Economy Matters, November-December 2013


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Euro Area is recovering slowly, with its major member countries registering lower-than-expected growth rates in the third quarter. Major Asian economies have shown diverse growth trends in the last few quarters. We cover this in the section on Global Trends in this month’s issue of Economy Matters.

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

The Sectoral spotlight for this issue is on Electricity, which remains an important contributor to GDP growth. We evaluate the impact of the Electricity Act, 2003 on the sector’s performance.

In the Special Article, we provide a snapshot of India’s exports sector along with analyzing the important sectors in exports such as services and tourism.

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Economy Matters, November-December 2013

  1. 1. ECONOMY MATTERS Volume 01 November-December 2013 Rejuvenating Exports Cover Story Inside This Issue - Asian Economies: A 'Mixed Bag' as far as Growth is Concerned - GST is Inevitable; - But Only After Next General Elections! - - Cautious Optimism on Growth and Current Account - Sector in Focus: Electricity Euro Area's Economic Recovery Falters in the Third Quarter No. 11
  2. 2. FOREWORD Euro Area is recovering slowly, with its major member countries registering slowerthan-expected growth rates in the third quarter. Real GDP grew by 0.1 per cent in Q3 2013, moderation from the 0.3 per cent growth seen in the previous quarter. With this, in the three quarter of this fiscal so far, Euro Area's GDP has contracted by 0.7 per cent as against decline of 0.5 per cent in the corresponding period last year. As per the new set of data on the PMI indices, some rebound in growth is perceptible; however, weak retail sales data is keeping the currency bloc's growth outlook under pressure. Moving over to the Asian continent, the major economies are growing at varied pace, with Indonesia and Malaysia notching up impressive set of GDP numbers in the third quarter. Singapore economy also did well in the July-September quarter, while Thailand, Hong Kong and Japan remained the laggards. The growth outlook in these Asian economies remains contingent on the strength of the recovery in US, Euro Area and China going forward. Domestically, growth seems to have bottomed out. Two crucial macroeconomic parameters were released in November 2013, which have infused some enthusiasm amongst the economy watchers. GDP growth increased to 4.8 per cent in the second quarter of the fiscal from 4.4 per cent in the previous quarter and current account deficit (CAD) fell sharply to 1.2 per cent of GDP from a high of 5.0 per cent in the quarter before. However, these set of feel-good data prints should be taken with a pinch of salt as the GDP growth still remains below 5 per cent and more importantly, the drivers needed to push it beyond that threshold are not visible. CAD compression also is largely due to the artificial controls on curtailing gold imports. To make the recovery more resilient, concerted action on the front of the policy makers is the need of the hour in terms of speedy implementation of projects, removing of structural bottle-necks etc. The improving global macroeconomic environment and a weaker rupee have given a fillip to India's exports, which rose by 12.2 per cent during the second quarter of the current fiscal. This strong growth in exports coupled with muted imports has had a favorable impact on the CAD. In the next 12-18-months, export performance will not only influence the CAD but will also be one of the factors supporting GDP growth because the domestic economy and investment cycle will improve only gradually. The services sector has been a key driver of India's improved trade performance and there is a potential for increasing its exports further given the fact that India is a leading player in the services trade in the world. Chandrajit Banerjee Director-General, CII 1 NOVEMBER - DECEMBER 2013
  3. 3. CONTENT Inside This Issue Executive Summary .................................................................03 Growth Outlook: 2013-14 .....................................................04 Rejuvenating Exports Global Trends Cover Story 05 The improving global macroeconomic environment and a weaker rupee have given a fillip to India's exports, which rose by 12.2 per cent during the second quarter of the current fiscal. This strong growth in exports coupled with muted imports has had a favorable impact on the Current Account Deficit. In the Special Article, we provide a snapshot of India’s exports sector along with analyzing the important sectors in exports such as services and tourism. Euro Area's Economic Recovery Falters in the Third Quarter Domestic Trends 11 Cautious Optimism on Growth and Current Account, IIP, Inflation Taxation 18 GST is Inevitable; - But Only After Next General Elections! Sector in Focus 20 Electricity Special Article 27 Rejuvenating Exports Economy Monitor ................................................................... 42 ECONOMY MATTERS 2
  4. 4. EXECUTIVE SUMMARY Global Trends Sector in Focus: Electricity The 17-nation Euro Area (EA) eked out marginal economic growth in the third quarter of the current year (Q3 2013), indicating that while the single currency bloc is sustaining a very modest recovery, it's struggling to gain momentum. Although the PMI indices for October and November have been better than in Q3 2013, unexpected fall in retail sales in October continues to keep EA GDP under pressure. Coming to the Asian continent, countries across Asia have been hit by falling exports, dragging on growth and pushing current account balances into the red. At the same time, capital has flowed out of the region amid rising U.S. interest rates as investors anticipated an end to the U.S. Federal Reserve's massive bondbuying program. That has compounded pressures on Asian currencies, making it harder for the region's central banks to loosen monetary policy to support growth. Electricity sector is an important contributor to the economic growth of the country. However, in the last year, the sector's growth halved to 4.0 per cent as compared to 8.2 in 2011-12. In order to make the sector more efficient, promote its development and consolidate laws relating to generation, transmission, distribution, trading and use of electricity, government had brought into effect the Electricity Act on 10th June 2003. With the Act now 10 years old, the sector has come full circle - from emerging as one of the most attractive investment destinations in the late 2000s, private investment has since receded. An assessment of the last 10 years of the Act reveals that while the sector has not delivered on its objectives, this is less because of flaws in the Act, and more due to poor execution, unprecedented fuel price increases and project execution bottlenecks. In fact, the Act provides a strong platform for development if certain critical learnings are incorporated as the sector moves forward. Domestic Trends The data on India's current account deficit (CAD) and GDP released over the last one month has injected a dose of mild optimism among policymakers and market analysts. GDP growth marginally lifted to 4.8 per cent in the April-September quarter from 4.4 per cent in the preceding quarter and CAD fell to 1.2 per cent of GDP from 5.0 per cent in the previous quarter. However, industrial production number of October 2013 once again disappointed, as the headline number slipped into the negative territory. The decline in IIP during the month was underpinned by contraction in many of its sub-sectors such as manufacturing, mining, basic and consumer goods. In contrast, WPI inflation accelerated to more than one year high of 7.5 per cent in November 2013 as compared to 7.0 per cent in the previous month on the back of increase in food and fuel inflation. To be sure, consumer prices based inflation (CPI) too quickened to 11.2 per cent in October 2013 from 10.1 per cent in the previous month. However, citing the transitory nature of food prices and high probability of them receding in the subsequent months, RBI kept the policy rates unchanged in its mid-December policy review. Special Article India's export performance over the last two years has been affected by continued sluggishness in global trade and an overvalued exchange rate for a prolonged period. Exports began on a weak footing in the start of this fiscal, contracting by 3.1 per cent in the first quarter; however, its growth picked up to 12.2 per cent in the second quarter, moderating to 9.7 per cent in OctoberNovember 2013. Export recoveries were evident in sectors, such as petroleum products, rice, readymade garments, marine products and other chemicals. The depreciation in the exchange rate, both in nominal and real terms, appears to have helped improve India's export competitiveness in the recent quarters. Improvement in exports is critical for lifting the economic growth and containing the current account deficit. In order to take our exports performance to the next level, further expansion of Focus Market Scheme (FMS) and inclusion of new product in Focus Product Scheme (FPS) is very much needed. 3 NOVEMBER - DECEMBER 2013
  5. 5. GROWTH OUTLOOK FOR 2013-14 REVISED FURTHER DOWN 2012-13 2013-14 Rationale GDP Growth 5.0% 4.8-5.3% We have scaled down our growth forecast to a range of 4.8-5.3 per cent for the current fiscal as compared to 5.35.8 per cent forecasted earlier on the back of higher-thanexpected demand compression in the wake of global uncertainities coupled with fragile domestic situation. Agriculture remains the sole saviour for overall GDP this year. Rising inflation has dimmed the possibility of lowering of interest rates by RBI, which is not going to help growth. Concerted policy actions by policy makers in the form of addressing the structural bottlenecks are need of the hour in order to lift growth out of its current abyss. Agriculture 1.9% 4.3-4.8% Aided by a low base and normal monsoons, agriculture is expected to grow at an above-trend rate of around 4.5 per cent in the current fiscal. Consequently, we have scaled up the growth forecast of agriculture GDP to a range of 4.34.8 per cent from 3.0-3.5 per cent forecasted earlier. Industry 2.1% 1.6-2.1% Industry GDP growth has been scaled down to a range of 1.6-2.1 per cent as compared to an earlier estimate of 3.54.0 per cent for the current fiscal. The main reasons for this growth downgrade is the continued poor performance of the sector in the wake of depressed global demand, reduced chances of RBI cutting interest rates, general risk aversion amongst investors and mining sector de-growth amongst other reasons. In order to lift industrial growth, its pivotal to sort out issues related to mining, and opt for speedy clearances of projects. Services 7.1% 6.3-6.8% Services sector GDP growth too has been revised downwards to a range of 6.3-6.8 per cent as compared to an earlier estimate of 6.5-7.0 per cent for the year. The spillovers from lower industrial growth are expected to adversely impact services sector growth. However, the upside to our services sector forecast emerges from the rise in rural incomes due to better-than-expected farm sector growth and increased government spending owing to a pre-election year. WPI Inflation 7.4% 6.0-6.5% We have revised our WPI inflation forecast upwards for the current year in view of rising inflationary expectations aggravated by rising food prices. The new forecast now stands at 6.0-6.5 per cent, revised upwards from 5.5-6.0 per cent. However, the downside risks to headline inflation arises from slower GDP growth, which will help in cooling down of demand-side pressures on inflation going forward coupled with the lagged impact of monetary tightening purused by RBI since September 2013. Note: F- CII Forecast ECONOMY MATTERS 4
