GLOBAL GROWTH SLOWDOWN

Despite setbacks, an uneven global recovery continues. Largely due to weaker-than-ex-pected
global activity in the first half of 2014, the growth forecast for the world economy
has been revised downwards in the latest edition of IMF’s World Economic Outlook (WEO).
Short-term risks include a worsening of geopolitical tensions and a reversal in the recent com-pression
of risk spreads and volatility in financial markets. In order to mitigate these risks,
advanced economies will require continued support from monetary and fiscal policies. Pre-mature
withdrawal of the expansionary policies will hurt their growth prospects. In emerging
markets, the scope for macroeconomic policies to support growth if needed varies across
countries and regions, but space is limited in countries with external vulnerabilities. Going
forward, both advanced and emerging economies would need to implement structural re-forms
1
FOREWORD
SEPTEMBER - OCTOBER 2014
to make growth more sustainable.
On the domestic front, industrial production data for the month of August 2014 indicated
that the slowdown phase is not over yet. What is worrisome is the poor performance of the
manufacturing sector which continues to be under stress as new orders are not forthcoming
in a big way. There is need for taking cognizance of the slow growth of industrial produc-tion
and take steps to revive investment and stimulate demand in the economy. Recent an-nouncements
and policy actions like ‘Make in India’ initiative, ensuring flexible labour policy,
etc should help the turnaround. Inflation, in contrast, has been trending downwards, thanks
to lower global crude prices, stable currency and proactive measures taken by the govern-ment.
This will allow RBI to reduce interest rates in the coming months in order to cushion
falling industrial growth.
The recent Supreme Court verdict cancelling all but four coal blocks allocated since 1993 has
increased by manifolds the challenges faced by this important sector. The ruling is likely to
cause many far reaching “consequences” for the Indian coal sector in terms of its effect on
coal production, on coal supplies to the core/other industries, on the resulting compulsion
for coal imports, in particular, and the Indian economy, in general. The apex court’s decision
should act as an opportunity for the government to have a full review of the coal sector
policy and come up with appropriate coal reforms. Recently, it allowed the e-auction of coal
blocks, which would help private firms in the steel, power and cement sectors through cap-tive
use of mines. Given the fact that India has a huge power deficit fuelled by a persistent
coal shortage, it is pivotal that the government chalks out a strategy to pull out the sector
from its current bout of difficulties at the earliest.
Chandrajit Banerjee
Director General, CII

5
EXECUTIVE SUMMARY
Global Trends
With world growth in the first half of 2014 slower than ex-pected,
the October 2014 World Economic Outlook of IMF
revised the global growth projections for 2014 and 2015
downwards to 3.3 per cent and 3.8 per cent, respectively.
Among advanced economies, growth is projected to pick
up, but is slower in the Euro Area and Japan and gener-ally
faster in the US and elsewhere. Among pertinent risks
are the geopolitical turmoil in Ukraine and Middle East
and the fear of weak recovery in Euro Area. Further, dis-inflation,
largely driven by softening of commodity prices,
presents a concern. Not only are the advanced economies
challenged by output gaps, weak credit conditions, and
financial fragmentation, but in emerging market and de-veloping
economies too, inflation is projected to decline.
Domestic Trends
IIP data for the month of August 2014 shows that indus-trial
production continues to be in the slowdown phase
and a visible turnaround in industrial growth is still not
happening. And if we factor in the base effect, the per-formance
of industry shows that demand is yet to show
distinct signs of a pick-up. There is need for taking cog-nizance
of the slow growth of industrial production and
take steps to revive investment and stimulate demand in
the economy. Inflation on the other hand has been tread-ing
downwards. Both WPI and CPI based inflation moder-ated
in September 2014 as food prices came down. Over
the next 2 months, headline CPI inflation could ease fur-ther
due to a base effect from last fiscal, lower crude oil
prices, revival of monsoon, proactive measures taken by
the government to keep food prices under control, and
a stable currency. This would also give RBI the necessary
leg-room to ease interest rates.
Corporate Performance in Q2FY15
Second quarter earnings of companies show that a sus-tained
recovery in earning growth remains elusive. In
fact, net sales of companies (manufacturing plus services)
grew at the slowest pace in four quarters at 11.4 per cent,
slower than 13.8 per cent in the preceding June quarter,
and the 14.9 per cent growth in the year-ago September
quarter. In contrast, the performance analyzed in terms of
Profit after Tax (PAT) exhibits an improvement in financial
results of companies at aggregate level. On an aggregate
basis, growth in PAT improved significantly to 17.9 per
cent in the second quarter as compared to growth to the
tune of 14.9 per cent in the same quarter of last year. This
has been driven by sharp improvement in PAT growth of
manufacturing sector. Our analysis is based on the finan-cial
performance of 246 companies (146- Manufacturing
and 100 Services and excludes oil & gas companies), using
a balanced panel, extracted from the Ace Equity database.
However, since our analysis is based on small sample of
firms, it is too early to say anything conclusively.
Sector in Focus: MSME
If India is to emerge as one of the leading economies over
the next decade in light of a positive political and eco-nomic
scenario, the Micro, Small & Medium Enterprises
(MSME) segment is expected to play a significant role. The
development of this segment is extremely critical to meet
the national imperatives of financial inclusion and genera-tion
of employment in urban, rurban and rural areas. Fur-ther,
it can nurture and support new age entrepreneurs
who have the potential to create globally competitive
businesses in India. Seizing the emerging opportunities to
develop a robust MSME sector as a strong backbone for a
growing economy will require efforts by the Government
to bring the various stakeholders – Equity funds, banks
and financial institutions, industry sector majors and
MNCs, regulators across various Ministries in Centre and
State and trade associations and global economies having
trade flows with India and others stakeholders together;
and create a forward looking framework and ecosystem.
Focus of the Month- Coal:
Challenges and Way Forward
Coal with a proven reserve of 860 billion tonnes is mined
the most in the world. At the same time, the demand
curve for this sector is always on the rising side. As a pros-pering
economy, India faces energy security as a growing
challenge and the coal production is expected to grow at
a fast pace. However, the recent Supreme Court verdict
cancelling all but four coal blocks allocated since 1993 has
increased by manifolds the challenges faced by this impor-tant
sector. The ruling is likely to cause many far reaching
“consequences” for the Indian coal sector. To negate the
ill-effects of the cancellations of coal blocks, the cabinet
recently cleared an ordinance to facilitate the allotment of
coal mines to state-owned companies that need the fuel,
and also to private entities in businesses such as power,
iron and steel, and cement for so-called captive consump-tion.
Hence, the spotlight currently is clearly on coal sec-tor.
In this month’s focus of the month, we invite experts
to voice their opinions on the many challenges faced by
the sector and the way forward.

GLOBAL TRENDS
Legacies, Clouds, Uncertainties
The world economy is in the middle of a balancing
act. While countries must address the legacies
of the global financial crisis, ranging from debt
overhangs to high unemployment, they face a cloudy
future. The interplay of these two forces has resulted in
several downward revisions to the forecast during the
past three years. Because these two forces operate to
different degrees in various countries, the evolution of
the global economy has become more differentiated.
With world growth in the first half of 2014 slower than
expected, global growth for 2014 is projected at 3.3 per
cent, 0.4 percentage point lower relative to the April
2014 World Economic Outlook (WEO). The growth pro-jection
for 2015 is also slightly lower at 3.8 per cent.
Growth prospects across both advanced economies
and emerging markets exhibit sizable heterogeneity.
Among advanced economies, growth is projected to
pick up, but is slower in the euro area and Japan and
generally faster in the US and elsewhere. Among major
emerging markets, growth is projected to remain high
ECONOMY MATTERS 6
in emerging Asia, with a modest slowdown in China and
a pickup in India, but to stay subdued in Brazil and Rus-sia.
Outlook for Advanced Economies
In the US, conditions remain in place for a stronger
pickup in the recovery: an accommodative monetary
policy stance and favorable financial conditions, much-reduced
fiscal drag, strengthened household balance
sheets, and a healthier housing market. Asset purchas-es
by the Federal Reserve are projected to end in Octo-ber
2014. Employment growth is projected to be strong.
In the euro area, a weak recovery is projected to gradu-ally
take hold, supported by a reduction in fiscal drag,
accommodative monetary policy, and improving lend-ing
conditions, with a sharp compression in spreads for
stressed economies and record-low long-term interest
rates in core countries. Growth is projected to average
0.8 per cent in 2014 and 1.3 per cent in 2015, weaker than
April 2014 projections. Prospects are uneven across
countries. Growth in Spain has resumed, supported by
external demand as well as higher domestic demand
reflecting improved financial conditions and rising con-fidence.
The Italian economy, in contrast, contracted in

7
GLOBAL TRENDS
the first half of 2014, and on an annual basis is not ex-pected
to return to positive growth until 2015. Growth
projections for the German economy have been revised
downward relative to April 2014, primarily reflecting a
weaker recovery in domestic demand. Growth in France
stalled in the first half of 2014, and projections have
been revised downward.
In Japan, in light of the larger-than-expected contrac-tion
in the second quarter, GDP is now projected to in-crease
0.9 per cent in 2014—0.5 percentage point less
than April 2014 projections. With private investment
expected to recover, growth is projected to remain
broadly stable in 2015, notwithstanding the planned fis-cal
adjustment.
In most other advanced economies, including Canada,
Norway, Sweden, and the UK, growth is expected to
be solid. In the UK, activity has rebounded and become
more balanced, driven by both consumption and busi-ness
investment, thanks to improving credit and finan-cial
market conditions and healthy corporate balance
sheets. Growth is projected to average 3.2 per cent in
2014 and 2.7 per cent in 2015, about 0.25 percentage
point stronger than forecast in April 2014. House prices
are increasing at a strong pace, especially in London,
and have also been buoyant in other advanced econo-mies,
including Canada, Norway, Sweden, and Switzer-land.
Outlook for Emerging Market and
Developing Economies
In China, after a weaker than- expected first-quarter
outturn, the authorities deployed policy measures to
support activity, including tax relief for small and me-dium
enterprises, accelerated fiscal and infrastructure
spending, and targeted cuts in required reserve ra-tios.
Growth gained traction in the second quarter on
these measures, as well as on stronger exports, and is
projected to average 7.4 per cent in 2014, in line with
the authorities’ target. For 2015, growth is projected
to moderate to 7.1 per cent as the economy makes the
transition to a more sustainable path and residential in-vestment
slows further.
In India, growth is expected to increase in the rest of
2014 and 2015, as exports and investment continue to
pick up and more than offset the effect of an unfavora-ble
monsoon on agricultural growth earlier in the year.
The outlook is slightly stronger for 2014 relative to that
in April 2014, and unchanged for 2015. Growth in the
ASEAN-5 is projected at 4.7 per cent in 2014, rising to 5.4
per cent in 2015. Relative to that in April 2014, the fore-cast
is slightly weaker for 2014—driven by a sharp slow-down
in Thailand amid political tensions earlier in the
year—and unchanged for 2015. Elsewhere in emerging
and developing Asia, growth is likely to remain strong,
helped in part by favorable financial conditions and
broadly accommodative policies.
Growth for Latin America and the Caribbean is now

