. - Data Released by RBI showed that during the first quarter of 2014-15 (April-June), net services exports were valued at US$17.2 billion, growing at 1.8 per cent over the same period a year ago. - The Indian Meteorological Department (IMD) in its long range forecast (LRF) for second-half (August-Septem-ber 2014) estimates that the rainfall over the country as a whole during the second half of the 2014 southwest monsoon season is likely to be 95 per cent of LPA with a model error of ±8 per cent. For the season as a whole, rainfall over the country as a whole is likely to be 87 per cent of LPA with a model error of ±4 per cent. IMD has also decreased the probability of weak El Nino conditions to 50 per cent during the remaining part of the season.
  29. 29. CORPORATE PERFORMANCE Net Sales Foretell a Recovery Indian firms posted an impressive performance in the first quarter of the current fiscal (1QFY15), as net sales and profit rose at the fastest pace in seven quarters, spurring investor optimism that the worst is over for corporate earnings. The net sales of companies (manu-facturing plus services) in the first quarter expanded by 10.0 per cent on a y-o-y basis, up from 5.7 per cent in the comparable period last year. Our analysis is based on the financial performance of 1613 companies (840- ECONOMY MATTERS 30 Manufacturing and 773 Services and excludes oil & gas companies), using a balanced panel, extracted from the Ace Equity database. It is encouraging to note that the beleaguered manu-facturing sector witnessed sharp acceleration in sales growth in the first quarter. Manufacturing sector in the first quarter grew at its highest pace in the last seven quarters at 9.8 per cent as compared to paltry 0.7 per cent in the same period last year, indicating that the downtrend is over. We expect further improvement in growth performance during the current fiscal on the back of the slew of policy measures which the new gov-ernment has introduced in the recent months to spur investment and revive growth.
  30. 30. 31 CORPORATE PERFORMANCE JULY - AUGUST 2014 The net sales of services sector in the first quarter though moderated to 10.3 per cent as compared to 13.8 per cent in the same quarter previous year, it continued to remain in double-digits. Sustaining this momentum is important even as the rupee continued to remain vola-tile against the US dollar and economic growth contin-ues to remain restrained. Even though the growth of net sales of services has been relatively impressive, the sector has shown a sharp deterioration in expansion rate in last few years and its revival is critical for facilitat-ing the overall acceleration in economic growth. The expenditure costs of the firms, on an aggregate ba-sis, accelerated by 11.4 per cent in the reporting quarter, as compared to 6.2 per cent in the comparable time pe-riod last year. Under its various heads, growth of raw materials cost increased to 10.4 per cent over decline to the tune of 2.3 per cent in the same period last year. In contrast, growth in wages & salaries showed mod-eration. Total expenditure costs for manufacturing sec-tor also increased to 10.0 per cent in the first quarter of 2014-15 as compared to decline of 0.3 per cent in the In sum, both the ‘top-line’ and ‘bottom-line’ of compa-nies improved in the first quarter of the current fiscal. However, it would remain to be seen, how far this re-same quarter last year. All the heads of expenditure for manufacturing except wages & salaries accelerated during the quarter. Total aggregate expenditure costs for services sector too increased to 13.1 per cent in the reporting quarter, albeit at a marginal pace, as com-pared to 12.8 per cent in the same quarter a year ago. The performance analyzed in terms of Profit after Tax (PAT) exhibits a sharp improvement in financial results of companies at aggregate level in the first quarter of the current financial year. On an aggregate basis, growth in PAT improved significantly to 25.4 per cent in the first quarter as compared to contraction to the tune of 4.5 per cent in the same quarter of last year. This has been driven by sharp improvement in PAT growth of both manufacturing and services sector. PAT growth across the manufacturing sector firms, improved sharp-ly to 36.4 per cent in the first quarter as compared to decline of 12.0 in the same quarter of previous year. For services sector, PAT growth accelerated to 16.5 per cent as compared to an anemic 2.6 per cent in the same quar-ter a year ago. covery is sustained. The emerging signs are propitious though, with the election of a new government which enjoys absolute majority and hence would face little dif-ficulty in implementing strong policy measures.