  6. 6. GLOBAL TRENDS Euro Area's Economic Recovery Falters in the Third Quarter growth seen in the second quarter that ended the region's record-long recession was a one-time spurt, boosted by a significant bounce in construction activity in some countries (most notably Germany) after it had been held back in the first quarter by particularly poor weather. In year-on-year terms, real GDP declined by 0.4 per cent in Q3 2013 thus marking its seventh consecutive decline. In the first week of November, European Central Bank (ECB) had cut the headline interest rate by 25 bps to 0.25 per cent, citing underlying weak growth momentum. The weak set of numbers for 3Q 2013 in way vindicates ECB's decision to cut interest rates to restimulate growth across the single currency area. T he 17-nation Euro Area (EA) eked out marginal economic growth in the third quarter of the current year (Q3 2013), indicating that while the single currency bloc is sustaining a very modest recovery, it's struggling to gain momentum. EA-17 real GDP grew 0.1 per cent in Q3 2013, unchanged from the first estimates released last month, as per the second estimates of GDP released by Eurostat. This clearly shows that the 0.3 per cent Euro Area's GDP (on seasonally-adjusted basis) 0.3 0.1 -0.2 -0.4 -0.5 -0.6 y-o-y% q-o-q% -1.0 -1.2 4Q12 2Q13 1Q13 3Q13 Source: Eurostat 5 NOVEMBER - DECEMBER 2013
  7. 7. Among member states for which data are available for the third quarter of 2013, economic activity in Germany grew by 0.3 per cent in Q3 2013, a slowdown from the prior quarter, and in France it fell by 0.1 per cent, indicating that the Euro Zone's (used interchangeably with Euro Area) nascent recovery faltered in the summer. Between them, they account for almost half of total Euro Zone output. In France, a slump in exports and business investment failed to offset strong consumer spending, thus pulling down the GDP. Austria, which accounts for 3.2 per cent of total Euro Zone GDP, grew by 0.2 per cent, the Czech Republic contracted by 0.5 per cent but Hungary beat expectations with growth of 0.8 per cent from the second quarter. GDP in Netherlands, accounting for 6.3 per cent, rose by 0.1 per cent from the second quarter. Italy, which has faced prolonged period of political instability, was also mired in economic gloom after a 0.1 per cent decline in GDP in the third quarter extending the country's recession from the summer of 2011 to nine quarters. Real GDP Growth in Selected Euro Area Countries 2.0 1.0 0.0 -1.0 y-o-y% q-o-q% -2.0 Germany France Italy Netherlands 3Q13 2Q13 1Q13 3Q13 2Q13 1Q13 3Q13 2Q13 1Q13 3Q13 2Q13 1Q13 3Q13 2Q13 1Q13 -3.0 Hungary Source: Eurostat Amongst the broad GDP categories in Euro Area, total investments (or Gross Capital Formation) grew 2.0 per cent on q-o-q basis in Q3 2013, marking its first growth in the past nine quarters. However, it is important to note that majority of that growth came through inventories, as fixed investments (or Gross Fixed Capital Formation, GFCF) growth was only slightly higher at 0.4 per cent on q-o-q basis in Q3 2013, as against 0.2 per cent in the previous quarter. This clearly shows that inventories added 27 bps to GDP growth in Q3 2013, as against a ECONOMY MATTERS deduction of 14 bps in the previous quarter. Thus, excluding inventories, Euro Area's real GDP contracted 0.2 per cent on q-o-q basis in Q3 2013, as against a growth of 0.4 per cent in the previous quarter. Besides investments, private consumption expenditure (PCE) grew 0.1 per cent on q-o-q basis in Q3 2013, slower than 0.2 per cent in the previous quarter. Consequently, PCE had a neutral contribution to GDP growth, contributing only 4 bps to GDP growth, less than half the contribution of 9 bps in Q2 2013. 6
  8. 8. GDP by Components (from Demand-Side) GDP Components (q-o-q%) 1Q13 2Q13 3Q13 Household and Final Consumption Expenditure -0.1 0.2 0.1 Government Final Consumption Expenditure 0.3 0.0 0.2 Gross Fixed Capital Formation -1.9 0.2 0.4 Exports -1.0 2.1 0.2 Imports -1.2 1.6 1.0 Source: Eurostat To sum up, in the first three quarters of 2013, Euro Area real GDP contracted by 0.7 per cent on y-o-y basis, as against decline of 0.5 per cent in the corresponding period last year. Although the PMI indices for October and November have been better than in Q3 2013, unexpected fall in retail sales in October continues to keep EA GDP under pressure. However, it would be safe to say that while the region's recovery remains on track in the fourth quarter, the upturn continues to look both fragile and weak. Asian Economies: A 'Mix-Bag' as far as Growth is Concerned Countries across Asia have been hit by falling exports, dragging on growth and pushing current account balances into the red. At the same time, capital has flowed out of the region amid rising U.S. interest rates as investors anticipated an end to the U.S. Federal Reserve's massive bond-buying program. That has compounded pressures on Asian currencies, making it harder for the region's central banks to loosen monetary policy to support growth. In this piece, we will analyse briefly the growth performance of the key Asian economies in the last few quarters. have stymied economic growth in the crucial fourth quarter. In 2014, however, the Thai economy is expected to grow in the range of 4.0-5.0 per cent on the back of a global economic recovery and massive state spending on infrastructure. The economy grew by 6.5 per cent in 2012. Indonesia expanded less than 6 per cent in the third quarter as high interest rates weighed on consumption and exports fell. Gross domestic product increased 5.6 per cent on a y-o-y basis in the July-September quarter as compared to 5.8 per cent in the previous quarter. The third quarter data print was the weakest quarterly growth figure since 2009 when the global financial crisis impacted the economy and clearly highlights the vulnerability of Southeast Asia's largest economy as it weathers a depreciated exchange rate, faster inflation and diminished foreign capital inflows ahead of elections in 2014. Bank Indonesia has raised its benchmark rate by 1.5 percentage points since early June 2013 to shore up the Rupiah and stem price gains, while the government has acknowledged growth next year will be slower as it reins in spending to narrow a record current-account gap. Amongst the ASEAN economies, Thailand's economy grew at a lower-than-expected pace of 2.7 per cent on yo-y basis in July-September quarter, weaker than the adjusted 2.9 per cent in April-June. It was the third straight quarter of slowing growth in the kingdom, and came on the back of a drop-off in consumer spending, although the economy did benefit from a surge in tourist arrivals and increased state spending. In view of the lower GDP growth in the first three quarters of the year so far due to strengthening Thai Baht, slower than expected recovery in key export markets and reduced private consumption spending, government recently slashed its full year growth estimates. On a year-on-year basis, Thailand's 2013 GDP or gross domestic product is now officially forecast to come in at less than three per cent in view of the ongoing anti-government rallies that Malaysian economy grew 5 per cent year-on-year in the third quarter of 2013, rising strongly from 4.4 per cent in the previous quarter. The country registered a better 7 NOVEMBER - DECEMBER 2013
  9. 9. economic performance during the third quarter due to improved external demand and continued strength in domestic demand that supported the overall growth. Private consumption expanded by 8.2 per cent in 3Q 2013, supported by a higher wage growth in both export and domestic-oriented industries, while exports rebounded by 1.7 per cent. Malaysia's economic growth has panned out on expected lines in the first three quarters of the year so far (average growth of 4.5 per cent) and has prompted the Malaysian Central bank to maintain its outlook for the current year GDP growth at between 4.5 to 5.0 per cent. ASEAN-3 Real GDP Growth (y-o-y%) 6.0 5.8 5.4 5.6 5.0 4.1 2.9 4.4 2.7 Thailand Indonesia 1Q13 2Q13 Malaysia 3Q13 Source: Trading Economics Among the Newly Industrialised Economies (NIEs), South Korea's economy maintained a robust pace of growth in the third quarter as private consumption and investment picked up the slack from a fall in exports. Gross domestic product expanded by 3.3 per cent in the third quarter, accelerating from the second quarter's 2.3 per cent gain. The slightly stronger-than-expected rate of expansion has bolstered hopes that Asia's fourth-largest economy will remain on a recovery track and will be able to reach Bank of Korea's growth forecast of 2.8 per cent for the year, despite slowing global demand. South Korea's export-reliant economy has been hit by shrinking global demand. Exports fell 1.3 per cent last year, the first decline in three years, as growth weakened in China, the country's largest export destination. In order to counter this, early this year, the government put forth a 17.3 trillion won ($15.5 billion) extra budget, its first fiscal stimulus in four years, to boost the economy. healthy 5.8 per cent in the third quarter of 2013 as compared to 4.4 per cent in the previous quarter. This higher-than-expected growth in the 3Q 2013 prompted the government to raise its growth forecast to 3.5 per cent to 4.0 per cent in 2013 from earlier forecast of 2.5 to 3.5 per cent and project as much as 4 per cent growth next year. Sectors that have been performing well include manufacturing, wholesale and retail trade, as well as transportation and storage, and they will continue to perform well towards the year-end in line with the slight pick-up in the global economy. Singapore's neighbouring economy, Hong Kong, on the other hand, registered a deceleration in growth at 2.9 per cent in 3Q 2013 as compared to 3.2 per cent growth in the previous month. Domestic demand, a key factor in Hong Kong's economy, expanded for the period, helped by rising incomes and a low unemployment rate of 3.3 per cent. The government has predicted three per cent growth for the year, saying that moderate growth is "likely attainable" for the fourth quarter. The Southeast Asian city-state of Singapore grew at a ECONOMY MATTERS 8
  10. 10. NIE's Real GDP Growth (y-o-y%) 5.8 4.4 3.2 3.3 2.9 2.9 2.3 1.5 0.3 South Korea Hong Kong Singapore 1Q13 2Q13 3Q13 Source: Trading Economics Gross domestic product in Japan expanded by only 1.1 per cent (on an annualised basis) in the third quarter of the current year, a slower rate than 3.8 per cent in the previous quarter. The sharp deceleration raises questions about the strength of recovery in Japan, which enjoyed rapid growth of almost 4 per cent in the first quarter. Prime Minister Shinzo Abe has been working to jolt the world's third largest economy out of stagnation. His ambitious turnaround plan, known as Abenomics, aims to end years of deflation, leading to more robust growth. Going forward, the weakness in Yen coupled with the announcement of a government stimulus (in order to negate the impact of rise in sales tax to be announced in April next year) is expected to support growth. Japan's Real GDP Growth (Annualised basis, %) 4.3 3.8 1.1 1Q13 2Q13 3Q13 Source: Trading Economics In sum, the global economic outlook is expected to continue to improve modestly in 2014, supported by a slow recovery in the U.S. and Euro Zone. Uncertainties remain over how markets will react to the tapering of quantitative program by the US Federal Reserve. The Euro Zone remains susceptible to a flare-up of the sovereign debt crisis. These are the crucial triggers for the Asian economies as they step into 2014. 9 NOVEMBER - DECEMBER 2013
  11. 11. Other Global Developments During the Month v The Fed surprised the market, announcing that it would reduce its bond buying program from US$ 85 billion/month to US$75billion/month. As per the announcement, Fed would trim its purchases of long-term Treasury bonds to US$40 billion/month (from US$45 billion previously), and cut its purchases of mortgagebacked securities (MBS) to US$35 billion/month (from US$40 billion previously). Non-farm payrolls (NFP) in US increased by 203K in November 2013, much higher than market expectations of v an increase of 185K. Total job additions for September and October were revised to 163K and 200K respectively, taking the 2013 monthly average to 187K as compared to 182K in 2012. The unemployment rate in the UK fell to 7.4 per cent in the three months ending October 2013, as against 7.6 per v cent in the previous rolling quarter (ending September 2013). Notably, the number of unemployed people declined 78,000 m-o-m (99,000 q-o-q) in October 2013, marking the highest monthly decline in more than the past four decades, beating its previous highest fall of 71,000 in the quarter ending September 1997. UK inflation fell to its 4-year lowest level in November 2013. The Consumer price Index (CPI) grew 2.1 per cent on v y-o-y basis last month, as against 2.2 per cent in October and 2.6 per cent a year ago. The largest negative contributions came from 'food', wherein inflation eased from 4.3 per cent in October to 3.0 per cent in November. ECONOMY MATTERS 10