ECONOMY MATTERS 8
GLOBAL TRENDS
projected to fall to 1.3 per cent in 2014, with a rebound
to some 2.2 per cent in 2015. In Brazil, GDP contracted
in the first half of the year, reflecting weak investment
and a moderation in consumption, given tighter finan-cial
conditions and continued weakness in business and
consumer confidence. In Mexico, weak external de-mand
and construction activity, lowered projections for
this year relative to April 2014 forecast. Elsewhere in the
region, downward growth revisions reflect weaker do-mestic
demand (Chile and Peru); deepening macroeco-nomic
and policy imbalances that are manifesting them-selves
as high inflation, negative growth, and a rising
differential between the parallel and official exchange
rates in Argentina; and severe policy distortions that
have led to widespread shortages, a collapse in growth,
and inflation now exceeding 60 per cent in Venezuela.
The forecast for the Commonwealth of Independent
States has significantly weakened. In Russia, investment
remains weak amid subdued confidence, which is fur-ther
affected by geopolitical tensions and sanctions. Ac-tivity
is not projected to pick up before 2015. Continued
declines in industrial production and exports will cause
a sharp contraction in activity in Ukraine in 2014, with
conditions improving slowly next year. Growth in the
rest of the CIS has already slowed, with weaker trade
and remittance flows from Russia, and is projected to
be lower in 2014– 15 relative to April 2014 projections.
With increased strife in the region, pickup in growth in
the Middle East, North Africa, Afghanistan, and Paki-stan
region is projected to be weaker relative to April
2014 forecast. Growth is expected to increase in 2015,
assuming that security improves, allowing for a recov-ery
in oil production, particularly in Libya.
In sub-Saharan Africa, growth is projected to remain
strong, broadly in line with April 2014 WEO projections
over 2014–15. In South Africa, 2014 growth is being
dragged down by industrial tensions and delays in fixing
infrastructure gaps, including electricity constraints. A
muted recovery is expected in 2015. In contrast, in Nige-ria,
activity has been resilient despite poor security con-ditions
and a decline in oil production earlier this year.
In a few countries, including Ghana and, until recently,
Zambia, large macroeconomic imbalances have result-ed
in pressures on the exchange rate and inflation. The
Ebola outbreak is set to have an acute impact on the
economies of Guinea, Liberia, and Sierra Leone.
External Sector and Outlook for
Rebalancing
Global trade volume growth slowed markedly in the
first half of 2014 compared with global activity. Some
of the slowdown in trade growth could reflect a more
modest pace in the fragmentation of global production
processes (value chains) after years of rapid change.
And some of this slowdown could be cyclical, reflecting
declining world growth since 2011.
Risks
The downside risks are clear. First, the long period of
low interest rates has led to some search for yield, and
financial markets may be too complacent about the
future. These risks should not be overplayed, but poli-cymakers
clearly must be on the lookout. Macro pru-dential
tools are the right instruments to mitigate these
risks; whether they are up to the task, however, is an
open question. Second, geopolitical risks have become
more relevant. So far, the effects of the Ukraine crisis
have not spread beyond the affected countries and
their immediate neighbors. And the turmoil in the Mid-dle
East has not had much effect on the level or volatil-ity
of energy prices. But clearly, this could change in the
future, with major implications for the world economy.
Third, there is a risk that the recovery in the euro area
could stall, that demand could weaken further, and that
low inflation could turn into deflation.
Adapting to a Changing Environment
in EMDEs
While recovery in advanced economies suggests in-crease
in demand for emerging market exports, ensu-ing
normalization of monetary policy would indicate re-versal
of capital flows that went to emerging markets.
In this environment, these countries should continue
to manage external financial shocks with exchange
rate flexibility, complemented with foreign exchange
intervention to limit excessive market volatility. Vul-nerabilities
in some countries relate to rapid domestic
credit expansion. In other economies, higher external
borrowing has increased exposure to external fund-ing
risks, and raising domestic saving rates, including
through stronger public finances, should be a priority
(Brazil, Turkey). In China, rebalancing toward domestic
demand has been characterized by booming invest-ment
and credit, with credit intermediation occurring

9
GLOBAL TRENDS
not only through banks, but also through local govern-ment
and shadow banking. Expansion of social safety
net, by reducing the current high rate of social security
contribution would help reduce household saving rates
and raise domestic consumption. This domestic rebal-ancing
strategy, together with further exchange rate
flexibility, would also contribute to global rebalancing.
The agenda, naturally diverse across countries, includes
removing infrastructure bottlenecks in the power sec-tor
(India, South Africa); easing limits on trade and in-vestment
and improving business conditions (Indone-sia,
Russia); and implementing reforms to education,
labor, and product markets to raise competitiveness
and productivity (Brazil, China, India, South Africa) and
government services delivery (South Africa). The poli-cies
implemented in Mexico—particularly opening en-ergy
and telecommunications sectors to competition,
and labor market reforms—are welcome steps. The
post-election recovery of confidence in India also pro-vides
an opportunity for that country to embark on its
much-needed structural reforms.
Inflation Outlook
Inflation remains too low in advanced economies, an in-dication
that many of these economies have substantial
output gaps, and deflation continues to be a concern.
In the US, inflation measured with the personal con-sumption
expenditure deflator is forecast to be 1.6 per
cent at the end of 2014 and to rise gradually toward the
Federal Reserve’s longer-term objective of 2 per cent. In
the euro area, inflation is projected to increase gradu-ally
as the recovery strengthens and output gaps slowly
decrease, to 0.9 per cent on an annual basis in 2015 and
1.2 per cent in 2016. But price pressures are expected
to remain very subdued under the current baseline pro-jections,
because persistent output gaps, weak credit
conditions, and financial fragmentation—especially in
stressed economies—will combine to contain prices. As
a result, euro-area-wide inflation rates are expected to
remain substantially below the ECB’s price stability ob-jective
through at least 2019 with current policies, sug-gesting
that the risk of inflation expectations becoming
unanchored has increased.
In Japan, headline inflation is projected to rise to an an-nual
average rate of 2.7 per cent in 2014. This rise re-flects
the consumption tax increase, but underlying in-flation
is rising as well, at 1.1 per cent this year. Inflation
is projected to increase gradually toward the 2 per cent
target in the medium term as the output gap closes and
inflation expectations rise. In emerging market and de-veloping
economies, inflation is projected to decline in
2014, in line with the April 2014 WEO projections, and to
remain broadly unchanged in 2015. The recent decline
reflects to an important extent the softening of com-modity
prices—particularly those for food commodi-ties,
which have a high weight in the consumer price
index baskets for these countries.
The Inflation Quandary

ECONOMY MATTERS 10
GLOBAL TRENDS
Fighting Low Inflation and Sustaining
the Recovery in Advanced Economies
Across advanced economies, output gaps generally re-main
large and are projected to close only gradually, in-flation
is low, and dealing with high public debt requires
fiscal consolidation to continue, as discussed in the Oc-tober
2014 Fiscal Monitor. Thus, maintaining an accom-modative
monetary policy stance to support the recov-ery
is essential. Within these broad contours, however,
challenges increasingly differ across countries.
The recovery in the euro area remains weak and une-ven,
unemployment rates far exceed their equilibrium
value in most countries, and euro-area-wide inflation
is too low, pointing to pervasive weakness in domestic
demand. This requires policy actions to support activity.
On the monetary policy front, recent measures taken by
the ECB—lower policy rates, and the announcement of
cheap term funding for banks and a program of private
asset purchases— are welcome. But if the inflation out-look
does not improve and inflation expectations con-tinue
to drift downward, the ECB should be willing to do
more, including purchases of sovereign assets. Never-theless,
reducing fragmentation in stressed economies
and ensuring that inflation rises back toward the price
stability objective requires action beyond monetary
policy. The review of banks’ asset quality that is cur-rently
underway is critical to reestablishing confidence
in banks and improving intermediation. And looking
beyond the demand constraints, structural measures
must be taken to increase very low potential growth
rates—as discussed further in the next subsection. On
the fiscal policy front, the pace of fiscal consolidation
has slowed and the overall fiscal stance for 2014–15 is
only slightly contractionary. This strikes a better bal-ance
between demand support and debt reduction.
Germany, which has completed its fiscal consolidation,
could afford to finance much-needed public investment
in infrastructure (primarily for maintenance and mod-ernization),
without violating fiscal rules. Large nega-tive
growth surprises in euro area countries should not
trigger additional consolidation efforts, which would be
self-defeating. Moreover, if deflation risks materialize
and monetary policy options are depleted, the escape
clauses in the fiscal framework may need to be used to
respond.
In Japan, aggressive monetary policy easing—the first
arrow of Abenomics—has helped lift inflation and infla-tion
expectations, and actual and expected inflation are
progressing toward the 2 per cent target. Communica-tion
by the Bank of Japan has been effective, but more
could be done to help anchor expectations, including
clarifying the indicators used to assess whether infla-tion
is on track. This effort would also help guide expec-tations
when a need arises to adjust the asset purchase
program and facilitate preparations for eventual exit.
Should actual or expected inflation stall or growth dis-appoint,
further action by the Bank of Japan would be
warranted—but it would be essential that such action
be accompanied by complementary growth enhanc-ing
reforms, partly because of potential risks to finan-cial
stability. On the fiscal front, given very high public
debt, implementation of the second consumption tax
increase is critical to establish a track record of fiscal dis-cipline
but is likely to take a toll on domestic demand,
underscoring the importance of a pickup in confidence
and investment.
In the US, with growth expected to increase above
trend in the remainder of 2014 and 2015, the main policy
issue is the appropriate speed of monetary policy nor-malization.
Under the IMF staff’s baseline projection,
the current plans—namely, ending asset purchases
later this year and gradually increasing the policy rate
starting in mid-2015—are appropriate, given the still-siz-able
output gap and subdued inflation. But the timing of
the increase in the policy rate may have to be adjusted
based on developments on the inflation and unemploy-ment
fronts. Two factors complicate efforts to assess
the amount of slack in the economy: it is difficult to de-termine
how much of the decline in labor force partici-pation
is cyclical, and uncertainty exists about the equi-librium
rate of unemployment. With the labor market
strengthening more rapidly than forecast and inflation,
although low, beginning to rise, risks of persistently low
inflation have decreased, and the likelihood is arguably
higher that policy interest rates could rise faster rela-tive
to the WEO baseline on account of reduced slack.