  31. 31. SECTOR IN FOCUS Jobless Growth and its Implications As India progresses on its demographic ‘sweet spot’, the imperative of translating demographic advantages into tangible gains has emerged as a top priority. Although the country is expected to have the world’s fastest growing workforce over the next two decades, it cannot be taken for granted that economic growth would follow a declining age-dependency ratio. ECONOMY MATTERS 32 Since economic reforms commenced in 1991, the Indian population and workforce structure is marked by sig-nificant trends. To begin with, the age pyramid is in the process of shift-ing from a large base to a wide bulge in the working age sections. This means that the number of dependents per worker is declining. In 1991, this ratio stood at 70 per 100 working-age population; by 2013, age dependency ratio had fallen to 531. It is further expected to fall up to 2030 when India will have the largest workforce in the world. The declining age dependency ratio is expected to convert into rising savings, thus driving investments and growth as workers produce more than they con-sume. The impact of the demographic window however depends additionally on numerous factors, such as edu-cation levels, participation of women in the workforce, policy environment, and socio-cultural context, among others. A second trend in India’s workforce structure is the de-clining Labour Force Participation Rate (LFPR). As a pro-portion of the total working age population, the number of people actually entering the workforce or looking for employment is falling. Much of this has to do with the withdrawal of women from the workforce, especially in rural areas. This is attributable to rising participation in
  32. 32. 33 SECTOR IN FOCUS JULY - AUGUST 2014 education, rise in incomes, and other factors. Three, the country is seeing a shift in sectoral employ-ment as workers move from agriculture to non-agricul-tural sectors for livelihood. In rural India, off-farm liveli-hoods account for a greater proportion of workers than those finding livelihood in the field. Four, the percentage of workers in the organised sec-tors has declined while informal employment has risen. Studies show that a vast proportion of new employ-ment opportunities relates to the informal sector while the number of workers in the formal sector has stag-nated. Even within this, the share of the public sector has fallen while that of the private sector is going up. i. The Demographic Dividend India’s demographic dividend refers to the fact India currently has and will continue to have the largest num-ber of people in the working age group of 15-59 years. As of 2010, India’s working age population constituted 62.1 per cent of the total population, of which a little less than half were in the ‘young’ age group of 15-29. However, this can be turned into an advantage only if jobs can be created for the large number of people joining the working age population every year. Accord-ing to our calculations, the working age population is expected to swell by about 200 million between 2010 and 2030. This implies about 10 million people attaining working age every year. Not all these people join the Five, the number of jobs created in the economy over the last fifteen years is not enough to absorb the rising number of workers. Thus, there has been an increase in self-employment. The quality of such self-employment is poor, characterised by low productivity and incomes. The impact of these trends is far-reaching with implica-tions for economic growth, poverty alleviation, produc-tivity, social security and socio-cultural developments over the long-term future of the country. The discus-sion paper studies the above trends in the employ-ment scenario based on recent data and analyses the implications of a changing workforce structure. It ends with possible policy responses to leverage India’s best resource – its people. This trend will continue well into the next few decades even as large parts of the world are experiencing an ageing population. What this means is that the depend-ency ratio, i.e. the ratio of the population aged 0-14 and 65+ per 100 people in the working age group will keep declining. With a median age of 26.4, India has one of the youngest populations among the major countries in the world. labour force, as some may opt for further education or training. India, in particular, has a low rate of labour force participation probably because the expectation of finding a suitable job is limited. A complete overhaul of labour force regulations as well as the business environ-ment is required in order to change the employment scenario in the coming years. 1 http://data.worldbank.org/indicator/SP.POP.DPND?page=4 I. Employment Structure and Trends – the Data
  33. 33. ECONOMY MATTERS 34 SECTOR IN FOCUS ii. The Employment Imperative In order to take advantage of India’s demographic divi-dend, job opportunities have to be created on a large scale. Further, as the share of agriculture in GDP shrinks, so should its share in employment. Labour being ren-dered surplus from agriculture needs to be absorbed in either industry or services. However, the experience so far has not been encouraging in that employment has not increased to the extent it should have, given the additions to the labour force and the high rate of eco-nomic growth till 2007-08. As the growth rate slowed down in the recent period, the data does not show an increase in unemployment. Instead, it shows a decline in the labour force participation rate (LFPR). This could indicate that instead of reporting as unemployed and available for work, respondents prefer to remain out-side the labour force. iii. Sectoral Shares in Employment Comparing the shares of the three broad sectors in em-ployment, it is apparent that agriculture remains by far the largest employer. However, the share of agriculture in employment fell below 50 per cent for