  12. 12. DOMESTIC TRENDS Cautious Optimism on Growth and Current Account he data on India's current account deficit (CAD) and GDP released over the last one month has injected a dose of mild optimism among policymakers and market analysts. GDP growth marginally lifted to 4.8 per cent in the April-September quarter from 4.4 per cent in the preceding quarter and CAD fell to 1.2 per cent of GDP from 5.0 per cent in the previous quarter. The good news is that the economy seems to be bottoming out and current account concerns too have retreated. The notso-good news is that GDP will only see a mild bounce from the trough as drivers to crank up GDP growth beyond 5 per cent in this fiscal year are absent. And, even the reduction in CAD is largely due to artificial controls on gold imports and the slowing economy. Let me elaborate. Real GDP Growth (y-o-y%) Current Account Deficit Snapshot Mr Dharmakirti Joshi Member, CII Economic Policy Council and Chief Economist, CRISIL T 6.5 35 6.0 5.3 5.5 5.3 4.7 4.8 4.8 8 6.7 30 4.4 25 5.4 20 15 6 4.9 32.6 3.6 4 22.6 21.8 18.1 10 2 1.2 5 5.2 2QFY14 1QFY14 4QFY13 3QFY13 2QFY13 1QFY13 4QFY12 3QFY12 2QFY12 0 2QFY13 3QFY13 CAD (US$ billion) 4QFY13 1QFY14 0 2QFY14 CAD (as a % of GDP) RHS Source: CSO & RBI 11 NOVEMBER - DECEMBER 2013
  13. 13. growth. Industrial growth picked up to 2.4 per cent in Q2FY14 from a mere 0.2 per cent in the previous quarter. But a large part of the industry, particularly linked to investment and discretionary consumer spending (automobiles, white goods etc) remains weak and will grow at a slower pace than last year. Services growth, too, remained weak at 5.9 per cent in the second quarter. The 4.8 per cent growth in GDP in Q2FY14 was propelled by a mild upturn in industry and a sharp pick-up in agriculture. Agriculture benefitted from a normal, welldistributed monsoon (rains have been 6 per cent above normal this year) and some sectors with rural exposure such as tractors and two-wheelers gained from this. The pick-up in exports in a few sectors such as textiles and pharmaceuticals is providing a cushion to industrial Supply-Side Components of GDP (y-o-y%) 1QFY13 2QFY13 Q1FY14 Q2FY14 GDP at factor cost 5.4 5.2 4.4 4.8 Agriculture 5.4 5.2 2.7 4.6 Industry 1.8 1.3 0.2 2.4 Services 7.7 7.6 6.6 5.9 Mining & quarrying 0.4 1.7 -2.8 -0.4 Manufacturing -1.0 0.1 -1.2 1.0 Construction 7.0 3.1 2.8 4.3 Electricity, gas & water supply 6.2 3.2 3.7 7.7 Trade, hotels, transport & communication 6.1 6.8 3.9 4.0 Financing, insurance, real estate & business services 9.3 8.3 8.9 10.0 Community, social & personal services 8.9 8.4 9.4 4.2 Source : CSO private corporate investment and manufacturing sector are both revived, a material and sustainable lift in India's GDP growth is unlikely. Despite the recent pick-up, overall GDP growth will remain sub-par at 4.8 per cent in 2013-14; GDP growth will be marginally better in the second half (5.0 per cent) compared with the first half (4.6 per cent). The sharp drop in CAD was due to a variety of factors, but not all of them can be treated as positive. The improvement in CAD was due to: (i) curbs on gold imports, ii) sharp slowdown in domestic demand, which pulled down imports of consumption and investment goods, and (iii) a weak rupee, which benefitted exports. In the short run, policymakers do not have instruments to fire up growth; high deficits do not permit increase in government spending to create demand and high inflation precludes interest-rate cuts. The Reserve Bank of India (RBI) recently raised interest rates to tame inflation, which continues to stay above its tolerance level. In addition, the private investment climate continues to be weak due to tardy project clearances, high interest rates and the added uncertainty of impending general election results. The steep fall in gold imports, due to duty hikes and restrictions on imports, has been the dominant factor behind the drop in CAD. This may not be sustainable and curbs on gold imports will have to be eventually withdrawn. As and when that happens, gold import demand will once again escalate. It is, therefore, critical to come out with attractive investment options that provide a hedge against inflation. Successfully launching an inflation indexed bond is one such option. Not only has short-term growth come down, India's medium-term potential too has been dented. With the growth in the first two years of the 12th five year plan (2012-2017) at 5 per cent per year, the growth for the entire plan period is likely to be around 6 per cent per year compared to 8 per cent in the previous plan. Unless ECONOMY MATTERS One positive spillover of slowing demand has been reduced imports of both consumption and investment 12
  14. 14. source their inputs domestically such as IT-ITES and pharmaceuticals also benefited from a weak currency. Consequently, exports grew by 11.9 per cent whereas imports fell by 4.8 per cent in the second quarter of 201314. The net result was a sharp contraction in India's trade deficit. This together with a pick-up in remittances narrowed the CAD to 1.2 per cent of GDP. goods. This together with the sharp depreciation of the rupee against the US dollar not only boosted exports but also made imports less attractive. Textile exports got a short in the arm from the weak rupee. The appreciation of the Bangladesh Taka against the US dollar also improved the relative competitiveness of India's textile exports. Similarly, other export-oriented sectors that Growth in Merchandise Exports & Imports (y-o-y%) 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 11.9 10.4 5.7 4.0 4.7 -1.0 -3.0 -3.9 2QFY14 -1.5 -4.8 -4.6 -8.8 Exports Imports Source: RBI by entering into currency swap agreements (notable being the US$50 billion agreement with Japan). These developments have helped stabilise the rupee, which has been extremely volatile in recent months and touched a low of over 68/US$ in August. A low CAD implies reduced dependence on foreign inflows, which vary with global risk appetite and liquidity. The global environment still remains fragile with US Fed tapering a key risk to both global risk appetite as well as liquidity. The postponement of the taper provided India a window of opportunity to trim its CAD and also improve its financing. This is, however, a short term fix. India should use this opportunity to fix its innards in the external sector make exports competitive and come out with viable alternatives to gold investments. Unless that happens, CAD worries could come to haunt us again when the curbs on gold imports are lifted and the domestic economy begins to look up. From a short-term crisis management perspective, we have done well on both counts. We reduced our external vulnerability by cutting CAD while improving capital inflows through innovative schemes for attracting NRI deposits and building a cushion against external shocks Industrial Growth Disappoints in October 2013 Industrial output declined by 1.8 per cent in October 2013 as compared to 2.0 per cent growth in the previous month and 8.4 per cent growth in the same period last year. The decline in IIP during the month was underpinned by contraction in many of its sub-sectors such as manufacturing, mining, basic and consumer goods. While high interest rates continue to impinge on these sectoral growth rates, policy bottlenecks too have been the culprit. The contraction in industrial output however did not come as a surprise as it was preceded by a decline in the core sector output (which constitutes close to 38 per cent of the total index) by 0.6 per cent during the reporting month and a high base of last year. The decline in output of eight core sector industries - coal, crude oil, natural gas, refinery products, fertilisers, steel, cement, electricity -- follows 13 NOVEMBER - DECEMBER 2013
  15. 15. a robust 8 per cent growth in September 2013. The sequential momentum declined too as the seasonallyadjusted month-on-month series slid into the negative territory in October 2013. On a cumulative basis, for the first seven months of the fiscal, IIP growth remained flat. IIP Contracts in October 2013 y-o-y% SA m-o-m% 10 5 0 -1.8 -2.0 Oct/13 Aug/13 Jun/13 Apr/13 Feb/13 Dec/12 Oct/12 Aug/12 Jun/12 -5 Source: CSO & CII calculations On the sectoral front, manufacturing sector production declined by 2.0 per cent in October 2013 as compared to 0.6 per cent growth in the previous month. This is the fourth negative data print so far in this fiscal and has elevated the upside risks to growth. In terms of industries, ten (10) out of the twenty two (22) industry groups (as per 2-digit NIC-2004) in the manufacturing sector have shown negative growth during the month of October 2013. It's pivotal for the policy makers to announce measures to revive this ailing sector as its rebound is critical for aiding the pickup in overall industrial growth. Meanwhile, regulatory and environmental issues continued to plague the mining sector, as it contracted by 3.5 per cent in October 2013 and proved that the lone positive growth data print in September 2013 was a mere aberration. Electricity sector growth, which has remained on a strong footing since last couple of months, witnessed a downward momentum in October 2013 as its growth decelerated to 1.3 per cent as compared to a healthy 8.4 per cent average growth from July-September 2013. compared to decline of 6.7 per cent in the previous month, despite an adverse base effect. This actually helped to prop up the headline number to some extent as IIP excluding capital goods would have contracted by 2.4 per cent. Consumer goods remains a drag primarily led by the continuing weakness in the durables sector, which was on expected lines as lead indicators such as passenger car sales had shown a contraction in October 2013 despite festive season demand. During the month, consumer goods sector showed de-growth to the tune of 5.1 per cent in October 2013 as compared to positive growth of 0.7 per cent in the previous month. The continued poor performance by consumer durables since last the last three quarters, wherein it remained in the negative territory, is a matter of concern as it is widely regarded as a proxy for consumption growth. Non-durables, on the other hand, remained in the positive territory, albeit showing a sharp moderation in output in October 2013 as compared to the previous month. Going ahead, we expect recovery in this component as high growth in agricultural GDP this year will support rural demand, which will prop up nondurables even if urban demand remains weak. On the use-based front, the consistently volatile capital goods segment surprised by coming in at 2.3 per cent as ECONOMY MATTERS 14
  16. 16. Sectoral Growth (y-o-y, %) Apr-Oct Weight Oct-12 Aug-13 Sept-13 Oct-13 FY13 FY14 1000.0 8.4 0.4 2.0 -1.8 1.2 0.0 Manufacturing 755.3 9.9 -0.2 0.6 -2.0 1.1 -0.3 Mining 141.6 -0.2 -1.0 3.3 -3.5 -1.0 -2.7 Electricity 103.2 5.5 7.2 12.9 1.3 4.7 5.3 Basic 456.8 4.3 1.1 5.3 -1.6 2.9 0.7 Capital 88.3 7.0 -2.0 -6.7 2.3 -11.6 -0.2 Intermediates 156.9 9.6 3.7 4.2 1.8 2.3 2.5 Consumer Goods 298.1 13.8 -0.9 0.7 -5.1 4.2 -1.8 -Durables 84.6 16.7 -7.7 -10.8 -12.0 5.7 -11.2 -Non durables 213.5 11.2 4.8 11.6 1.8 2.8 6.7 General Use-Based Source : CSO Outlook The negative growth in industrial performance evidenced at the threshold of the third quarter is disappointing. No doubt, the high base effect of last year could have been partly responsible for the slowdown in growth. But this does not dispel the impression that the growth impulses continue to remain weak. CII fully appreciates RBI's compulsions to keep inflation under check, however, it is also important that the RBI takes cognizance of the steep slide of industrial production and revert to the accommodative monetary policy to revive demand. However, easing monetary policy alone is not sufficient. Efforts should be made to ensure that the structural bottlenecks and other hurdles which constrain investment even after the project has been approved by CCI is checked so that the actual impact of project clearance is seen on the ground. Inflation Rises to 14-month High in October 2013 WPI inflation accelerated to more than one year high of 7.5 per cent in November 2013 as compared to 7.0 per cent in the previous month on the back of increase in food and fuel inflation. Amongst the food prices, vegetable prices were the main driver which rose to a record high of 95.3 per cent during the month. This is the sixth straight month that wholesale inflation has remained above the Reserve Bank of India's comfort zone of 5 per cent and in the last four months has even inched to 7 per cent. Indicating the upward sequential momentum, the seasonally-adjusted month-on-month series climbed to 1.0 per cent during the month. In a worrying development, the September inflation reading was revised up to 7.1 per cent versus provisional print of 6.5 per cent. To be sure, consumer prices based inflation (CPI) too quickened to 11.2 per cent in October 2013 from 10.1 per cent in the previous month. Rising food prices have continued to remain the key driver behind the jump in both WPI and CPI inflation in the last few months. Additionally, the continued pass-through from the weakening of the exchange rate has also contributed towards pushing the headline inflation number higher. 15 NOVEMBER - DECEMBER 2013