11
GLOBAL TRENDS
In this context, an effective communications strategy is
essential to prevent disruptive market responses and
anchor market expectations. On the fiscal policy front,
the priorities should be avoiding short-term fiscal acci-dents
caused by political brinkmanship and adopting a
more growth-friendly approach to fiscal consolidation,
including through front-loaded infrastructure spending,
while reaching political agreement on a credible and de-tailed
medium-term fiscal consolidation path.
The recovery in other advanced economies is becoming
stronger, with buoyant house prices posing policy chal-lenges
in some of them. In the UK, for example, macro
prudential tools have been deployed to contain finan-cial
stability risks. Tighter monetary conditions could
also be considered if macro prudential tools prove in-effective
at addressing financial stability concerns, but
careful consideration would need to be given to the
trade tradeoff between damage to the real economy
and the ultimate costs of financial vulnerabilities.
Disinflation and the Domestic
Situation
Global disinflation will benefit India in its long battle
against high inflation. Lower crude oil prices will also
bring down the fuel subsidy bill in the government
budget as well as cut the import bill. India has had a rel-atively
smoother ride than many other emerging mar-kets
in recent weeks. The rupee has been relatively sta-ble
against the dollar. Equity prices have not yet been
hit with a brutal wave of selling. The immediate benefits
of global disinflation for India are obvious: it will help re-duce
the economic imbalances that were built up over
the past decade. The advantages over the longer term
to economic growth are less clear. India is more inte-grated
with the world economy than it previously was
because of a growing ratio of trade-to-gross domestic
product. The rate of economic expansion in India is now
more tightly correlated with global economic growth
than it was a decade ago. Indian policy makers are cur-rently
in a relatively relaxed mood because of the sud-den
relief they have got from falling energy prices. The
next year may not be so benign if there is a global liquid-ity
shock. The key challenge will be how to sustain the
fragile economic recovery at a time when the rest of the
global recovery is faltering.

DOMESTIC TRENDS
Making ‘Make in India’ Happen
For that, the Government needs to tackle issues impacting ease of doing business
The manufacturing sector has exhibited a tenta-tive
revival after three years of subdued growth,
registering 3.5 per cent growth in the first quar-ter
of the year. However, this revival cannot be taken
for granted.
India is the only country with a young, growing and
competitive workforce. A strong and deep manufactur-ing
foundation with capabilities across traditional and
advanced technology sectors is the springboard for the
next growth cycle. Indian companies have proved to be
globally attuned and energetic in leveraging compara-tive
advantages. With the many free trade agreements
that India has signed, the manufacturing sector has a
good chance to slot into global supply chains.
India can easily reach annual manufacturing growth
ECONOMY MATTERS 12
rates of 12-14 per cent over a sustained period of time
under the right conditions. However, even a growth
rate of just over 6 per cent would need an additional
manufacturing investment of Rs. 98 lakh crore at cur-rent
prices over the next five years. To attract such in-vestment,
the right policy structure is essential.
Right Approach
Government and industry have already commenced
concerted efforts to enhance the ease of doing busi-ness
and kick-start manufacturing growth. The Govern-ment
has also relaxed FDI limits in critical sectors like
defence, construction and railways.
Estimates suggest that India could achieve an additional
Rs. 8 lakh crore of GDP and 25 million more jobs through
a facilitative business environment. There also needs to
be a review of labour laws, many of which are outdated
in the current context. The Goods and Services Tax will
be a huge step forward in making India a single market.
Land acquisition for industrial development must be
speedy and cost effective while simultaneously leaving
displaced populations better off. Of course, the action
at the grassroots level of State governments and dis-trict
administrations will be critical.

This article appeared in Hindu Business Line dated 24th September 2014. The online version can be accessed from the fol-lowing
link: http://www.thehindubusinessline.com/opinion/making-make-in-india-happen/article6442477.ece
Industrial Output Trajectory Remains Subdued
13
DOMESTIC TRENDS
The operating environment for the micro, small and
medium enterprises sector needs to be strengthened.
Access to finance, redefining investment limits, encour-aging
technology adaptation and facilitative regulation
could transform MSMEs into the hotspot of entrepre-neurial
activity.
Finally, firm level competitiveness must be encouraged
by building a comprehensive support system with a
wide knowledge base across parameters like quality
management systems, lean manufacturing and envi-ronmental
assessments and audits to meet the require-ment
of ‘Zero defect, zero effect’ as enunciated by the
Prime Minister.
Confidence-Building
Some 153 mega projects with an investment of around
Rs. 5.2 lakh crore are being monitored by the Project
Monitoring Group, which will create better infrastruc-ture
and ease cost pressures. India must also sync trade
agreements with domestic manufacturing strengths
and leverage global markets. In particular, exports must
be stepped up in highly-traded sectors such as electron-ics
and machinery.
Industrial output growth remained unchanged at 0.4
per cent in August 2014 from July 2014. In the year so
far (April to August), IIP growth has been higher at 2.8
per cent compared to ‘near zero’ in the same period of
last year. Manufacturing output contracted in August
2014 for the second month in a row. In addition, capi-tal
goods output – with 9 per cent weight in the index
- also fell by 11 per cent. Going forward, the upcoming
Certain industry sectors of strategic significance could
help set the stage for future growth in alignment with
global trends. For example, a policy on capital goods
and engineering, coupled with rationalisation of taxes
and duties and correction of anomalies, will promote
the competitiveness of Indian equipment manufactur-ers.
The Information Communication Technology &
Electronics (ICTE) sector is critical as currently over 60
per cent of the domestic demand is being met through
imports.
The steel industry has huge potential. The sector would
benefit from the introduction of compact designs for
steel plants, creation of a larger pool of metallurgists,
and promotion of R&D. Measures for the iron ore min-ing
sector such as expanding the iron ore reserve base
and modern mechanised mines would also need to
be addressed. Emphasis on establishing textile mega
parks, special incentives for value added textile and ap-parel
manufacturing, and export promotion are neces-sary.
The Prime Minister’s call to ‘Make in India’ itself
imparts confidence to the industry to undertake new
investments.
festive season holds some respite for the industry, es-pecially
the consumer goods sector, where a seasonal
pick-up could aid sales. The sequential momentum as
indicated by the movement in the seasonally-adjust-ed
month-on-month series too showed that indus-trial
output growth declined in August 2014 (from 0.2
per cent in July 2014 to -1.0 per cent in August 2014).

ECONOMY MATTERS 14
DOMESTIC TRENDS
The core sector output moderated to 8-month low in
September 2014 on the back of dwindling production
of crude oil, fertilizer and natural gas. The eight core
industries comprise nearly 38 per cent of the weight
of items included in the Index of Industrial Production
(IIP). The combined Index of eight core industries stood
at 160.6 in September, 2014, which translates into 1.9
per cent growth on y-o-y basis as compared to 5.8 per
cent growth in August 2014. Its cumulative growth dur-
On the sectoral front, output of the manufacturing sec-tor,
which constitutes over 75 per cent of the index, de-clined
to -1.4 per cent in August 2014 as compared to
contraction to the tune of 1.0 per cent in the previous
month, despite a low base of last year. In terms of in-dustries,
eleven (11) out of the twenty two (22) industry
groups (as per 2-digit NIC-2004) in the manufacturing
sector showed positive growth during the month of
ing April to September, 2014-15 was 4.0 per cent as com-pared
to 5.0 per cent in the same period last year. Coal
production (weight: 4.38 per cent) increased by 7.2 per
cent in September, 2014 over August, 2013. Going for-ward,
coal production growth is likely to moderate due
to the recent Supreme Court verdict canceling all but
four coal blocks. The production of crude oil, natural
gas, fertilizer, refinery products declined in September
2014.
August 2014 as compared to the corresponding month
of the previous year. The industry group ‘Basic metals’
showed the highest positive growth of 19.1 per cent, fol-lowed
by 14.3 per cent in ‘Other transport equipment’
and 10.9 per cent in ‘Luggage, handbags, saddlery, har-ness
& footwear; tanning and dressing of leather prod-ucts’.
On the other hand, the industry group ‘Radio, TV
and communication equipment & apparatus’ showed