the first time in 2011-12 from 56.6 per cent in 2004-05. Agricultural em-ployment fell as the labour force migrated from agricul-ture to industry and services. As for industry, it has wit-nessed a rise in its share of employment from 18.7 per cent to 24.6 per cent in the comparable period. How-ever, this is mostly attributable to the rise in workers The NSS conducts Employment-Unemployment Sur-veys (EUS) every five years, but the latest survey for 2011-12 was carried out two years after the EUS 2009- 10, as the latter had shown some contentious results in terms of low employment growth. The table below, reporting the results from the last few surveys, shows the number of people in the labour force (persons who are either working or available for work) and the work force (persons working). It is apparent that additions to the labour force out-stripped the additions to the work force till 2004-05 when the growth rates were high, while additions to the labour force itself declined in the period after 2004- 05. In terms of employment creation, there has been a slowdown in the latter period – while 60 million jobs were created in the five-year period between 1999-00 and 2004-05, only 15 million were created in the seven-year period between 2004-05 and 2011-12. engaged in construction. The services sector has seen a smaller increase in its share in employment, from 24.7 per cent in 2004-05 to 27.9 per cent in 2011-12. Since its share in GDP has increased sharply in the same period, one possible implication of this trend could be that the sector’s productivity is on the rise. It needs to be noted that industry continues to have the lowest share in total employment and within industry, the share of employment in manufacturing is merely 13.0 per cent. Employment in manufacturing increased by merely 5.4 million between 2004-05 and 2011-12 while employment in construction increased by a much larger
  34. 34. 35 SECTOR IN FOCUS JULY - AUGUST 2014 23.9 million. The Planning Commission is projecting that by the end of the 12th Plan period (2016-17), the share of agriculture would decline to 45.0 per cent with a com-mensurate rise in industrial and services sector employ-ment. The share of manufacturing is expected to rise to 18.0 per cent by 2016-17. This pattern of employment clearly sets India apart from other countries that have entered a high-growth period which have all typically experienced an increase iv. Low Share of Organised Sector in Employment Another unique characteristic of the employment scenario in India is the very low level of employment in the organised sector. Enterprises with more than 10 workers are supposed to register with the govern-ment, and are regarded as the ‘organized sector’ of the economy. The ‘organized sector’ is subject to govern-ment regulations regarding many aspects of economic activity including more stringent labour regulation and procedural requirements. It is well known that regula-in the share of output and employment in manufactur-ing and other industrial activities. In India, this is yet to happen due to the lack of large scale job opportunities outside agriculture. In fact, the NSS data shows that there has been a decline in manufacturing employment between 2004-05 and 2009-10. While this could be relat-ed to the onset of the global economic crisis in 2009-10, it is indeed worrying that manufacturing employment declined during a period of relatively high growth. tory requirements for businesses are quite stringent in India, as a result of which India gets a low rank of 134 out of 185 countries in the World Bank’s Ease of Doing Business rankings. These regulations have acted as a disincentive for firms to increase employment and be categorised as part of the ‘organised sector’. The Planning Commission considers an increase in or-ganised sector employment as one of its objectives since this is associated with some security of tenure and higher wage rates. Also, the productivity of labour is higher in the organised sector. However, it is pertinent
  35. 35. ECONOMY MATTERS 36 SECTOR IN FOCUS to note that only 29 million out of a workforce of 472 million are employed in the organised sector, as regula-tions imposed on it are certainly a deterrent to increas-v. Large Share of Self-Employed The workforce is dominated by the self-employed, who account for more than 50 per cent of workers. The share of those in regular salaried or wage employment is the lowest but a good sign is that it has been rising since 2004-05. Some concern has also been expressed about the increasing casualization of the workforce, even within the organised sector. This has happened vi. Women workers According to NSSO, the Labour Force Participation Rate (LFPR) for women came down from 29 per cent in 2004-05 to 22.5 per cent in 2011-12. This accounts for the major proportion of the declining LFPR in the country. There has been speculation about the factors causing ing employment. A concerted effort is required to ease the regulatory burden on the organised sector so that better quality employment can be generated in much larger numbers. largely to get around the stringent labour laws that are applicable to regular or salaried employees. The data, shown below, does indicate some increase in the share of casual labour in 2009-10 over 2004-05 but this has moderated in 2011-12. However, it should be noted that this data is for the entire workforce that includes those employed in agriculture and not just those employed in organised industry or services. this at a time when women are increasingly entering the workforce in other countries. Possibly, as household in-comes rise, women prefer not to work, especially when work opportunities relate to physical labour. Other fac-tors could be the rise in women in higher education, preference to raising children, etc. Whatever the cause, the decline in proportion of women participating in the economy is of deep concern.