  17. 17. Both WPI & CPI Inflation Remain High 11.2 12 9.4 10 7.5 8 6 7.7 4 WPI y-o-y% Nov-13 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Mar-12 2 CPI (Combined) y-o-y% Source: Office of Economic Advisor Primary inflation jumped sharply to 15.9 per cent in November 2013 (highest value since February 2011) as compared to 14.7 per cent in the previous month. This was mainly attributable to the spike in food inflation to a high of 19.9 per cent as against 18.2 per cent in October 2013. The major increase in the food inflation came on account of a rise in inflation in vegetables, which rose due to supply-side inefficiencies in the vegetable market. Going forward, vegetable prices are expected to come down due to off-load of fresh vegetable supply in the market in December 2013. Non-food inflation too increased to 7.6 per cent as against 6.8 per cent in the previous month. In contrast, inflation in minerals decelerated to 6.1 per cent as compared to 7.0 per cent in the previous month. month. High-speed diesel inflation rose to 15.7 per cent with in October 2013 as compared to 14.7 per cent in the previous month. Going forward, we expect fuel inflation to moderate due to stabilisation witnessed in global crude prices and the recent strengthening of the Rupee. Manufacturing inflation marginally increased to 2.6 per cent in October 2013 as compared to 2.5 per cent in the last month. Non-food manufacturing, which is widely regarded as the proxy for demand-side pressures in the economy, too increased marginally to 2.7 per cent during the reporting month as compared to 2.6 per cent last month. The persistent rise in primary food inflation in this fiscal is now leading to a pass-through effect on manufactured food products where the food prices rose by 2.5 per cent in October 2013 as compared to 1.9 per cent in the previous month. Mirroring the increasing trend in primary and manufacturing food inflation, total food inflation (primary and manufacturing) too rose to 13.8 per cent from 12.4 per cent in the previous month. Fuel inflation increased to 11.1 per cent in October 2013 as against 10.3 per cent in the previous month, driven by rise in administered fuel components like diesel prices and LPG prices. An adverse base effect was also partly responsible in pushing fuel prices higher during the Outlook The continued rise in both WPI and CPI inflation has raised red flags in the economy. Persistence of high food prices has lent an upward bias to the inflation trajectory. Notwithstanding the expected moderation in food prices going forward due to the fresh stock of vegetable supply hitting the market, the food shock prevalent since last many months has started to become increasingly generalised, which in all probability will keep headline number elevated for the next few months. However, the lagged effects of effective monetary tightening since September 2013, should also exert an opposite force on inflation. ECONOMY MATTERS 16
  18. 18. Sectoral Components of Inflation April-Nov Weight Nov-12 Sept-13 Oct-13 Nov-13 FY13 Fy14 General 100.0 7.2 7.0 7.0 7.5 7.6 6.1 Primary 20.1 9.6 14.0 14.7 15.9 9.7 11.0 14.3 8.8 18.7 18.2 19.9 9.4 14.2 - Non-Food 4.3 14.0 4.9 6.8 7.6 10.0 5.8 - Minerals 1.5 6.9 2.3 7.0 6.1 11.3 0.9 14.9 10.0 11.7 10.3 11.1 10.8 10.1 - Food Fuel - Petrol - High Speed Diesel Manufacturing 1.1 1.5 9.6 5.3 4.4 8.0 1.9 4.7 14.6 20.2 14.7 15.7 8.0 21.0 65.0 5.4 2.4 2.5 2.6 5.7 2.8 - Food 10.0 9.2 1.6 1.9 2.5 8.0 4.1 - Non-food 55.0 4.6 2.5 2.6 2.7 5.3 2.5 Source: Office of Economic Advisor RBI Keeps Policy Rate Unchanged RBI chose to keep the key interest rates unchanged in its mid-quarter monetary policy review held on December 18th, 2013. The repo rate was maintained at 7.75 per cent, and accordingly reverse repo and marginal standing facility (MSF) remain unchanged at 6.75 and 8.75 per cent, respectively. Though the market participants were expecting the RBI to hike the key repo rate by atleast 25 bps, RBI chose to maintain a 'status-quo', citing expectations of tapering of inflation going forward along with weak state of the economy. CII welcomes this RBI's move. However, RBI clearly admitted in its policy statement that its decision was a close one as it would prefer waiting for more data points to reduce uncertainty. In the same vein, it also added that there are obvious risks to waiting for more data, including the possibility that tapering of quantitative easing by the US Fed may disrupt external markets and that it may be perceived to be soft on inflation. The Central Bank also made it amply clear that if the next round of data releases does not go on expected lines and throws up some surprises, it will act including on off-policy dates if warranted, so that inflation expectations stabilise and an environment conducive to sustainable growth takes hold. Know Your Facts: Shadow Banking* Shadow banking refers to a "bank-like" activity outside the banking system. The Financial Stability Board (FSB), which coordinates among financial authorities at the international level, defines shadow banking as "credit intermediation involving entities and activities outside the regular banking system". Globally, the size of shadow baking has grown significantly in the recent years. According to FSB, its global size went up from the level of $26 trillion in 2002 to $62 trillion in 2007. The activity suffered a bit during the financial crisis, but reached a level of $67 trillion in 2011, which is 111 per cent of the global gross domestic products (GDP). The term shadow banking itself is relatively new and gained currency just before the financial crisis. Institutions outside the banking system in the developed world, especially in the US, were leveraging themselves to accumulate assets and were, to a large extent, responsible for the meltdown in 2008. There are different ways and different reasons for the rise of shadow banking. In an economy where banking system is not adequately spread, something will come in to fill the vacuum. In India, as per RBI data, the assets of the shadow banking system (in India) accounted for 21 per cent of GDP compared with bank assets which were 86 per cent of GDP. However, a variety of institutions, such as non-banking financial institutions, that are part of the shadow banking system is regulated in India. *Adapted from Mint, dated June 20, 2013 17 NOVEMBER - DECEMBER 2013
  19. 19. TAXATION Guest Article GST is Inevitable; - But Only After Next General Elections! the Empowered Committee of State Finance Ministers (EC) was tasked to steer the introduction of GST as well. In November 2009, the EC came out with the First Discussion Paper on GST which outlined its broad structures and flagged the issues to be sorted out between Centre and the States. Some such issues were determination of 'Threshold' above which GST would be applicable, items and taxes that would remain outside its ambit, identification of exemptions, determination of Revenue Neutral Rates (RNR) and GST rates, and designing a mechanism of administering Dual Control by Centre and the States. On taxation of inter-state transaction of goods and services, it endorsed the scheme of Integrated GST (IGST) proposed by the Centre, in terms of which the IGST on inter-state transactions would be levied and collected by Centre and distributed to the destination States. Mr Sumit Dutt Mazumdar Indirect Tax Ombudsman and Former Chairman, CBEC G oods and Service Tax (GST) is designed to facilitate seamless flow of goods and services throughout the country. With its introduction, there will be minimal cascading effect of taxing the taxes because of input tax credit at each taxation point, and optimum contact between taxpayers and taxmen since its administering would be technology driven. There will be two streams of GST - the Central GST and the States GST. The two tax administrations will have commonality of law, procedure and dispute resolution mechanisms. Due to substantially higher tax base, the GST rate is expected to be low, and that would bring down the price of the goods and services. The other important issue was the need for amendment of the Constitution. The Centre had placed a Constitution Amendment Bill (the Bill) before Parliament in March 2011. Besides empowering both Centre and the States for collecting GST, the Bill proposed creation of a 'GST Council' and a Dispute Settlement Authority (DSA) so as to ensure that the GST With the success of Value Added Tax (VAT) in the States, ECONOMY MATTERS 18
  20. 20. norms are not violated. The Parliamentary Standing Committee on Finance chaired by Yashwant Sinha submitted its report on the Bill in July 2013. It made an unequivocal endorsement of the Dual GST structure. While making recommendations on various provisions of the Bill, the all-party Committee also allayed the fears of some of the States about loss of fiscal autonomy. identifying the exemptions and determination of RNR. An important pending issue is finalisation of the rules relating to 'Place and Time of Supply of Goods & Services'. On the issue of Dual GST, the States have sought to administer and collect on Centre's behalf CGST as well, for Small Business with a threshold of annual turn-over of Rs 1.5 crore. While opposing this move, the Centre pointed out that a slew of measures including use of robust technology would mitigate the apprehensions of the Small Business on dual control. The issue of collection of SGST in inter-state transactions by Centre was closed in the First Discussion Paper itself when the Integrated GST (IGST) model was chosen. But some States have desired to administer SGST on interstate transactions as well. Final decision on these important technical issues are critical for designing the GST-Net, a special purpose vehicle that would provide the IT support for GST business processes. The Centre accepted most of the Committee's recommendations and sent a revised Bill for endorsement by the States. Some of the features of the Revised Bill were as follows. The stipulation regarding 'consensus' before every decision of the GST Council was replaced by 'voting'. The provision regarding GST Dispute Settlement Authority was dropped, and instead GST Council was to deal with the disputes. Certain critical items like Petroleum and Petroleum products, Alcohol etc were not to be excluded from the ambit of GST in the Constitutional provision itself. The 'entry tax' including 'Octroi' was to be subsumed in the GST. In deference to the Committee's observations, the Centre also suitably modified the provisions regarding 'Declared Goods' by bringing the GST Council in the loop. Thus, besides the issue of Constitutional amendment, lot of grounds will have to be covered on technical issues as well before a decent dual GST can be introduced. In the light of the seemingly endless negotiations on these critical issues, a question therefore arises whether the Centre should seriously consider introducing its own Central GST by bringing all Central indirect taxes within its ambit. This would not require any Constitutional amendment. In fact, Sijbren Cnossen, an international VAT expert, has recently suggested precisely this. He has inter alia suggested that the Centre should proceed to introduce its own GST on as broad a base as possible and apply a single, uniform low rate. It would then be upto the States to introduce a similar GST. He felt that it would be 'easier with an overarching modern GST at the Central level'. This is a pragmatic idea, which deserves careful consideration. The bottom-line, however, is that any further critical decision with respect to GST will have to wait until the next General Elections in 2014. The States, however, in the November meeting of the EC opposed most of the views of the Centre. They insisted on retaining the exclusion clause relating to Petroleum, Alcohol etc in the Constitution itself. They opposed subsuming of 'entry tax'. They even opposed the existing Constitutional authority of the Centre with regard to 'Declared Goods'. They also reiterated the demand for a formal Constitutional mechanism for compensating the States for possible revenue loss after introduction of GST. Against this backdrop, one will now have to wait for the new Lok Sabha to deal with a new Amendment Bill after the general elections. Among the technical issues, agreement has been reached on 'threshold' which would be an annual turnover of Rs. 25 lakhs. Exercise is continuing on (Views are personal) 19 NOVEMBER - DECEMBER 2013