15
DOMESTIC TRENDS
the highest negative growth of (-) 48.8 per cent, fol-lowed
by (-) 43.9 per cent in ‘Office, accounting & com-puting
machinery’ and (-) 17.8 per cent in ‘Electricity ma-chinery
& apparatus n.e.c.’.
Meanwhile, electricity generation remained was robust
at 12.9 per cent growth in August 2014, up from 11.7 per
cent in July as delayed rainfall in large parts of India led
to higher electricity demand. Mining output also con-tinued
to expand in August (by 2.6 per cent compared
to 1.2 per cent in July). Going forward, we expect the
electricity production growth to somewhat taper down
due to shortfall in coal supply. In addition, the Supreme
Court ruling on cancellation of coal blocks allocations
to 214 mines could see some impact on mining sector
growth in the interim.
From the use-based perspective, consumer goods pro-duction
continued to remain in negative territory. The
major part of the contraction in consumer goods was
primarily on account of sharp drop in consumer dura-bles
by 15.0 per cent. Acute rainfall deficiency during
the initial phase of the monsoon season (about 30 per
cent average during June to August) has likely to have
dented farm incomes and hence demand for consumer
durables. The negative print for non-durables during
the month was also worrying. Moreover, the volatility
in capital goods continued and the sector contracted by
11.3 per cent in August 2014 as compared to decline to
the tune of 3.9 per cent in the previous month. Mean-while,
basic goods production remained strong at 9.6
per cent in August 2014 and was a silver lining in the
overall use-based indices.
Outlook
IIP data for the month of August 2014 shows that industrial production continues to be in the slowdown phase and
a visible turnaround in industrial growth is still not happening. And if we factor in the base effect, the performance
of industry shows that demand is yet to show distinct signs of a pick-up. What is worrisome is the poor perfor-mance
of the manufacturing sector which continues to be under stress as new orders are not forthcoming in a big
way. The negative growth of the capital and consumer goods sector, especially consumer durables, need interven-tions.
There is need for taking cognizance of the slow growth of industrial production and take steps to revive in-vestment
and stimulate demand in the economy. This would entail expediting execution of approved projects and
providing a competitive market for coal and mining sectors. Recent announcements and policy actions like ‘Make
in India’ initiative, ensuring flexible labour policy, etc should help the turnaround.

Inflation Moderates Sharply in September 2014
ECONOMY MATTERS 16
DOMESTIC TRENDS
WPI based inflation continued its downward trajectory
as it moderated further to 2.4 per cent in September
2014 from 3.7 per cent in the previous month. The fall
in WPI inflation was attributable to all round modera-tion
in all its sub sectors. Retail inflation (as measured
by CPI) too fell to 6.5 per cent in September 2014 – the
lowest level since January 2012 when the new inflation
series started - from revised 7.7 per cent in August 2014.
This was mainly driven by a fall in food inflation (fell to
7.7 per cent from 9.4 per cent in August). Moreover,
fuel CPI slipped to another record low of 3.5 per cent
aided by a sharp decline in global crude prices as well.
Primary inflation moderated further to 2.2 per cent in
September 2014 from 3.9 per cent in august 2014. Part
of the moderation was driven by a high base of last
year. Primary food inflation too eased to 3.5 per cent
from 5.2 per cent in the previous month. Notably, food
inflation has come down sharply in the last couple of
months, thanks to proactive steps taken by the govern-ment
such as release of food grain stocks, low increase
in minimum support prices etc. Amongst primary food
prices, the data showed that vegetable prices have
come down sharply to -14.9 per cent in September 2014
from -4.8 per cent in August 2014. In contrast, inflation
in fruits has remained relatively firm at 20.9 per cent in
the reporting month as compared to 20.3 per cent in
August 2014. Primary non-food inflation decelerated
sharply to 0.5 per cent in September 2014 from 4.2 per
Core CPI inflation (excluding food and fuel inflation fell
from 7.0 per cent in August 2014 to 6.0 per cent in Sep-tember
2014. Core inflation fell across all categories in
the month driven by a decline in transport & communi-cation
(fell by 2.2 ppt) and household requisites (fell by
1.5 ppt). Both of these categories, (together having a
weight of 30 per cent in the core CPI index) favourably
benefited from a very strong base effect from Septem-ber
last year. For 4 consecutive months CPI inflation has
been at or below the RBI’s target of 8 per cent for Janu-ary
2015.
cent in the previous month. This is its lowest reading
since March 2012. Amongst non-food articles, inflation
in fibres and minerals was the main driving force behind
the moderation.
Fuel inflation too decelerated sharply to 1.3 per cent
in September 2014 as compared to 4.5 per cent in the
previous month, benefitting from a favourable base ef-fect.
Fuel prices came off sharply tracking a fall in global
Brent crude prices, which is now trading at a two-year
low. Inflation in petrol declined to 9.4 per cent from -0.2
per cent in August 2014. In an interesting development,
in October 2014, government de-regulated the price
of diesel and announced a new price for domestically-produced
natural gas. The price of diesel, like petrol,
would now stand linked to the market without any gov-ernment
intervention, with retail rates reflecting price

Outlook
Over the next 2 months, headline CPI inflation could ease further due to a base effect from last fiscal, lower crude
oil prices, revival of monsoon, proactive measures taken by the government to keep food prices under control, and
a stable currency. However, factors such as improvement in demand conditions and rising geopolitical tensions
reversing the current decline in oil prices can derail this moderation in the coming months.
RBI Maintains ‘Status-Quo’ on Policy Rates
17
DOMESTIC TRENDS
changes in the global market. The immediate impact on
diesel will be a reduction in prices by Rs 3.37 a litre.
Manufacturing inflation eased further to 2.8 per cent in
September 2014 as compared to 3.5 per cent in the pre-vious
month. Encouragingly, non-food manufacturing
or core inflation, which is widely regarded as the proxy
In its fourth bi-monthly monetary policy review held on
30th September, 2014, RBI maintained status quo on all
key rates citing continued risks to inflation and difficult
external situation especially on the geopolitical front.
According to the minutes of meeting of the Technical
Advisory Committee, RBI, if the pace of disinflation is
faster than what is anticipated now, then there may be
a case for a rate cut, particularly if inflation expectations
also soften.
for demand-side pressures in the economy, moderated
to 2.8 per cent during the month as compared to 3.5 per
cent in August 2014. In the coming months, we expect
core WPI to hover around 3.0-3.5 per cent, RBI’s com-fort
level for this inflation measure. Manufacturing food
inflation too showed a deceleration during the month.
With this the repo rate stands at 8.0 percent, the re-verse
repo rate at 7.0 per cent, the marginal standing fa-cility
(MSF) rate and the Bank Rate at 9.0 per cent. The
cash reserve ratio (CRR) of scheduled banks remains at
4.0 percent of net demand and time liabilities (NDTL),
although the liquidity provided under the export credit
refinance (ECR) facility has been reduced from 32 per
cent of eligible export credit outstanding to 15 per cent
with effect from October 10, 2014. Additionally, the RBI

ECONOMY MATTERS 18
DOMESTIC TRENDS
will continue to provide liquidity under overnight repos
at 0.25 per cent of bank-wise NDTL at the LAF repo rate
and liquidity under 7-day and 14-day term repos of up to
Since June 2014, headline inflation has ebbed to levels
which are consistent with the desired near-term glide
path of disinflation - 8 per cent by January 2015. The
most heartening feature has been the steady decline in
inflation excluding food and fuel, by a cumulative 111 ba-sis
points since January 2014, to a new low. With interna-tional
crude prices softening and relative stability in the
foreign exchange market, some upside risks to inflation
are receding. Yet, there are risks from food price shocks
as the full effects of the monsoon’s passage unfold, and
from geo-political developments that could materialize
rapidly. For the near-term objective the risks around the
baseline path of inflation are broadly balanced. Turning
to the medium-term objective (6 per cent by January
2016) the balance of risks is still to the upside, though
somewhat lower than in the last policy statement.
On the growth front, with the improvement in business
confidence and investment demand, real GDP growth is
expected to pick up in the final quarter of 2014-15, aided
by modestly firming global recovery supporting exports
and the ongoing search for yields in international finan-cial
markets spurring capital inflows. As per the RBI,
elevated inflation expectations of households and risks
from still-high input costs and sticky wages, however,
present challenges to bringing down inflation to 6 per-
0.75 per cent of NDTL of the banking system through
auctions while continuing with daily one-day term repos
and reverse repos to smooth liquidity.
cent by January 2016 along the committed glide path.
The key to a turnaround in the growth path is a revival
in investment activity supported by fiscal consolidation,
stronger export performance and sustained disinfla-tion.
With expectations of these conditions remaining
broadly unchanged, the RBI has retained projection of
growth for 2014-15 at 5.5 per cent.
As per the RBI, liquidity conditions have remained
broadly balanced through the second quarter of 2014-
15, except for transient tightness in the second half of
July and early August due to delayed government ex-penditure.
With credit growth falling well below depos-it
growth in August and September, structural sources
of liquidity pressures also eased. The average recourse
to liquidity from the Reserve Bank, measured by daily
net liquidity injection through LAF, term repo and MSF,
decreased from Rs. 870 billion in July to Rs. 795 billion
during August and further to Rs. 450 billion during Sep-tember.
The credit market has been subdued through the sec-ond
quarter; with non-food credit growth decelerating
on account of risk aversion related to asset quality as
well as weak demand in general. With deposit growth
remaining largely flat, a decline in credit growth led to