  36. 36. 37 SECTOR IN FOCUS JULY - AUGUST 2014 In the ultimate analysis, job creation is a matter of hu-man rights as has been recognised by the Indian Consti-tution. Article 41 of the Constitution provides that “the State shall within the limits of its economic capacity and development, make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disable-ment, and in other cases of undeserved want.” Article 43 states that it shall endeavour to secure a living wage and a decent standard of life to all workers. The question therefore is how the state would ensure that all workers can secure a living wage and a decent standard of life. Given the ‘limits of its economic capac-ity and development’, the government can make ‘effec-tive provision’ by facilitating job creation through the private sector. The challenges of job creation are inextricably linked to multiple economic dimensions: 1. Education system: Our education system should be responsive to market needs to enhance the em-ployability of the workforce and make them con-tribute to the production process. This would obvi-ate the situation wherein an array of unemployed graduates co-exists with huge skill shortages within industry. The application of ICT has vast potential to energize education and skill development as it provides more opportunities for extended learning. 2. Skill development: While employment is one side of the challenge, employability is the obverse. The skill development endeavor has to be accelerated and greatly scaled up in a joint effort of government, in-dustry, and civil society. While the 12th Plan targets skilling of 50 million people in five years the actual number of beneficiaries has been much lower. Ar-eas to be examined could include raising resources, scaling up infrastructure and institutions, voucher system, teacher training institutes, building capac-ity of state governments, ensuring quality teaching, convergence with MNREGA, etc. 3. Growth: To raise the quality of jobs available to new entrants to the workforce, it is essential to rejuve-nate growth to at least 7 per cent by the end of 2014. Some issues of top priority at the policy level would be governance, project implementation, taxation, interest rates and inflation, public private partnerships, long-term financing, and FDI, among others. 4. Industrial performance: Given that large sections of the workforce are moving off the land and that the demand is for less-skilled jobs, it is the industry sector that would have to be promoted to provide such jobs. Employment-intensive mass manufactur-ing sectors would be central to the endeavor. II. Recommendations
  37. 37. III. Some Innovative Ideas to Push Employment ECONOMY MATTERS 38 SECTOR IN FOCUS 5. Investments: Rejuvenating investments and mak-ing them more efficient is a top priority. New in-vestments and projects including in infrastructure, power and manufacturing can strengthen the envi-ronment for job creation. 6. Ease of doing business: A business climate that fosters entrepreneurship and promotes new busi-ness ventures and the expansion of existing ven-tures with stability and clarity is the best way to create employment opportunities. It is important to examine each of the regulations covered under the World Bank Ease of Doing Business Indicators and set a target of reaching rank 50 within 5 years. Administrative, environmental and bureaucratic procedures must be examined in detail to minimize them. 7. Export competitiveness: Strategic security derives much from a nation’s footprint on the global eco-nomic stage. India needs to increase its presence in top globally traded goods and services, which is also a key avenue for job creation domestically. Overseas investors have a significant role to play in plugging India into global supply chains. A National Export Competitiveness and Market Promotion Council could be considered to assist domestic sup-pliers and build overseas markets. Reducing trans-action costs would be required. 