  21. 21. SECTOR IN FOCUS Electricity cent. In order to make the sector more efficient, promote its development and consolidate laws relating to generation, transmission, distribution, trading and use of electricity, government had brought into effect the Electricity Act on 10th June 2003. The six key elements of the reform agenda were: E lectricity sector is an important contributor to the economic growth of the country. However, in the last year, the sector's growth halved to 4.0 per cent as compared to 8.2 in 2011-12. In the current year, the firsthalf growth remained tepid at 5.9 per cent, however, in September 2013, growth stood at a fiscal year high of 12.9 per cent. In October 2013, the momentum in the sector slowed down as growth came in at a paltry 1.3 per - Introducing competition - Enhancing accountability and transparency - Improving cost recovery and commercial viability - Increasing access to electricity, particularly in rural areas - Improving customer service and affordability - Enhancing accountability and transparency Electricity Sector Growth (as per IIP), y-o-y% 16 12 8 6.5 4 1.3 0 ECONOMY MATTERS 20 Oct-13 Jul-13 Apr-13 Jan-13 Oct-12 Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 Jan-11 Jul-10 Oct-10 Source: CSO Apr-10 -4
  22. 22. As the Act completes its 10 years, it will be pertinent to evaluate the post Act era, especially the key successes of the Act, the important learnings and enumerate the next steps for the Indian power sector. 1. Competition in generation, leading to capacity addition and better price discovery: The Act created initial positive momentum and the rate of capacity addition increased three times from an average of 3.5 GW per year from 1993-2002 (VIIth and IXth plan periods) to 10.5+ GW per year during 2003-2013. The progress in renewables has been equally impressive, with India adding approximately 26 GW during 2003 to 2013, against an installed base of just 3.5 GW in 2002. However, this momentum was then lost due to falling returns and increasing risks to developers and is amply clear from the fact that India still suffers from a peak deficit of around 10 per cent. Moreover, at a time when capacity addition should continue to keep pace, the industry is hit by declining investments, as evident from BHEL's order inflow. Decreasing investment, and thus the reduced rate of capacity addition, does not augur well for the energy sector. Based on the current trajectory, India could expect a continued power deficit situation, and could face a peak deficit of 13 per cent by 2017. I. Overarching Objectives Not Met The Electricity Act 2003 was intended to pave the way for an India that provided "power for all". It aimed to develop the power markets (competition in generation, development of merchant markets), improve the viability of distribution companies (discoms) and make the sector more consumer oriented (supply in all areas, choice). This was to be enabled by the establishment of independent regulators. However, the sector has not achieved its main objectives. Only 75 per cent of villages were electrified by 2012, as per the World Energy Outlook. Progress in creating peaking power capacity is crucial for India, given that it has over 50 per cent share of service in GDP and also it continues to urbanise rapidly. The Act focused on aforesaid six areas to drive development. Progress was achieved in two areas, which subsequently lost momentum, and little to no progress was made in the rest. Here is an evaluation: Order Inflow for BHEL (Rs Crores) 59678 59037 Power Deficit is Likely to Continue 60507 199 22096 FY09 FY10 FY11 22500 135 FY12 FY13 Peak demand 176 123 Peak supply 2012 Peak demand Peak supply 2017 (E) Source: BHEL Annual Reports, Planning Commission, CEA & McKinsey Analysis 2. Supply of electricity to all areas, through T&D network build-up, and introduction of open access: The Rural Electrification policy was launched in 2006, in order to comply with the 2003 Act, and aimed to provide electricity to all households. The Rajiv Gandhi Grammen Vidhyutikaran Yojana (RGGVY programme) was launched under National Electricity policy to ensure electrification of all villages by 2010, and the deadline was later shifted to 2012. However, the scheme failed to achieve electrification of all villages. The Ministry of Power's definition of electrification (a village is considered electrified if power is available to public places and to 10 per 21 NOVEMBER - DECEMBER 2013
  23. 23. cent of the village's households), 90 per cent of electrification has been achieved so far. However, this is still way off the Act's stated objective of 100 per cent electrification. cent of that remained unsold, despite an energy deficit of 8.5 per cent, and significant amount of power was being generated from diesel sets at over Rs 25 per unit. This was largely driven by discoms resorting to load shedding to prevent further financial losses, and partly due to unavailability of evacuation infrastructure. 3. Trading and merchant market development: Power available at the exchange doubled in the last 3 years to 18 TWh. However, almost 20 per Demand Supply Imbalance in Power Exchange (in TWh) Demand Supply Position (in TWh) Supply Demand Supply 861.6 Demand 18.3 830.6 14.9 788.4 9.8 9.4 746.6 2009 2010 2009 2010 Source: IEX & CEA 4. Discom viability through improved aggregate technical and commercial (AT&C) performance, unbundling and cost reflective tariffs: Though AT&C losses were reduced from over 35 per cent in 2003 to 25 per cent in 2012 and discoms were unbundled and recapitalised, the accumulated losses in 2013 far exceed the prerecapitalisation losses. most states, and the creation of independent regulators. Moreover, there has been a steady progress in capacity addition since the implementation of the Act in 2003. 117 GW of generation capacity was added in the last decade, an average of approximately 11 GW per year. Of the total, 75 GW was added in the last 4 years. This is a significant improvement compared to the 36 GW added between 1999 and 2002 (3.6 GW per year). Some of its successes have been enumerated below: 5. Consumer benefit through choice (open access), improved service and affordability: This has remained a non-starter. a. Mobilised massive private sector interest and investment: Past attempts to mobilise private sector investments in electricity were not successful. However, the Act prompted massive private sector and even international interest in investing in the power sector. Of the 111 GW of generation capacity installed in the last decade, the private sector contributed more than 50 per cent (57 GW). This has increased their overall contribution in generation capacity from a mere 11 per cent in 2004 to 31 per cent in 2013. II. Good Act, Derailed By Poor Execution And Externalities Even though many of the objectives of the Act remained unmet, it did lay a sound foundation for the electricity sector in India. The many successes of the Act include: the creation of generation capacity across conventional and renewable technologies, operations improvements across most discoms, unbundling of electricity across ECONOMY MATTERS 22
  24. 24. Increasing Share of Private Sector in Generation (in GW) Government Private 88 87 86 85 82 80 12 13 14 15 18 20 2006 2007 2008 2009 2010 2011 73 69 27 31 2012 2013 Source: CEA, Planning Commission & Infraline b. Very competitive tariffs underpinned by innovation on capex and opex: The early rounds of competitive bidding in generation led to very competitive tariffs - among the lowest in the world. While some of this was driven by exuberance, there is also ample evidence to show that the boundaries of efficiency, technology, capital efficiency and plant availability have been pushed through innovative practices. e. Conducive for the growth of renewables: The Electricity Act has also been conducive for the growth of renewables. The installed renewables capacity has grown from an insignificant 3.5 GW to more than 29 GW by 2013 - a phenomenal 8x increase. Wind power has been the main driver of growth in the last decade. The next decade has been termed the "decade of solar" with ambitious targets and incentives for growth being set. c. Spectacular operational performance improvement in a few Discoms: High AT&C losses have been the bane of the sector for many decades and many believed it was impossible to reduce them. However, average AT&C losses have come down in the last 10 years from approximately 35 per cent to approximately 25 per cent. What is more impressive is that a few discoms have reduced losses from over 40 per cent to less than 20 per cent in 5 to 6 years, and that 31 out of 35 discoms have an improving trajectory here. Importantly, similar Acts have succeeded in other countries, e.g., United Kingdom. Further, the principles of these acts are seen as the template of power sector reforms in countries considering reforms. However, despite the aforesaid benefits of the Act, poor execution and externalities have marred its performance. This is discussed in the next section. III. Poor Execution and Externalities Have Marred Performance Despite the significant AT&C loss reduction reported in the last few years, discoms continue to bleed financially. Their accumulated losses have grown six times in the last 7 years, to a staggering Rs 250,000 crore. This has severely constrained their ability to secure long-term and short-term power, and many discoms prefer to resort to load shedding. This has mainly been driven by their inability to pass on increases in power sourcing costs (due to fuel inflation) to consumers. At the same d. Unbundling and establishment of independent regulators: There is legitimate frustration on the difficulty of making any progress in the power sector due to it being a state subject. However, the silver lining is that most states aligned with Electricity Act 2003, undertook the unbundling, and established independent regulators. 23 NOVEMBER - DECEMBER 2013