CII Reaction
By all indications, the twin deficits—fiscal and current account—are well under control and core inflation has been
trending downwards. On the other hand, industrial production has been muted. This could have been a good
opportunity for RBI to reduce rates. The infusion of liquidity at this juncture, through a reduction in policy rates,
would have provided an impetus to the feel-good factor brought on by the recent burst of policy announcements
by the government.
Trade Deficit Widens on Strong Growth in Imports
19
DOMESTIC TRENDS
and higher funding has been obtained from non-bank
sources. The corporate bond market recorded a pick-up
in activity during the second quarter with an increase
in offerings of public issues and rights issues, partly re-flecting
tightening bank credit conditions. During 2014-
15, term deposit rates and weighted average lending
rates (WALR) have softened marginally.
a negative wedge (since August 2014) between credit
and deposit growth, indicative of an increase in avail-ability
of structural liquidity with banks. The estimated
growth rate of bank credit of schedule commercial
banks for 2014-15 is 14.8 per cent. Mirroring the slowing
of bank credit growth, the flow of financial resources to
the commercial sector has been lower than a year ago
Exports maintained its muted growth even in Septem-ber
2014 at 2.7 per cent as compared to 2.4 per cent re-corded
in the previous month. In cumulative terms, ex-ports
grew by 6.5 per cent in the second quarter of the
current fiscal (July-September 2014). Given that the In-dian
currency has remained broadly stable for the past
few months, global growth prospects have become an
important variable for exports. Growing concerns re-cently
about growth recovery globally may pose risks
to exports going ahead. At a disaggregate level, some
of the important commodities that witnessed relatively
strong growth during September 2014 were engineer-ing
goods (20.2 per cent), textiles (15.9 per cent), gems
and jewellery (11.1 per cent) etc. The slowdown in ex-ports
was driven by a sharp decline in exports of petro-leum
products (decline by 13.3 per cent) and electronic
goods (decline by 17.4 per cent).
In contrast, imports grew at 26 per cent – their fastest
pace in 2.5 years in September 2014 as compared to 2.1
per cent recorded in the previous month. Despite an
over US$10 per barrel decline in crude oil prices, oil im-ports
rose by 9.7 per cent during the month due to high-er
import volumes. Oil imports during April-September,
2014-15 were valued at US$ 82.5 billion which was 3.1
per cent higher than the oil imports of US$80.0 billion in
the corresponding period last year. Non-oil imports also
grew by staggering 36.2 per cent in September 2014
due to both higher gold and well as higher core (non-oil
non-gold) imports. Gold imports increased to US$3.75
billion September 2014 – the highest monthly imports
since curbs were imposed last August. Higher demand
spurred by the upcoming festive season and low prices
is likely to have led to the rise in imports of the yellow
metal. Non-oil imports during April-September, 2014-15
were valued at US$151.6 billion which was 0.8 per cent
higher than the level of such imports valued at US$150.5
billion in April-September, 2013-14.

CII Business Confidence Index Shoots Up Second
Time in a Row
ECONOMY MATTERS 20
DOMESTIC TRENDS
Underpinned by a sharp growth in imports as compared
to exports during the month, trade deficit widened
sharply to US$14.3 billion in September 2014 as com-pared
to US$ 10.8 billion in August 2014. This is the high-est
monthly deficit since June 2013. The services trade
data released for the month of August 2014 showed
that exports had contracted by 0.5 per cent after 7
consecutive months of positive growth. Imports on the
other hand grew by 7.5 per cent taking the services bal-ance
for August to US$5.5 billion as compared to US$6.5
billion in July.
Outlook
Prospects for exports may not remain very robust amid the backdrop of growing concerns about global recovery.
However, the outlook for the current account deficit remains benign for now given that global crude oil prices
have declined sharply and there is stability in our currency, which may mitigate any adverse impact of an export
slowdown.
Indicating a sharp improvement for the second con-secutive
quarter, the CII Business Confidence Index (CII-BCI)
for July-Sept quarter FY15 shot up to 57.4, up from
53.7 in April-June quarter and 49.9 in Jan-March quarter
this year. During the same quarter last fiscal, the index
had touched the all-time low value of 45.7. The number
50 is the dividing line on the index between positive and
weak business confidence.
Commenting on the upward march in the value of in-dex,
Mr. Chandrajit Banerjee, Director General, CII, said
that “the determination shown by the new government
at the Centre to provide an impetus to growth along
with reviving the ‘feel good’ factor has sent the busi-ness
confidence index soaring for the second quarter
in a row. In order to capitalize on the early signs of im-proving
business sentiments, we must ensure that this
momentum is maintained going forward.”

21
DOMESTIC TRENDS
The 88th Business Outlook Survey is based on responses
from over 150 industry members. Majority of the re-spondents
(44 per cent) belong to large-scale sector,
while medium scale companies comprise another 12 per
cent. Around 38 per cent and 6 per cent respectively
are from the small-scale and micro firms. Further, 60 per
cent of the respondents are from manufacturing and 36
per cent are from the services sector.
The highest percentage (41 per cent) of respondents
expected GDP in the current fiscal to expand by 5.0-
5.5 per cent, up from sub-5 per cent growth witnessed
in the last two years. In fact, 30 per cent respondents
expected GDP to grow in a range of 5.5-6.0 per cent in
FY15, which indicates that 6 per cent growth is within
reach this year. We have already started this financial
year on an impressive note with the first quarter GDP
recording a growth of 5.7 per cent, up from 4.6 per cent
in the previous quarter.
WPI Inflation is expected to average 5.5-6.5 per cent in
FY15, which is slightly on a higher side considering the
likelihood of a sub-normal monsoon this year. “The
management of inflationary expectations through
supply-side measures would hold the key for ensuring
continued momentum of economic revival”, suggested
Mr. Banerjee.
The expectation of higher economic growth in the cur-rent
fiscal is rooted in optimism about the overall de-mand
situation. A significant 77 per cent of the respond-ents
expected their sales to increase in the July-Sep
quarter, much higher than 50 per cent respondents in
the previous quarter. Similarly, 49 per cent of the re-spondents
expected their export orders to increase in
July-Sep quarter compared to 39 per cent respondents
in the previous quarter.
The revival in domestic and global demand has resulted
in a majority (46 per cent) of the surveyed businesses
contemplating new investment in the July-Sep quarter,
whereas only 10 per cent expected contraction. This in-dicates
that economic recovery is sustainable, provided
we maintain the demand momentum, where the mon-etary
stance by the Central Bank will play a crucial role.
The businesses, besides undertaking new investments,
have started experiencing a rise in capacity utilization.
Nearly half (49.5 per cent) of the respondent firms ex-pected
their capacity utilization to exceed 75 per cent in
July-Sep quarter of FY15, up from 34 per cent respond-ents
in the previous quarter, which augurs well for the
turnaround of the economy.
CII survey has observed a sharp decline in the percent-age
of respondents reporting increase in inputs costs
related to raw materials, energy and employees in the
Jul-Sep quarter as compared to the previous quarter,
which is in line with the official data specifying the cur-rent
moderation in inflation rate.
Expectation of recovery in sales, coupled with sharp de-cline
in input costs, has led to a rise in percentage of
respondents expecting an increase in profits after tax
(PAT) in the July-Sept quarter to 40 per cent as against
36 per cent in the previous quarter. On the other hand,
the percentage of respondents reporting a decline in
PAT between the two periods declined from 30 per cent
to 20 per cent.
A slow pick up in global demand, high inflation and ris-ing
borrowing costs are cited to be the top three con-cerns
of the respondents. “While we can do little about
addressing the global slowdown concern, all policy op-tions
must be explored to tackle the problem of infla-tion
and high borrowing cost. At a time when economic
recovery needs to be strengthened, the ideal policy in-strument
would be to manage inflation through supply-side
measures, and make a direct intervention to reduce
borrowing costs”, added Mr. Banerjee.

ECONOMY MATTERS 22
DOMESTIC TRENDS
Other Developments During the Month
• Festive Season Heralds a Jump in Passenger Vehicle Sales: Passenger vehicle sales increased by 3.3 per cent
on year on year basis during September 2014 to 223,568 units, according to data released by the Society of
Indian Automobile Manufacturers (SIAM). September’s sales were also up 4.5 per cent from the August total
of 213,915 units. Automakers in India sold 1.93 million passenger vehicles during the first nine months of 2014,
making a slim increase of 834 units over sales levels in the same period last year. The biggest change in monthly
sales came in the form of growth leadership by utility vehicles (UVs) as car sales actually dipped in September
2014. Sales of passenger cars stood at 154,882 units, marking a 1 per cent decline, while sales of vans continued
to remain lower with a 10.7 per cent drop to 15,683 units. However, this weakness was offset by a sharp 24.9
per cent surge in shipments of UVs to 53,003 units.
• Government Deregulates Diesel Prices: The Cabinet has decided to completely deregulate the price of diesel.
Henceforth, the price will be linked to the market. Over the last five years, prices of diesel have significantly
gone up. But given the crude price today, diesel prices would stand to be reduced after being market-linked. On
an immediate basis, this move of the government will result in a Rs 3.37 a litre cut in retail rate of India’s most
consumed fuel. The staggered diesel price hike initiated since September 2012 and the recent drop in crude
prices in global markets have converted under-recovery (difference between retail price and its imported cost)
of public sector oil marketing companies into an over-recovery (profit). The over-recovery on diesel for such
companies reached Rs 3.56 a litre for the first fortnight of October. Hence, as the crude prices in global market
are likely to remain low in the near term due to the US’ discovery of shale oil as also the struggling economies
of Europe and Asia, deregulating diesel prices is both the right and opportune step.
• Labour Reforms Launched: In a bid to simplify labour reforms in the country for making ‘doing business’ attrac-tive
in India, Prime Minister Narendra Modi launched the ‘Pt. Deendayal Upadhyay Shramev Jayate Yojana’.
A string of measures would aim to make inspection of businesses transparent and also ease rules so that
employees can smoothly move their social security funds when they change jobs. A new website, managed
by the labour ministry, will allow companies to fill forms online and raise their grievances. The 1,800 labour in-spectors
will no longer have the powers to decide on the premises they would survey. Instead, a computerized
system will randomly, based on data and objective criteria, identify the companies to be inspected. Further,
the inspectors will have to upload their inspection reports within 72 hours and can’t modify them thereafter.
The World Bank says India has one of the world’s most rigid labour markets, but fears of a trade union backlash
and partisan politics have deterred successive governments from reform measures. Hopefully, these strings of
measures will help improve the business investment environment in the country.
• New Chief Economic Advisor: Arvind Subramanian, Senior Fellow at the Peterson Institute for International
Economics, has been appointed as India’s new chief economic adviser (CEA). The CEA, a post that has been
lying vacant since September last year after Raghuram Rajan took over as new Reserve Bank of India (RBI)
governor, is usually the main go-to person for advice for the finance minister on macro-economic matters
and primary responsibilities, among others, include authoring the mid-year analysis and the Economic Survey.
Dr. Subramanian has obtained his undergraduate degree from St. Stephens College, Delhi; his MBA from the
Indian Institute of Management at Ahmedabad, India; and his M.Phil and D.Phil from the University of Oxford,
UK.
• New Economic Affairs Secretary: Rajiv Mehrishi will be the new Economic Affairs Secretary in the Ministry
of Finance. He replaces Arvind Mayaram who has been transferred to the Tourism Ministry. Previously, Mr.
Mehrishi was the Chief Secretary in the Rajasthan Government and has been credited for introducing several
important reforms in the state.
• New Base for National Accounts: In accordance with the recommendation of the National Statistical Commis-sion
to revise the base year of all economic indices every five years, it has been proposed to revise the base
year of national accounts from 2004-05 to 2011-12 in 2015. As earlier, the new base year has been selected in
line with the latest Quinquennial round of Employment-Unemployment Survey. The new series of national ac-counts
is tentatively scheduled for release on January 31, 2015.