8. Legal and regulatory architecture: India’s legal and regulatory framework should be geared towards Mass Manufacturing Enterprises: In most countries, enterprise size is defined by the number of workers on the payroll. In India, just as there is a separate category of MSME based on investments, there could be a sepa-rate category of enterprises that employ large numbers of people. Enterprises employing more than a certain minimum – say, 4000 workers – would be eligible for tax relief, deductions for skill development or worker housing, benefits in terms of land, special provisions re-garding labour regulation applicability, etc. employment-creation and in line with global best practices. Social security and worker protection have to be addressed simultaneously at, with the imperative of mass scale employment creation. The regulatory architecture should be relooked with the idea of light-handed, fair, and independent regulation that encourages competition. A number of bills would need to be reintroduced and a new Parliament offers a chance to redraft some of them. Mining, insurance, pension, etc. are some impor-tant pending bills. 9. Labour Law Reforms: The provision of more flex-ible labour laws, which confer to employers the right to take management decisions, is crucial to provide a fillip to labour intensive manufacturing. There is need to create a ‘social safety net’ to com-pensate workers rationalized during the produc-tion process. Outdated laws need to be weeded out and existing laws would need to be adapted in tune with current realities. 10. Entrepreneurship: Promoting entrepreneurship is vital to expanding opportunities for livelihood and employment. In particular, start-ups must be encouraged. There is need for a national policy on facilitating entrepreneurship which would bring together elements of capacity building, access to finance, boosting venture capital and angel invest-ing, and the creation of necessary infrastructure such as industrial parks. Taxation benefits: A graded system of corporate taxes could be considered for manufacturing enterprises de-pending on employment. For example, enterprises em-ploying more than 1000 workers could get 2 per cent discount on tax, enterprises employing more than 3000 workers could get 4 per cent discount, etc. Services: The manufacturing sector may not be able to take up the entire responsibility for employment and many services sectors too could provide large scale employment opportunities. This can be scaled up with
  38. 38. 39 SECTOR IN FOCUS JULY - AUGUST 2014 appropriate training. Some top services sectors with huge employment potential are tourism and hospital-ity, healthcare, education and skill development, retail trade especially multi-brand retail, logistics services, etc. It is necessary to devise policy frameworks that would expand services with high employment potential. These also benefit from short lead times. Non-farm employment in rural areas: Since the share of agriculture in employment in rural areas is declining and more and more workers need to find work off the farm, rural non-farm sectors can be identified and pro-moted. Some of these sectors could be food process-ing, construction, large-scale poultry and fish farms, horticulture, floriculture, sericulture, packaging, etc. Ex-port processing from rural areas can also be promoted in an employment-enhancing manner in products such as bovine meat, poultry, fisheries and marine products, flowers, vegetables, etc. National Entrepreneurship Policy: It is necessary to de-vise a policy which clearly lays out the benefits that a new enterprise would be accorded and the administra-tive and facilitative architecture for its operation. This would include elements of training and skill develop-ment, finance, technology, marketing, cluster format, etc. Entrepreneurship could also be considered as part of the regular secondary school curriculum to inculcate awareness on its dimensions, as a large proportion of school-leavers would go into self-employment/small en-trepreneurship. Resources for skill development: A National Skill De-velopment Bank could be set up to finance skill devel-opment training, fund skill development institutes and provide seed capital for new entrepreneurs. MNREGA should include a component of skill development to ef-fectively deploy employment funds for building employ-ability capacity. Weighted deduction could be offered to companies for providing certifiable skill development for employees.