  25. 25. time, consumers use significantly higher cost, diesel based power, pointing to a massive market failure. own. It is no surprise that the sentiment has turned negative. Massive externalities like fuel security and project execution delays have further hurt the sector. Challenges at each stage of mining (e.g., exploration, clearances and development) have severely impacted domestic coal production. This has led to heavy reliance on expensive imported coal for power generation, causing significant value erosion in the sector - with distribution companies resorting to load shedding and suffering from unviability; and consumers paying over Rs 25 per unit; while generating stations lie idle. 3. Gaining privileged access to low cost fuel is necessary: Fuel prices will continue to escalate. Recent analysis suggests that the price of seaborne thermal coal could cross US$130 per ton by 2015. In such an escalating, volatile environment, leaving a significant part of India's generation capacity exposed will make the task of creating a viable distribution sector even tougher than it is now. Therefore, it is critical that India fully monetises its domestic fuel resources and use its scale to gain privileged access to international fuel resources. IV. Repowering the Indian Electricity Sector India needs to add 450 to 600 GW of power generation capacity over the next 20 years to meet the demands of the economy. This means a staggering 20 to 30 GW per year that requires US$1 to 1.5 trillion in investments (at today's real value). Meeting these challenging goals requires mobilising significant public and private sector participation across the value chain. Building on the strong foundation of the Electricity Act 2003 and incorporating learnings from the last 10 years, it will be possible to drive the development of the electric power sector in India and increase its contribution to India's economic and social progress. Needless to say, these learnings are very difficult to operationalise. Though many solutions have been discussed by various stakeholders, following are the few solutions, which have worked in small pockets and can be scaled up, and new ideas which are becoming feasible due to recent technologies. - Ensure cost reflective tariffs. This is the single biggest lever to ensure the viability of the distribution sector, though politically this remains the most difficult. While the usual options (e.g., linking payment to performance, open access) should continue to be pursued, leveraging Aadhaar to pay subsidies directly to economically weak families is a promising area to explore. - Pay subsidy directly to economically weak households. The biggest obstacle against cost reflective tariffs is the need to provide affordable power to users in the agricultural sector and low income households, which is provided through low tariffs for these categories. However, as with other subsidies, most of these lower tariffs get misdirected. Aadhaar now allows for subsidies to be directly paid to the economically weaker segments, removing the need to keep tariffs artificially low. The direct payout amount is likely to be a much lesser, compared to the annual discom losses our analysis suggests subsidy for residential customers would reduce by approximately 40 per cent. More importantly, it will pave the way for making distribution viable and will help unlock the development of the sector. As we look ahead, it is critical that we fully learn from the experiences of the past decade. 1. The power sector can't develop if distribution is not fixed: Distribution generates the cash flows to fund the full power sector value chain, and unless it becomes viable, sustainable development in the power sector is not possible. At the same time, politically, this is the most difficult to achieve and will require significant ingenuity. 2. A balanced risk-return profile is critical to attract investment and drive innovation: Investment will only flow into the sector if the opportunities offer balanced risk and returns. Over the last seven years, the return on invested capital in the sector (based on an analysis of listed companies) has fallen from approximately 11 per cent to 5 per cent. At the same time, developers are bearing risks (e.g., fuel price and availability, project execution, counter party risks), many of which they cannot legitimately ECONOMY MATTERS 24
  26. 26. Subsidy/Under - Recovery Burden (Rs Crore) Residential Power Consumption 100% = 16.58 cr households 25.000 100% = 170 Twh 13% 40% 34% 14.000 40% 53% 20% Domestic electricity consumption Electrified households Direct payout1 Current residential under - recovery 1 Lowest income 40% households consume 22.1 Twh of energy (13% of household consumption). At cost to serve of INR 6.5 per unit, it translates to a direct payout of INR 14,000 crore, even at full subsidy Source: Census India; National Sample Survey Data; CEA - Drive private sector participation in distribution. There is strong evidence that the private sector is more effective in driving operational performance - the average AT&C losses of the private sector discoms, at approximately 12 per cent, are significantly lower than the average losses of public sector discoms, which are 27 per cent. Even the top 10 public sector discoms have AT&C losses of 19 per cent. Private Sector has Performed Significantly Better (Per cent, AT&C losses) 34.8 19.1 12.4 Private sector performance average Top 10 public DISCOM average Other public sector average Source: Powerline Magazine, CEA & Company Websites Note: Simple average of per cent AT&C loss value of DISCOMs has been taken Private DISCOMs include Torrent, Reliance Infra, NDPL, CESC, BYPL 25 NOVEMBER - DECEMBER 2013
  27. 27. - Scale-up separation of agricultural feeders. This has proven to be very successful in creating transparency and driving performance improvement, and should be scaled-up. - Link FRP payout to financial and operational performance, including discoms setting cost reflective tariffs. Through CERC, set a minimum floor level for tariffs for all states (across categories). - Evaluate separation of content and carriage. Many countries have implemented this to provide more choice, and by definition, better service to customers. It also allows for competition in electricity retail, which could drive down power tariffs and allow consumers to buy expensive peaking power (vs. running diesel gensets), if power retailers are able to supply. The opinion of various stakeholders was split on whether India is ready for the separation of content and carriage. Regulators, in collaboration with industry participants, should evaluate this in detail. - Leverage de-centralised distributed generation (DDG) to drive rural electrification. With India significantly behind its rural electrification targets, the cost of grid extension already very high (Rs 15 to 20 per unit depending on distance from existing grid and population density of villages), and declining solar and bio-mass costs, the DDG policy could drive significant rural electrification. India should aim to light-up an additional 50,000 villages through DDG in the next 5 to 10 years. - Accelerate development of CIL reserves through a process similar to NELP (which, in effect, reassigned blocks not being developed by ONGC). Identify reserves where no or little development has taken place (based on milestones, e.g., exploration license received) and auction these reserves to public and private entities using NELP or a similar model. This should increase investments in the sector and introduce competition. It is anticipated that power tariffs will provide a natural cap to auction prices for these blocks. - Accelerate the implementation of multi-year time-of-day tariffs to give consumers access to peaking power - either through discoms or using open access. - - Allow for automatic index-linked revision of the fuel component of tariffs. Consider an oil product style linkage of tariffs to the national coal basket. - Based Incentive in Wind). Additionally, a sovereign fund could be created to bolster R&D in these areas. Finally, and most importantly, set-up future project bidding and award processes that allow for above threshold returns, and have the potential for upside (e.g., ownership of assets). Private capital has many opportunities for deployment, and will seek out the best returns over time. For new projects, which will need to rely on imported coal, create a 100 MTPA imported channel into the country. The Government of India, through a consortium of companies, could float an international competitive bidding for this volume of coal over a 20 year period. While the exact numbers can be worked out, the volume and duration of the contract must be such that it incentivises global producers to develop new tier 2 coal reserves over the next 10 years and bring them to market. The contracted coal, if secured at attractive prices, can be offered to power generation developers in India, who would bid for projects based on the lowest development cost, with coal being a free issue material. Conclusion Given the importance of electricity sector to the overall growth schema of the country, it's pivotal that government in liaison with relevant stakeholders tries to remove the existing lacunae from the Electricity Act 2003 through suitable amendments and also implements all its recommendations in its entirety for the sector to benefit. CII through its National Committee on Power has been at the forefront of this dialogue with the government and will continue to do so in the future too. Create disproportionate returns for innovation. Encourage investments in relatively newer and efficient technologies (e.g., ultra super critical plants, low speed wind, energy storage, AT&C loss reduction). One possible route could be to provide an incentive to bumpup developer IRRs (e.g., similar to Generation This article is based on the Report Repowering India's Electricity Sector, published by CII in November 2013 ECONOMY MATTERS 26
  28. 28. SPECIAL ARTICLE Rejuvenating Exports export competitiveness in the recent quarters. Improvement in exports is critical for lifting the economic growth and containing the current account deficit. Judging by the trends so far, global trade volumes in 2013 are expected to expand at roughly the same rate as last year, which was the slowest pace in the last 12 years, except for the contraction in 2009 in the wake of the global Financial crisis. However, the recent optimistic set of data sets coming out of the major advanced economies in last few months is expected to continue cushioning India's exports growth going forward. I ndia's export performance over the last two years has been affected by continued sluggishness in global trade and an overvalued exchange rate for a prolonged period. Exports began on a weak footing in the start of this fiscal, contracting by 3.1 per cent in the first quarter; however, its growth picked up to 12.2 per cent in the second quarter, moderating to 9.7 per cent in OctoberNovember 2013 so far. Export recoveries were evident in sectors, such as petroleum products, rice, readymade garments, marine products and other chemicals. The depreciation in the exchange rate, both in nominal and real terms, appears to have helped improve India's In this article, we provide a snapshot of India's exports sector along with analyzing the upcoming sectors in exports such as services and tourism, listing out suggestions in order to accelerate their exports growth. 27 NOVEMBER - DECEMBER 2013
  29. 29. CII VIEW POINT India's Export Scenario Mr Sanjay Budhia Chairman, CII Export Committee and Managing Director, Patton Group 04.Although, the pace of exports growth was punctuated twice by sharp slowdown in the world economy during 2008-09 and during the last two fiscal years, India's trade prospects have continued to grow over time. India's exports were worth US$64.0 billion in 2003-04, which more than quadrupled to US$300.5 billion in 2012-13. Background India saw its foreign trade expand remarkably in the past decade. India's total trade with the world touched US$809 billion in 2012-13, growing at a compounded annual growth rate of 18.7 per cent since 2003- India's Exports, Imports & Trade Deficit 500 In $ Billion 400 300 200 100 0 -04 03 20 11 13 10 12 05 -0 9 -08 -06 -07 20 4-20 08 -20 -20 07 05 06 10 1120 12 09 20 20 00 20 2 20 20 20 20 Exports Imports Trade Deficit Source: DGCI&S In the merchandise trade, manufacturing goods still constitute the lion share of total merchandise exports. They constituted over 60 per cent of total exports in 2012-13, a fraction that has remained mostly unchanged over the decade, although dipped marginally last year. ECONOMY MATTERS The value of manufacturing goods exports has more than quadrupled to US$186.8 billion over the decade. Exports of primary products, with their share remaining fairly constant at little below 15 per cent during 2003-04 to 2012-13, have also scaled over five times in dollar value 28
  30. 30. terms, growing at a CAGR of 18.0 per cent over the last ten years. Importantly, petroleum and its products have brought in substantial revenues that soared from US$2.6 billion in 2003-04 to US$55.6 billion in 2012-13. Their share too has increased four times in the decade to a little below 20 per cent in 2012-13. Jump in export values is also attributable to soaring agricultural, mineral and metal commodity prices. Over a period of time from the year 2000 onwards, there has been change in composition of India's export basket as shown in graph below, indicating that India is gradually moving towards high-value added product exports especially in engineering goods. Nevertheless, a lot needs to be done to not only diversify the export basket but also have a perceptible share in the top items of world trade. Change in India's Export Composition 30 24.3 25 Share in % 20.3 18.9 20 16.8 14.4 14.0 13.8 15 10 5 2000-01 12.9 2012-13 10.7 8.8 8.8 4.4 2.6 1.9 2.5 2.8 1.6 4.3 0 s s y ls ts ts ics ral od uc uc l l er i ca on i ne Go we rod rod em ctr e P P ng Ch &M Ele &J er i r& ied es All i ne ms the Or g a Ge ri & Le En Ag ts es uc x ti l rod Te p m eu rol t Pe Source: DGCI&S India has made major strides in its diversification of export markets, as its dependence on the EU and the US has reduced to a large extent (see figure below). Europe currently occupies 19.5 per cent share in India's exports, in contrast to 26 per cent in 200-01. Similarly, share of US has shrunk from 23 per cent in 2000-01 to 13 per cent in 2012-13. In contrast to this, share of developing markets of Latin America, Africa, and ASEAN have witnessed a significant increase. This trend has helped India weather the global crisis emanating from Europe and America. 29 NOVEMBER - DECEMBER 2013