CORPORATE PERFORMANCE
Corporate Performance in Q2FY15
23
Second quarter earnings of companies show that
a sustained recovery in earning growth remains
elusive. In fact, net sales of companies (manufac-turing
plus services) grew at the slowest pace in four
quarters at 11.4 per cent, slower than 13.8 per cent in the
preceding June quarter, and the 14.9 per cent growth in
the year-ago September quarter. Our analysis is based
on the financial performance of 246 companies (146-
Manufacturing and 100 Services and excludes oil & gas
companies), using a balanced panel, extracted from the
Ace Equity database.
However, it is encouraging to note that the belea-guered
manufacturing sector witnessed acceleration in
sales growth in the second quarter of the current fiscal
as compared to the same period last year. Net sales of
manufacturing sector in the second quarter grew by 11.8
per cent as compared to 8.3 per cent in the same period
last year, indicating that the downtrend is over. We ex-pect
further improvement in growth performance dur-ing
the current fiscal on the back of the slew of policy
measures which the new government has introduced
in the recent months to spur investment and revive
growth. The net sales of services sector in the second
quarter though moderated to 11.2 per cent as compared
to robust 19.6 per cent in the same quarter previous
year. Its pivotal for the services sector sales growth to
pick-up in the coming quarters as its revival is critical for
facilitating the overall acceleration in economic growth.

ECONOMY MATTERS 24
The expenditure costs of the firms, on an aggregate ba-sis,
accelerated by 13.0 per cent in the reporting quar-ter,
as compared to 11.8 per cent in the comparable time
period last year. Under its various heads, growth of raw
materials cost increased by 16.5 per cent over a paltry
5.6 per cent growth in the same period last year. In
contrast, growth in wages & salaries showed modera-tion.
Total expenditure costs for manufacturing sector
also increased by 16.3 per cent in the second quarter of
2014-15 as compared to 4.1 per cent growth in the same
quarter last year. All the heads of expenditure for man-ufacturing
except interest cost accelerated during the
quarter. In contrast, total aggregate expenditure costs
for services sector moderated by 10.9 per cent in the
reporting quarter as compared to 17.2 per cent growth
in the same quarter a year ago.
The performance analyzed in terms of Profit after Tax
(PAT) exhibits an improvement in financial results of
companies at aggregate level in the second quarter
of the current financial year. On an aggregate basis,
growth in PAT improved significantly to 17.9 per cent in
the second quarter as compared to growth to the tune
of 14.9 per cent in the same quarter of last year. This has
been driven by sharp improvement in PAT growth of
manufacturing sector. PAT growth across the manufac-turing
sector firms, improved sharply to 25.5 per cent
in the second quarter as compared to decline of 8.5 in
the same quarter of previous year. For services sector,
PAT growth moderated to 15.7 per cent as compared to
healthy 24.3 per cent in the same quarter a year ago.

25
In sum, there is no cause for cheer yet in the Q2 earning
for the companies. However, since our analysis is based
on small sample of firms, it is too early to say anything
conclusively. The emerging signs though remain propi-tious,
with the new government announcing a slew of
reform measures in the last few months

SECTOR IN FOCUS
MSME
Introduction
India is to emerge as one of the leading economies over
the next decade in light of a positive political and eco-nomic
scenario, and the Micro, Small & Medium Enter-prises
(MSME) segment is expected to play a significant
role. The development of this segment is extremely
critical to meet the national imperatives of financial in-clusion
and generation of employment in urban, rurban
and rural areas. Further, it can nurture and support new
age entrepreneurs who have the potential to create
globally competitive businesses in India.
With domestic and foreign companies investing in the
‘Make in India’ initiative, MSME can be the mainstay for
existing and future high-growth businesses and make
substantial impact in the area of indigenization. Make
in India with zero defect and zero effect, is a significant
opportunity. The new wave MSME should be able to de-velop
an ecosystem that enables and continuously sup-ports
business gearing to deliver the right product, the
ECONOMY MATTERS 26
right quality, the right solution and the right service at
a competitive price, in domestic and international mar-kets.
The Digital India revolution, too, provides a great
opportunity to promote MSME participation in the In-formation,
Communication and Telecommunication
(ICT) sector, in line with the government vision.
It is equally important that the MSME segment devel-ops
in all areas of agriculture, manufacturing and ser-vices
sectors, as each of these sectors will continue to
be very relevant to both the overall GDP growth as well
as employment generation. The MSME sector will act
as a catalyst to bring about this socio-economic trans-formation.
The following section reviews the MSME sector, based
largely on the Report “The New Wave Indian MSME: An
Action Agenda for Growth” prepared by the Confed-eration
of Indian Industry (CII) and KPMG. The report,
which was released in October 2014, explores and as-sesses
the growth drivers and challenges for the sector.
Growth Opportunity for MSME
The GDP growth rate is likely to achieve 8.5 per cent lev-el
and India is expected to be an approximately USD 5
trillion economy by the year 2025. Given the right set of

27
SECTOR IN FOCUS
support and enabling framework, the MSME segment
has the potential to emerge as a backbone for this econ-omy
and act as an engine for growth. The MSME op-portunity
is to develop entrepreneurship and support
growth led by innovation over the next decade by:
• Significantly increasing the share of MSME contri-bution
to GDP from the current 8 per cent to 15 per
cent by 2020;
• Generate employment levels to the extent of 50
per cent of the overall employment representing
300 million jobs across agricultural, manufacturing
and services sectors; and
• Increase the share of MSME contribution across
key public and private industry sectors, fulfilling in-creasing
domestic demand, growth in exports, indi-genization
and import substitution.
Employment Opportunities
With the increase in MSME contribution to the GDP,
there is a potential for increasing its contribution to em-ployment
to over 50 per cent over the next decade. It is
also vital for the informal MSMEs who are currently not
registered need to be made part of the formal MSMEs
ecosystem. Growth incentives in the form of privileges
Share of MSME in the Economy
There are approximately 46 million Micro, Small and
Medium Enterprise sector enterprises across various
industries, employing 106 million people. Overall, the
MSME sector accounts for 45 per cent of Indian indus-trial
output and 40 per cent of exports. While most of
the sector is un-organized (approximately 94 per cent),
informal and un-registered, initiatives to have more en-terprises
registered are well underway.
The contribution of the MSME sector to India’s GDP cur-rently
stands at ~8 per cent for 2011-12, and is growing
at a rate higher than the projected GDP growth rate.
The contribution of the MSME segment to GDP in some
of the global economies is in the 25 per cent to 60 per
cent range. MSME sector in India has the potential to
increase the share of contribution to GDP from current
8 per cent to about 15 per cent by the year 2020.
and direct benefits for the MSMEs will encourage reg-istration
and participation in the growth opportunity.
Typically, MSME sector can provide comparatively larg-er
employment opportunities at comparatively lower
capital cost especially in the rural and remote areas, by
becoming part of the industrial ecosystem and act as
ancillary units for large enterprises to support the sys-tem
in growth.

ECONOMY MATTERS 28
SECTOR IN FOCUS
India needs to create 10 to 15 million job opportunities
per year over the next decade to provide gainful em-ployment
to its population, as per an estimate by Plan-ning
Commission. Current MSME employment is at 28
per cent of the overall employment.
The MSME sector is one of the key drivers for India’s
transition from an agrarian to an industrialized econo-my.
It is also critical to see that adequate growth is met
across services, manufacturing and agriculture seg-ments
to ensure holistic and stable overall economic
growth. The current growth of MSME is non-uniform
and there exists a significant gap in growth of enter-prises
across services and manufacturing sectors. Steps
to lower this gap must be taken for a balanced growth
outlook.
Export Potential
The contribution of the services, manufacturing and
agricultural to the overall exports from India is fairly
skewed. While export of services led by IT and ITeS sec-tors
have grown significantly in the last decade, the con-tribution
from manufacturing output has been largely
stagnant. India’s share of services exports in world ex-ports
of services was 3.3 per cent in 2011 and has been
increasing faster than the share of Indian merchandise
exports in world exports. During 2012-13, Indian mer-chandise
exports showed a slight negative growth rate
of around 2 per cent as compared to a positive growth
of 21.9 per cent during the financial year 2011-12.
The share of MSMEs in India’s total exports was estimat-ed
to be around 40 per cent in 2011-12. While globaliza-tion
presented a number of challenges for the manufac-turing
MSMEs, it also opened up ample opportunities to
shore up the growth of the manufacturing sector. India
can seize the opportunities provided by the dynamics
of globalization which has resulted in a dramatic shift
of manufacturing to developing countries over the last
decade. India can significantly diversify its export port-folio,
both in terms of products and goods exported as
well as regional coverage.
Enabling Opportunity Frame-work
for MSMEs
The new wave Opportunity framework will have to con-sider
the following elements in a cohesive and synergis-tic
manner. At different stages of growth, enterprises
need support and assistance in various aspects. Oppor-tunity
framework should be designed based on maturi-ty
stage and scale of enterprise i.e. start-up, growth, de-veloping
and should encompass all aspects of support
for MSMEs. The framework can be built around five
growth enabling pillars, viz. infrastructure, regulatory,
funding, performance incentives and skill India. The var-ious
measures to be undertaken under these five broad
heads are summed up below:
(1). Infrastructure
1. Allocating 25 per cent of the land available at all In-dustrial
Corridors for MSMEs at different rate slabs
and acquiring models. This will help MSMEs to start
their business ventures at affordable rates in key in-dustrial
parks and clusters.
2. World class infrastructure at national, regional and