  39. 39. FOCUS OF THE MONTH Rejuvenating the Textiles Sector Textiles is one of the most important sectors of In-dian economy, in terms of, its contribution to indus-trial output, employment generation, and the export earnings of the country. India’s dominance in global textiles can be gauged from the fact that the country is second largest producer of fibre in the world. It is also counted among the leading textile industries in the world. Abundant availability of raw materials such as cotton, wool, silk and jute and skilled workforce has ECONOMY MATTERS 40 made India a major sourcing hub. The textile industry in India traditionally, after agriculture, is the only industry that has generated huge employment for both skilled and unskilled labor in textiles. The textile industry con-tinues to be the second largest employment generating sector in India. Going forward, the Indian textile industry is poised for strong growth, given the strong domestic consump-tion as well as export demand. However, this age-old Industry in the country is facing many challenges for its survival and sustainability too. In this context, we cover this crucial sector in this month’s ‘Focus of the Month’, providing an in-depth analysis of the sector by sectoral experts.
  40. 40. The Indian Textiles Industry: Pivotal in Increasing the Share of Manufacturing in GDP 41 FOCUS OF THE MONTH JULY - AUGUST 2014 Q1: What is the vision of the Confederation of Indian Industry for the Indian Textiles Industry? CII envisions creation of a strong and competitive textile and apparel manufacturing value chain with creation of employment and value addition in focus. It aims to cre-ate a platform for sharing, nurturing and disseminating information on industry best practices and assisting in-dustry and government in making India a preferred des-tination for Textile manufacturing. Q2: What is current status of Textile Industry in India and how does it stack up in comparison? Today, the Indian textiles industry is one of the largest in the world. It is a US$100 billion industry. The domes-tic consumption is estimated at US$67 billion whereas the exports are about US$33 billion. The domestic tex-tile and apparel industry in India is estimated to reach US$141 billion by 2021. In addition to providing one of the basic necessities of life, the textiles industry in India plays a vital role through its contribution to industrial output, employment generation, and the export earn-ings of the country. It is the second largest sector after agriculture in terms of employment and provides direct employment to over 45 million. Besides, another 60 million people are engaged in its allied activities. During April-September 2013, textile exports from India reached US$16 billion, which is 8 per cent higher than the exports during the same period last year. The industry also accounts for about 14 per cent of in-dustrial production, 5 per cent of the country’s gross domestic product (GDP), 11 per cent of export earnings, 23 per cent of the world’s spindle capacity, 4 per cent of the global textile and apparel trade and 12 per cent of the world’s production of textile fibres. The global demand of textile and apparel products is on rise and within India the demand growth is still faster. Over last 10 years, some interesting progress has hap-pened in Indian Textile industry. New investment in spinning and shuttle less weaving machines have re-sulted in ~ 40 per cent of India’s spinning capacity and almost entire shuttle –less weaving capacity being less than 10 years old leading to higher efficiency. Also, India is faster becoming competitive in factor cost, particularly in power and wage cost, though there ex-ists a huge potential to improve productivity per unit of factor cost. Q3: What according to you are the key opportunities and challenges being faced by this industry today? While India is the country with second largest produc-tion infrastructure, it lags far behind China in terms of scale and technology level. It also faces competition from several other countries which have carved a niche for them e.g. Bangladesh, Vietnam, Turkey, etc. Indian textile industry faces several challenges like low value addition, higher power and financial cost, gaps in skill
  41. 41. ECONOMY MATTERS 42 FOCUS OF THE MONTH level at all levels, fragmentation, smaller capacities, etc. Since the industry’s growth is directly linked with its huge employment generation capability and export potential, focused initiatives to uplift the industry will result in significant growth for the overall economy as well. Some of the key challenges are • Lack of infrastructural support especially in power, road and ports, enabling faster lead time to con-sumption centers • Lack of long term policy regime which otherwise would have attracted investors to put long term in-vestment without fear of policy changes • To maintain raw material security at competitive price If we are able to tackle these challenges India can be-come a formidable force in the global textile value chain. Q4: What are your recommendations for leveraging the opportunities and combating the challenges de-tailed above? To achieve competitive edge within the domestic indus-try as well as in the global arena, a few policy reforms and amendments are required. In order to tap the op-portunity for growth and role in global textiles at this important juncture of time, CII recommends efforts re-quired in 4 broad areas for the overall growth and im-provement in competitiveness of the industry. 