  31. 31. Region- wise Share of India's Export Destinations (in 2000-01 & 2012-13) 2012-13 Europe 19% Others 26% 31% 37% 10% Africa 2000-01 5% 2% 4% 7% 1% 23% 2% 5% 13% 4% 11% U.S CIS & Baltics South Asia Latin America ASEAN Europe U.S Africa CIS & Baltics South Asia Latin America ASEAN Others Source: DGCI & S The strong growth in India's merchandise exports has been accompanied by an increase in the share of India in the global export market reflecting, among others, emergence of newer markets, increased adaptability of Indian exporting companies to meet the changing patterns of global demand, and the availability of financing structures for such activities. According to the World Trade Organisation (WTO), India's share in global exports and imports, which stood at 0.5 percent and 0.7 per cent in 1990, more than trebled to 1.6 per cent and 2.6 per cent, respectively, in 2012, resulting in a significant improvement of India's standing in the global trade. By 2012, India became the 10th largest importer in the world, as against 28th in 1990; and 19th largest exporter globally as against 33rd in 1990. Positive Developments in India's Trade Pattern Evidence suggests there has been a structural shift in both commodity composition as well as product and market diversification in India's merchandise exports. The revealed comparative advantage for India is higher in chemicals, agricultural products, mining products, iron and steel and textiles. The robust performance of India's international trade over the two decades reflects India's increasing integration with the global economy. Marked increase in adaptability of Indian exporters to meet the changing patterns of global demand can be testified by the change in India's export composition over the last two decades. The dynamics of inter-sectoral composition within manufactured exports reveal increasing contribution of technology-intensive goods in India's exports. For instance, the combined share of technology-intensive products like engineering goods, petroleum products, chemicals and related products At the same time, India's direction of trade increasingly shifted towards emerging markets. The combined share of developing Asia, Africa and Latin America and Caribbean increased from less than one-fourth of India's total exports in 1992-93 to more than half of India's total exports in 2012-13. ECONOMY MATTERS 30
  32. 32. and electronic goods in India's total exports which was 25.5 percent in 1992-93, more than doubled in 2012-13 to 55.8 percent. adopted involving measures such as Procedural rationalization; Enhanced market access; Diversification of export markets; Improvement in export infrastructure specially transportation & ports infrastructure; Provision of refund of all indirect taxes; and Providing marketing support. Also there is a need to re-look at the duty drawback rates, further expansion of Focus Market Scheme (FMS) and inclusion of new product in Focus Product Scheme (FPS). India is expected to open up further in the coming years as indicated in its recent trade policies. Continued market diversification towards developing countries based on the changing dynamics of growth in the world economy is the key to ensure sustained and accelerated growth of India's exports. Reducing high transaction costs in India is a crucial aspect of achieving export competitiveness. Currently, transaction costs add upto 10-12 per cent extra cost, and taking this into account, Second Task Force on Transaction Cost in Exports has been constituted by the Ministry of Commerce & Industry, which is reviewing the current situation and will come out with a comprehensive report. This report will suggest guidelines for removal of procedural complexities drawing from the global best practices and will also suggest steps to move towards transparent and increasingly paperless processing through digital platform. Enhancing Export Competitiveness The root cause of vulnerability is an unsustainable current account deficit emanating from a large trade deficit backed by inelastic oil imports. Though, there has been an improvement in India's net barter terms of trade (export price index as ratio to import price index) due to diversification of India's exports from low value to highvalue services and manufacturing exports, this has not improved the trade balance (currently -10 per cent of GDP) because the volume of imports has been rising faster than the volume of exports. Besides, depreciation of the real effective exchange rate has not helped because of the low elasticity of demand for exports and even lower elasticity of demand for imports. A true indicator of export competitiveness in these commodity groups is, therefore, a high value of exports combined with a high volume. Another issue which needs to be addressed is of high cost of export credit prevailing in India. This is currently in the range of 11 per cent and 12 per cent, which is much higher in comparison to competing countries in South East Asia, where it is in around 5-6 per cent. This needs to be lowered so that it becomes affordable to exporters. Also, solution to trade deficit lies in enhancing competitiveness in terms of expansion of the country's goods and non-software services exports on a sustained basis. Besides, a multi-pronged strategy should be If we are able to work on our capability and capacity and by timely intervention by policy makers, we will be able to increase our share in the global exports and achieve our export target of USD 325 billion. 31 NOVEMBER - DECEMBER 2013
  33. 33. Services Sector Exports in Indian Economy Mr Malvinder M Singh Chair, CII Services Council and Executive Chairman, Fortis Healthcare Services sector in India contributes close to 65 per cent of the GDP (including construction) and provides employment to millions. A comparison of the services performance of the top 15 countries for the 11 year period from 2001 to 2011 shows that the increase in share of services in GDP is the highest for India with 8.1 percentage points. In 2011, India ranked 10th in terms of the size of its Services GDP. Its CAGR in Services for the period 2001-11 was 9.2 per cent, second only to China. Services growth has consistently outperformed growth on other sectors of the economy and the economy as a whole. The fact that emerges is that services are clearly an important part of the India growth story and will continue to be so. Service Sector Share in GDP (2012) 43.0% 43.0% 38.0% Indonesia 49.0% China 54.0% Malaysia 55.0% India 61.0% Philippines 67.0% Russia 70.0% Brazil Japan UK USA 71.0% Thailand 78.0% Mauritius 79.0% Source: World Development Indicators, 2012 An interesting fact is that India is unique among emerging Asian economies in being a service led economy. Also data for 2010 shows that India is ahead of ECONOMY MATTERS Malaysia, Thailand, China and Indonesia in terms of Service sector contribution to GDP 32
  34. 34. Service Sector - Exports Service Exports 350.0 Merchandise Exports US$ Billion 300.0 250.0 200.0 150.0 142.3 309.8 2011-12 145.7 306.6 124.6 256.2 90.3 166.2 2007-08 2010-11 73.8 128.9 2006-07 96.0 182.4 57.7 105.2 2005-06 106.0 189.0 43.2 85.2 2004-05 50.0 26.9 66.3 2003-04 100.0 2012-13 2009-10 2008-09 0.0 Source: RBI As seen in the graph above, Services exports are about half the level of merchandise exports in India in 2012-13. Also Services exports grew at a CAGR of 34 per cent between 2002-03 and 2007-08 but have slowed down to a growth rate of 10 per cent in the 5 years since then. Service Sector - Exports by Categories 1.2 4.9 3.4 5.8 3.1 4.2 12.4 12.4 11.9 10.8 19.5 1.6 19.7 1.5 42.4 45.2 Travel Software Services Communication Services Transportation Business Services Others Insurance Financial Services Source: WTO 33 NOVEMBER - DECEMBER 2013
  35. 35. Global exports of commercial services Travel Transportation Services 25.7 Financial Services 25.6 Royalties and License Fees Computer and Information Services Communication Services 1.3 2.1 2.4 2.5 Construction Insurance Services 20.6 6.0 Personal, Cultural and Recreational Services 6.4 7.5 Other Business Services* Source: WTO * Other business services would include business and management consulting, accounting, legal and related services Similarly, the services sector has been a key driver of India's improved trade and FDI performance. There are also sizeable exports from the services sector, which is rather lop-sided and driven mostly by business processes exports, which include computer-related services and IT-BPO services and to a lesser extent by other business and professional services like R&D, accounting services and legal services. Hence India's competitiveness in world services market is concentrated in a few areas only. Although the services trade balance is positive at the sub sectoral level, it is significantly positive only in the computer and related services and is in deficit in most other segments. There is also lack of diversification of markets and at present there is a narrow mix of markets .The IT-ITeS services constitute around 50 per cent of the basket, and most of it is exported to the US and the UK. registering a growth rate of 11 per cent. Over half of India's net FDI inflows are in services and services also constitute an increasing part of outward investment by Indian companies. Also the huge contribution of remittances to India's Balance of Payments, underscores the significance of services to India's macroeconomic and external stability. Services sector is also a powerful tool for permeating inclusive growth. According to the National Sample Survey Organization's (NSSO) Report, for every 1000 persons employed in rural area, 241 are employed in the services sector. In the urban area, this figure is as high as 683. It is often said that business processes exports have sprung up on their own because of the inherent natural advantages that India has, such as proficiency in the English language, a large pool of skilled manpower etc. That could be true. The potential for increasing the services exports from India is immense given the fact that India is a leading player in the services trade in the world. India's share in the world in the export of services has risen from a nominal 0.6 per cent in 1990 to an impressive 3.3 per cent in 2011. Significantly, it has been increasing faster than that of merchandize exports from the country. In 2011, world's services exports reached US$4.17 trillion, ECONOMY MATTERS But there are certain weaknesses and issues that need to be addressed if India is to have a globally competitive services sector. The future growth of the services exports needs careful policy tooling on account of the heightened competition that might be coming from countries like Philippines, Brazil, Israel, Sri Lanka, China and on account of protectionist overtones in the policy framework of some of the developed countries. 34