29
SECTOR IN FOCUS
industry specific clusters and business centres (on
the lines of “polyclinics”) for MSME in PPP model
comprising physical infra, knowledge infra (crea-tion
of tool rooms), e-platforms, B2B access and
technology and innovation support for MSME. Link-ing
all stakeholders in MSME eco system i.e. bank-ers,
large MNCs, global markets customers, equity
investors, skill development, research and develop-ments
institutes, trade associations etc. with clus-ters
and MSME participants in the region.
3. IT development and implementation in MSME
Clusters (similar to the Quality Development Clus-ter
Movement). Implement the Cloud technology
among MSME Clusters which can help MSMEs in
knowledge sharing and competitiveness develop-ment.
4. Clusters alongside infrastructure in 100 modern cit-ies/
township, rurban and rural areas and the invest-ments
in road, rail, air and water to provide greater
connectivity for MSME businesses.
5. Incubation cells and hubs within clusters in collabo-ration
with academia / regional institutions to pro-vide
MSMEs with mentoring and technology sup-port,
and shared R&D facilities.
(2). Regulatory
1. Single comprehensive MSME Law for India, appli-cable
in all states and territories and to all MSMEs;
including Labour Law, Factories Act, Land acquisi-tion
Act, etc. Single window approval allow entre-preneur
and his/her MSME(s) to register their busi-ness,
obtain required licenses, PAN etc. through a
single application for setting up business and easy
facilitation of IP registrations. Annual Filing and
Declaration to file taxes and other regulatory com-pliances,
licenses, etc. in order to reduce adminis-trative
time and effort in meeting compliances on
monthly, quarterly basis.
2. Financial regulation to support on matters of:
•Effective policy to deal with delayed payments
to MSME by large companies on a timely basis.
Mandatory 60 day dispute resolution mecha-nism
for SME comprising 30 day fact finding
window and 30 day clearance window.
•Exit policy for MSME sector (on the similar
lines of the Chapter 11 of the United States
Bankruptcy Code) which can help MSMEs to
exit the business without any personal finan-cial
loss, and entrepreneurs should be given a
second chance.
3. National procurement policy for public and private
enterprises for specified areas in each industry
sector and incentives for vendor development for
large companies and MSME clusters.
4. Export promotion schemes for MSMEs, need for
continuity, simplification, effective utilization and
assistance in processing of the benefits through
effective implementation of IT platforms thereby
increasing the ease of doing business.
5. Direct and indirect tax benefits by way of Zero Tax
for the first 5 years (Micro Enterprises); 10 per cent
Tax slab for 10 years (Small Enterprises); 15 per cent
Tax slab for 15 years (Medium Enterprises).
(3). Funding
1. Open environment and incentives for investments
by HNWI and funds into MSME business as well in-centivize
debt funding in MSME segment by reduc-tion
in direct tax rates on income / profits generated
by funding MSME segment. Incentives for incuba-tion
fund, early stage fund, and MNC sponsored
early stage incubation fund by tax exemptions for
capital gains from investments made. Permit 200 in-vestors
in a single company and Rs 20 to 50 crores
equity through non-regulated crowd funding. Upto
10 per cent of tax liability by HNWI in registered and
approved MSMEs to be considered as discharge of
tax liability. Government can initiate an Innovation
fund to support private funds for investing in in-novation
with 30 per cent funding sponsorship by
Government.
2. Incentivize the bank by making lending to MSME
more manageable and profitable for banks:
- Provide capital adequacy norms support
through recognition of MSME credit ratings
program for each sector; rationalise interest
rate and margin requirements for MSME who
adopt credit rating programme.

ECONOMY MATTERS 30
SECTOR IN FOCUS
- Increase the current limits under the CGTMSE
scheme to Rs. 4 crores.
- Effective monitoring framework of CGTMSE
Scheme schemes by NBFCs
(4). Performance Incentives
1. Develop framework for the utilization of Rs 10,000
crore worth MSME Development Fund and Rs 200
Crore fund for MSME Technology upgradation an-nounced
in the recent Union budget.
2. Create business facilitation centres with linkage
of all stakeholders i.e. Industry Associations, equity
funds, banks and financial institutions, MSME, etc
at regional and district level to facilitate access to
finance for MSMEs.
3. Direct tax exemption on export income and income
generated directly or indirectly from indigenization
and import substitution exemption for a period of
5 years. Direct tax exemptions for 5 to 10 years for
foreign company wanting to set shop in India with
a JV/collaboration with MSMEs.
4. Financial aid in the form of grants must be given to
‘Prototype / Proof of Concept’ which are validated
and purchased by sector large players for scaling
up and commercialization. One year exclusivity win-dow
to be given for on patent and innovation.
(5). Skill India
1. Approved courses at approved training centres to
receive direct incentives and grants.
2. 10 per cent of additional employment generated to
be incentivized by way of employment allowance
type deduction. Tax exemption or weighted tax de-ductions
for employing women and special catego-ries.
5 to 10 year tax exemption on income gener-ated
in business by setting up facilities in Rural and
Rurban areas.
3. Profit sharing with traditional industries and artisan
through MSME JVs to be incentivized through spe-cific
schemes.
4. National Industry Bodies to play a role of Mentors
in promoting Innovation and Entrepreneurship
through innovative programs like Business Men-toring
Services and Senior Expert advisory Services
which will help in providing the necessary guid-ance’s
for the entrepreneurs and MSMEs in getting
the necessary inputs from the Mentors who have
knowledge in managing similar situations.
5. Support and provide incentives for upgradation of
skill development Institutions.
Conclusion
In India, MSME are very large in numbers, diverse in type of business and spread across remote geographies of
the vast country. Many are informal and not registered with the formal MSME ecosystem. It will require significant
changes in philosophy and approach to be able to develop and deliver a new wave ecosystem which facilitates
their development and seizes the emerging domestic and global opportunities. At a minimum, any hurdles in doing
business are to be removed. This will help unleash a young and dynamic entrepreneurial talent in India who will be
willing to make self-entrepreneurship the first career choice and develop growth companies.
Seizing the emerging opportunities to develop a robust MSME sector as a strong backbone for a growing economy
will require efforts by the Government to bring the various stakeholders – Equity funds, banks and financial institu-tions,
industry sector majors and MNCs, regulators across various Ministries in Centre and State and trade associa-tions
and global economies having trade flows with India and others stakeholders together; and create a forward
looking framework and ecosystem. Further, speedy utilization of the Rs 10,000 crore fund for MSME and the Rs
200 crore fund for technology upgradation announced in the recent Union budget can provide excellent immedi-ate
impetus to the development of MSMEs.

31
FOCUS OF THE MONTH
Coal : Challenges and Way Forward
Mining in India is a major economic activity
which contributes significantly to the econo-my
of India. The GDP contribution of the min-ing
industry varies from 2.2 per cent to 2.5 per cent. Coal
with a proven reserve of 860 billion tonnes is mined the
most in the world. At the same time, the demand curve
for this sector is always on the rising side. The major rea-sons
are the soaring power demand in India and China,
the growing worldwide steel production, and lastly,
the increasingly stringent environment regulations. As
a prospering economy, India faces energy security as a
growing challenge and the coal production is expected
to grow at a fast pace.
However, the recent Supreme Court verdict cancel-ling
all but four coal blocks allocated since 1993 has
increased by manifolds the challenges faced by this
important sector. The ruling is likely to cause many far
reaching “consequences” for the Indian coal sector. To
negate the ill-effects of the cancellations of coal blocks,
the cabinet recently cleared an ordinance to facilitate
the allotment of coal mines to state-owned companies
that need the fuel, and also to private entities in busi-nesses
such as power, iron and steel, and cement for so-called
captive consumption. The latter will have to bid
for such mines through an e-auction. Through the ordi-nance,
the government also retained the right of allow-ing
mines to be allotted to private companies for min-ing
coal and selling to others. Apart from resolving the
crisis created by the cancellations, the ordinance also
paves the way for addressing the issue of coal short-age
that has affected several power and other plants.
It will also significantly reduce India’s coal import bill of
around US$20 billion a year.
Hence, the spotlight currently is clearly on coal sector.
In this month’s focus of the month, we invite experts
to voice their opinions on the many challenges faced by
the sector and the way forward.