1. Attracting Investments – establishing Textile Mega Parks, Special Incentives for Value Added Textile and Apparel Manufacturing, Attracting Foreign Di-rect Investments (FDIs), Attracting investment in Machinery Manufacturing Segment; 2. Enhancing Manufacturing Competitiveness - Amendment in Labour Laws, promoting Skill Devel-opment, Rationalization of Taxation, Revising Pow-er Tariffs and Improving Availability and Supporting Technical Textile Manufacturing; 3. Market Development - expediting negotiations with regard to Free Trade Agreements, particularly India-EU FTA and creating “Brand India” through Exhibitions and Region Specific Textile Parks; 4. Support services - Custom Clearance Process and setting up of Centers of Excellence. Apart from this focus on higher value addition and de-veloping niche sectors should be a priority. One of the areas to focus can be supporting of technical textiles manufacturing. Technical textiles are among the most promising and fastest growing areas of Indian textiles industry. The technical textile sector has demonstrated encouraging growth trends in India with a CAGR of 8 per cent for the last few years it has reached a size of US$13 billion. The sector is expected to show a CAGR of 16 per cent to reach US$31 billion by 2016-17.Globally, these textiles account for more than one third of all textile consump-tion. Currently, India accounts for only 8.6 per cent of global technical textiles consumption. Technical textiles are bound to play an important role as our economy grows. Increasing disposable income and the growth of various end user segments like health-care, roads and highways, agriculture, automobiles etc. are expected to drive the demand for these products at a much higher rate in India.
  42. 42. Tiruppur – An Industry with Great Growth Potential 43 FOCUS OF THE MONTH JULY - AUGUST 2014 Tiruppur is a major textile export hub with special-ized expertise in cotton knitted garments with over 18000 Crores of apparel exports and significant turno-ver on account of domestic sale of garments in India to the tune of 8000 Crores, thereby providing direct em-ployment to over 5 Lakh people. It is called the knit capital of India as it caters to famous retail brands from all over the world. Almost every inter-national knitwear brand in the world has a strong pro-duction share from Tiruppur. It has a wide range of fac-tories which export all types of knits fabrics and supply garments for kids, ladies, men’s garments - both under garments and tops. Some of the world’s largest retail-ers including C&A, Switcher, Wal-Mart, Primark, Die-sel, ARMY, Tommy Hilfiger, M&S, FILA, Respect, H&M, HTHP, Whale, NIKE and Reebok import many textile items and clothing from Tiruppur city. Tiruppur was a small village about a couple of decades ago. Despite several disadvantages including lack of proper infrastructure facilities, difficult access to ports and airports, etc., Tiruppur has emerged as a major play-er in world apparel market because of unstinted hard work and enterprise of the entrepreneurs in and around the region. Most of the entrepreneurs hail from agrarian back-ground with very few qualified and educated. It is due to their dedicated hard work that these entrepreneurs have carved a niche for themselves in the Global textile map thereby contributing to the economic growth of the Country. The unique factors which has helped to en-trench Knitwear Industry in Tiruppur Cluster are • Micro, Small and Medium industries have got syn-ergized in the manufacturing process which is very unique for this cluster. Since this cluster caters mainly to the western markets which is so dynamic in nature where in change is the constant factor, to accommodate this companies should be flexible and be ready to swift adaptability to incorporate the required changes in the manufacturing process and in the embellishments area. Without this flex-ible nature it would be very difficult to cater to the markets on time. • Unity in diversity, that means competitors would mutually exchange the expertise without any sec-ond thought; the standing testimony for this unity is NIFT-TEA which is an institution promoted by 185 entrepreneurs together. The main objective of this Institute is to support the growth of this Industry. Moreover this is the only Institute across the coun-try which provides courses exclusively relevant to knitwear and is evolving itself as the repository of knitwear knowledge source. With all these efforts yet the knitwear / apparel industry in India caters to less than 3 per cent of the global de-mand for textile products. Off late the apparel exports from China and other competing countries are getting less competitive because of several internal factors. This presents a unique opportunity for Indian apparel indus-try, specifically clusters like Tiruppur, to effect manifold growth in volume of exports from the country.

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