  36. 36. Trends in World Exports and Indian Exports of Goods and Services in current USD (Index=100 in 1990) 3000 2500 2000 1500 1000 500 India (Good Exports) 2010 World (Good Exports) India (Services Exports) 2009 2008 2006 2007 2004 2005 2002 2003 2001 2000 1999 1997 1998 1996 1995 1994 1993 1991 1992 1990 0 World (Services Exports) Source: WTO Between 2005 and 2011, some of these countries have registered annual average growth of computer services in the range of 27 to 69 per cent, though the absolute figures of growth may be far less than that of India. According to NASSCOM, in the last few years India's market share in computer services exports has eroded by 10 per cent on account of the competition from these countries. There can be four distinct approaches to be adopted to unleash the export potential of the service sector in India. One is scouting for other unorthodox segments that can be significantly boosted. Medical Tourism accountancy, legal services, animation, management services, R&D, architectural services, audio-visual post-production, creation of content and intellectual property, animation and gaming fall in this category. The strategy should be to provide integrated end-to end services and also move up the value chain with time. Among the other services that are yet to be given their due importance but hold enormous potential, Healthcare and Medical Tourism offer tremendous promise because of the availability of a skilled talent pool, competencies at the cutting edge of modern medicine and proficiency in the conduct of complex medical procedures. All these are achievable in India at a huge cost advantage. Studies show that the current cost advantage may result in savings for the patient as high as 10 times the cost of an identical procedure in the West. Notwithstanding is the fact that the value of each procedure can be quite substantial resulting in significant monetary and goodwill gains. Also, medical tourism once developed is less prone to react to the exigencies of economic cycles making it a stable and sustainable income source for the country. India currently gets only 2 per cent of the US$79 billion global medical tourist flow showing the enormous headroom that is available for growth. Secondly, developing services sectors in India like hospitals, hotels etc. so that they get approvals and certifications from the international standards organizations in terms of the quality of their services, infrastructure etc. to attract more high budget visitors from abroad. Thirdly, developing a dedicated band of trained professionals in India in various avocations like doctors, nurses, paramedics, accountants, animators etc who can move from the country to other destinations will also help. Fourthly, the role of regulators should be redefined to include periodic consultations with the stakeholders to address the problems and prospects. Also we need to give thrust to employment-intensive growth in services. 35 NOVEMBER - DECEMBER 2013
  37. 37. Medical tourism, which falls under mode 2 of the WTO General Agreement on Trade in Services (GATS) is a case in point. The sector continues to have many bottlenecks. There are three ministries involved in medical tourism, these are the ministries of health, tourism and commerce and industry. Seamless coordination among these ministries could vastly facilitate the international arrival of medical tourists and improve the packaging and delivery of service. The complexity of rules and delays surrounding the issuance of medical visas and in getting international accreditation to hospitals are bottlenecks that can be resolved to accelerate growth. periodically reviewing the curricula of these disciplines for their relevance among the best in the world. One pre-requisite for tapping the services sector exports is skilling the people in the right trades. The government of India through various agencies has embarked on a mission to impart the right skills to 500 million people in the foreseeable future so that the demand from various sectors including the services sector can be met. These people will be trained in ITI's and similar organizations. India's track record of industry training has been inadequate. There are more than 100 trades that figure in the curricula of ITI's in India. Of that, only a handful of trades are relevant to industry. It is time to recast the curricula with the inputs from the user industry. Similarly, there are improvements needed in the administrative and legislative framework governing the professions like chartered accountants, company secretaries, cost accountants, lawyers etc. It is time to take a call on whether the age-old restrictions placed on these professions should be continued, such as restrictions imposed on foreign affiliate firms to operate in India, ban on advertisement etc. Equally important is that the regulators should give more attention to ECONOMY MATTERS There are well conceived industry -government partnership models developed elsewhere, particularly in Germany, which India can adapt. These can give a leg up to the services sector, particularly exports of services and trained manpower. 36
  38. 38. Tourism Inflows—Single Largest Way to Narrow CAD Mr Arjun Sharma Le-Passage to India Tourism in India has registered significant growth in the recent years and India has tremendous potential to become a major global tourist destination. As shown in graph below, in 2012, tourist arrivals to India grew to 6.58 million- an increase of 4.3 per cent over the year 2011. Arrivals to India have steadily grown since 2002 when there were 2.38 million tourists visiting India. Foreign Tourist Arrivals in India 1997-2012 7 FTAs (in million) in india 6 5 4 3 2 1 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 0 Year Source: Ministry of Tourism, India The 12th Five Year Plan envisages tourist arrivals to reach 11.24 million by the end of 2017. The breakup of source country for FTA (Foreign Tourist Arrivals) indicate that the USA led with 15.8 per cent share in total FTA arrivals, followed by UK (11.9 per cent), Bangladesh (7.4 per cent), Sri Lanka (4.5 per cent), and Canada (4.1 per cent) Percentage share of Top 10 Countries for FTAs in India in 2012 USA 15.81% Others 39.47% UK 11.98% Bangladesh 7.40% Malaysia 2.98% Canada Sri Lanka Australia Japan France 4.52% 3.07% 3.34% 3.66% Germany 3.89% 3.88% Source: Bureau of Immigration, India 37 NOVEMBER - DECEMBER 2013
  39. 39. Correspondingly foreign exchange earnings too have shown an increase- US$3103 million in 2002 to US$17,737 million in 2012 (see graph below). In 2013, till the month of June, the country has received 3.31 million visitors and has earned US$9201 million in terms of foreign exchange earnings. According to the World Travel & Tourism Council (WTTC), a global forum for the business leaders of the tourism industry, India is the 12th largest travel and tourism economies of the world and a significant contributor to the country's economy. Foreign Exchange Earnings from Tourism in India 1997-2012 20000 18000 FEE (in US $ Million) 16000 14000 12000 10000 8000 6000 4000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Year Source: Ministry of Tourism, India The tourism industry constitutes a significant source of export earnings. In 2011, visitor exports totalled US$17.2 billion. This was 12.0 per cent of all service exports and 3.9 per cent of all exports (including goods and services). In 2012, this grew to Rs.1004.6 billion which is 4.2 per cent of the total exports. This is forecast to grow by 8.7 per cent in 2013. The average growth rate per annum from 2013-23 is slated at 5.7 per cent. In terms of rankings, tourism sector earnings exceed earnings from exports from agriculture, mining, automotive manufacturing, financial services, construction, and education. In 2012, India's share in international tourist arrivals was 0.65 per cent of world travellers and its share in international tourism receipts was relatively higher at 1.61 per cent in 2012. The rising FTA flows is clearly a function of the stellar performance of Indian economy. Percentage Share of India in International Tourist Arrivals in World Percentage Share of India in International Tourism Receipts in World 0.70 1.8 1.6 0.60 India’s Share (%) India’s Share (%) 1.4 0.50 0.40 0.30 0.20 1.2 1 0.8 0.6 0.4 0.00 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0.2 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0.10 Year Year Source: Ministry of Tourism, India ECONOMY MATTERS 38
  40. 40. Furthermore, investment into this sector has risen over the years. In the year 2012, the industry is expected to have attracted a capital investment of Rs.1761 billion which is expected to grow by 6.5 per cent (per annum) over the next ten years. hotels from the liquidity crunch due to the prolonged economic slowdown. Infrastructure status will allow large capital-intensive hotel projects to avail loans with longer repayment tenures of 15 years at lower rates of interest and higher debt-to-equity ratio of up to 4:1. It will also enable hoteliers to access more funds through relatively low-cost external commercial borrowings and become eligible for financial assistance including takeout financing from specialised agencies like IDFC Ltd, India Infrastructure Finance Co. Ltd and the newly set up Infrastructure Debt Funds (IDF). WTTC report on the impact of tourism to the Indian economy states that tourism contributes approximately 6.4 per cent to the country's GDP, which is a larger share than the education and the mining sector and at par with the telecom sector. In terms of employment, the Indian tourism industry in 2011 created 39.3 million direct or indirect jobs in the country. This is 7.9 per cent of the total employment in India and ahead of the telecom, mining and automotive sectors. Over the next ten years, jobs the tourism industry creates will rise steadily by 2 per cent per annum reaching 48 million by 2022- 8 per cent of the total employment in India. Some of the bottlenecks hindering the tourism industry to realise its full potential are in Taxation, Visa, Aviation, Environment, HR and marketing. On Taxation front, rationalisation of tax structure on air fares/airport charges and ATF charges and reduction of multiplicity of taxes on aviation sector is needed. Luxury tax on hotel rooms should be limited to make India's accommodation globally competitive. Also the foreign exchange earned by hotels and inbound tour operators may be considered as 'deemed' exports and full service tax exemption be provided to them at par with other exporters. Also rationalisation of taxes would provide a better fiscal operating environment for the tourism sector to thrive. In India, tourism industry holds special position as it not only have potential to grow at a high rate, but also stimulate other economic sectors through its backward and forward linkages and cross-sectional synergies with sectors like manufacturing, construction, communications, agriculture, horticulture, textiles, arts and handicrafts, transport, etc and most importantly it enhances and increases social outreach. That is, it can provide impetus to other industries in the country and generate enough wealth to help pay off the international debt. It is the third largest net earner of foreign exchange for the country. The travel and tourism sector contributes to the national integration; preserves natural and cultural environments; as well as enriches social and cultural lives of the people. Secondly, roll out of Visa on Arrival at Goa, Agra, Bodh Gaya, Varanasi, Jaipur etc with requisite personnel and proper infrastructure will be a good boost. The process for application of visas should move to online. Also as there are some countries that find it difficult to comprehend the contents of the application form in english especially in France and Germany. Thus multiple language options are a necessity if India wants a sizeable share of international traffic. There is an urgent need to simplify visa procedures. While our neighbouring countries have made entry procedures extremely user friendly as well as price friendly. Some positive developments so far have been Visa on Arrival from 40 countries, to senior citizens from all the countries and easing of visa issuance for conference traffic should ease tourist inflow. The inclusion of hotels with project cost in excess of Rs.200 crore and convention centres with project cost of more than Rs.300 crore in the Harmonised List of Infrastructure and also to include such hotels and convention centres of any star rating and located anywhere in the country. Thirdly for the aviation sector there is a need for upgrading air connectivity at key tourist destinations and rationalisation of ATF charges and User Development Fees. Also air taxi operation with small aircrafts (20 seaters) should be permitted to a consortium of hoteliers, tour operators to lesser connected tourist destinations. This could be funded under the Large Revenue Generating Scheme (LRG) of the Ministry of Tourism under a Public Private Partnership (PPP) Mode. This is in addition to including three-star or higher category hotels outside cities but in places with populations of more than one million people in the Reserve Bank of India's Infrastructure Lending List late last year. The hotel industry has been demanding infrastructure status for some years now to bail out Fourthly, are the environmental issues. Tourism industry 39 NOVEMBER - DECEMBER 2013