Current Coal Situation and its Impact on
Power Sector
ECONOMY MATTERS 32
FOCUS OF THE MONTH
The power sector, for long, has been seeking the
much-needed reforms on fuel supply scenario
in the country. An analysis of the energy and
demand trends in India indicates that the energy mix
will remain heavily dependent on coal and imports of
crude oil. As on December 31, 1947, India’s per capita
electricity consumption was recorded to be 16.3 kWh1 ,
this figure as of March, 2013 was calculated to be 917.2
kWh2 indicating the mammoth increase in demand for
electricity in India in the past six plus decades. The de-mand
for electricity continues to grow as the country
aims to regain the 9 per cent growth rate – which can
only be sustained by a 12-13 per cent rate of growth of
the power sector.
Easing the regulatory framework and creating a smooth
liquidity flow in the sector has significantly improved
the condition of the power value chain. A developing
country like India with industrial growth at the crux of
our development - have a long way to go before we
consider ourselves to be energy sufficient. The biggest
roadblock is the acute shortage of fuels for power gen-eration.
This continues to be the primary challenge de-spite
the highest priority being given to development of
generation based on renewable energy sources under
the Low carbon growth strategy, the fuel mix of India’s
generation capacity is expected to remain roughly the
same in the coming years.
Domestic Coal - Issues & Concerns
Indian coal gives a comparatively poor natural fuel val-ue.
On an average, the Indian power plants consume
about 0.7 kg of coal to generate a kWh, as compared to
the United States, where the thermal power plants con-sume
about 0.45 kg of coal per kWh. This is attributed
to the variance in the quality of the coal, as measured
by the Gross Calorific Value (GCV). Indian coal approxi-mately
has a GCV of about 4500 Kcal/kg, which is lower
in comparison to other countries.
The stagnation of domestic coal production is also lead-ing
to India becoming increasingly dependent on coal
imports, which have recently experienced unprecedent-ed
rise in prices. To give a broad overview, in order to
bridge the gap between power demand and coal avail-ability,
power utilities’ imports of all types of coal during
the period (first half of 2014-15) stood at 110.15 million
tonnes (MT) as against 92.98 MT imported during the
corresponding period of 2013-14. This is an increase of
about 18.47 per cent in the first half of FY153.
Imported Coal – Issues & Concerns
Over the past four decades the international coal mar-ket
has been range bound and stable in terms of price
and availability. Internationally, coal commitments are
typically for short-term, less than 5 years for supply and
1 http://www.cea.nic.in/reports/planning/dmlf/growth.pdf
2 http://www.cea.nic.in/reports/monthly/executive_rep/aug14.pdf
3 http://articles.economictimes.indiatimes.com/2014-10-08/news/54784764_1_coal-imports-coal-minister-piyush-
goyal-less-than-four-days

33
FOCUS OF THE MONTH
less than 6 months for price. Suitable source for Indian
needs include countries like Indonesia, Australia, and
South Africa. However, in September 2010, the Indone-sian
government introduced a new regulation stipulat-ing
benchmarking coal prices. Consequently the prices
of coal from Indonesia have gone up an average of 130
– 150 per cent between 2007 and present 4. This change
in the market environment has created a volatile situa-tion.
Similarly, other countries exporting coal to India
have also amended domestic laws, impacting the price
of coal for Indian developers.
This unprecedented and unanticipated increase in im-ported
coal prices has made most imported coal based
power projects unviable at their contracted tariffs. The
projects awarded through competitive bidding have
been severely affected.
The problem that the Indian imported coal based pro-jects
are facing, is primarily on account of the sudden
shift in price levels of imported coal coupled with the
impact of unexpected ‘Change in Law’ in those foreign
countries from where coal is being imported. Since the
change in law, causing increase in the coal prices have
been effected in some of these foreign countries, the
provision for ‘Change-in-Law’ in the PPA does not pro-tect
the Indian power developers from this eventuality.
This has exposed the vulnerability of the power projects
dependent on imported coal due to legal/regulatory
changes in coal exporting, which are beyond the con-trol
of coal producers.
It is estimated that over 50,000 MW capacity power
plants have been impacted- in one way or the other-by
these volatilities in the coal market.
Recommended Way Forward
Fuel price pooling provides a possible solution, which
will enable the import of the fuels for the interim period
to boost this impacted capacity and allow the cost of
import to be shared equally by all the generation capaci-ty,
by pooling it with our domestic fuels. It is critical that
we take pooling as a short-term solution only.
There is need for reforms in the coal mining sector to
attract private investment that can support increased
domestic coal production.
The need of the hour is to evolve a long-term nation-al
energy security policy. At this time all the different
states/UTs of India plan for their power requirement in-dependently
as it is a state subject. There is a need for a
central body to assess the need of each of these states
and then plan for them, their fuel sourcing-from a bas-ket
of different fuels alongside their power production.
Under the policy, the central government must con-sider
mediating to resolve issues related to the pending
fuel supply agreements for long-term fuel linkages both
in India and overseas. The policy must take into account
that resources are a subject that many countries like to
deal on a government-to-government (G-to-G) basis.
An example is the growing engagement between Chi-na
and Latin America. These engagements were in the
form of loan provided by the China Development Bank
to Venezuela, Brazil, Argentina and Equador in return
for oil supply5. Like the other progressive nations, the
Indian government must, also, become more proactive
in engaging with the countries on a G-to-G basic to se-cure
access to scarce resources.
There is also a need to establish an appropriate mecha-nism
to offset in tariff the adverse impact of the unfore-seen,
uncontrollable and unprecedented escalation in
the imported fuel price due to market fluctuations. In
addition, it is imperative to make the domestic coal in-dustry
more competitive and introduce policy and regu-latory
reforms to enable increase in coal production in
the country.
4 http://www.financialexpress.com/story-print/1153460
5 Chinese Engagement in Latin America and the Caribbean: Implications for US Foreign Policy: American University, School of Internationa
Service

ECONOMY MATTERS 34
FOCUS OF THE MONTH
I have had a flurry of calls (anguished monologues in
most cases) and noticed copious Facebook posts from
fund manager friends from abroad expressing their
concern over the Supreme Court’s cancellation of coal-block
allocations. I suspect that much of what they are
saying is merely repetition of what editorials and op-ed
columns have already said. However, I thought it might
be a good idea to give readers a flavour of how the
world outside (albeit based on a remarkably small sam-ple)
views this.
One of the problems is that the verdict comes at the
beginning of what is likely to be a prolonged phase of
uncertainty for financial markets, the upgrade in India’s
ratings outlook by Standard & Poor’s notwithstanding.
Thus, the sell-off in the stock markets on Thursday, after
Wednesday’s verdict, merely built on the negative sen-timent
that things like the uncertainty over when the
United States Federal Reserve will hike rates has trig-gered.
There is also a growing sense that, despite the
government’s best efforts, the economy will take time
to heal. This is driving a rotation of funds away from cy-clical
stocks to defensives, such as consumer staples,
and these rotations are typically a period of consolida-tion
for the headline market indices. Thus, the untram-meled
upward momentum in the markets could have
been broken. The markets await the decision on natural
gas prices, and any hiccup there could provide negative
reinforcement.
It might be useful to put together a list of complaints or
concerns that centre around the verdict. To start with,
the court’s decision has brought back distinctly unpleas-ant
memories of both the retrospective taxation (and
the announcement of the General Anti-Avoidance Rules
in the February 2012 Budget) and the cancellation of 2G
licences. The problem, as with the 2G verdict, is the busi-ness
of “retrospective action” - trying to change the
past instead of trying to do better in the future. Some
have noted the curious irony of the highest court in the
land seeming to violate the very sanctity of the contract
between the executive and the firm, a contract that
they believe should have been carved in stone.
Minority shareholders of the miners feel particularly
peeved, as they were not part of the negotiation be-tween
the management of the de-allocated miners
and the government. No amount of due diligence, they
claim, would have alerted them to these regulatory
risks. There are two implications of this. There could be
a general aversion to sectors where there is even the
mildest whiff of regulatory or policy uncertainty. Sec-ond,
the repercussions are unlikely to be confined to
portfolio investments alone. An increase in political risk
premium will get built into direct investments as well.
For a country that finds itself close to the bottom of the
pile when it comes to the ease of doing business, this is
unlikely to augur well.
While “retrospective action” is a general point of con-cern,
there are more nuanced issues as well. Fund man-agers
are hardly legal experts, but one point they all
seem to be united on is the fact that the judiciary should
pass judgment on the impropriety or malfeasance of in-dividuals,
groups of individuals, or companies, and not
on a process or a policy. One implication of indicting the
policy as a whole is that it tars all players (in this case the
mine licensees) with the same brush. Thus, a somewhat
Too Big to De-Allocate?

35
FOCUS OF THE MONTH
extreme way to view this judgment is that it depicts all
companies that wanted to mine coal as part of a cabal
that worked with corrupt bureaucrats to perpetrate
one of the biggest land grabs in India’s history. This is
patently unfair to bona fide miners who thought they
were entering a legitimate business. Not only do they
lose their licences, they need to pay the government for
their efforts.
While accepting that the system was rotten and had
pushed the limits of forbearance, some contributors
to the “debate” claim that judgments that have major
implications for the economy should invoke a princi-ple
similar to the “too big to fail” argument applied to
troubled financial institutions. Clearly, there are ethical
issues in bailing out large banks when they face the pos-sibility
of comeuppance for irresponsible risk-taking ac-companied
by the moral hazard of encouraging similar
behaviour in the future by appearing to condone their
action. Yet they are bailed out keeping in mind the sys-tem-
wide repercussions. In the coal-mine case, a com-promise
that draws on this principle would have been
to exempt the 46 operational coal blocks and the six
that are likely to come on stream. There should be very
little doubt that the judgment will indeed cause signifi-cant
disruption in the economy. I find stakeholders in
the coal economy, such as the banks (who could see a
bulge in non-performing loans), putting on too brave a
face on the consequences of this at least in the public
domain. Instead, we could have done with a clearer pic-ture
of what the damage will be.
This action comes at a time when little regulatory nig-gles
abound. The Uber case (that involves a taxi compa-ny
and the Reserve Bank of India), however insignificant
in the larger scheme of things, seems to have attracted
a fair bit of attention as an example of regulation that is
both anti-competitive and chooses to go strictly by the
book rather than consider consumer interest. There is a
face-off between the department of telecom and telcos
on intra-circle roaming, a facility that was built explicitly
into the licensing agreement. The debate on whether a
“strictly by the book” approach to laws and regulations
or whether more “sensitive” and flexible interpreta-tion
is needed for our state and economy needs to be
resolved urgently.
This article appeared in Business Standard dated 28th September 2014. We thank Business Standard for allowing us to reprint the article. The
online version can be accessed from the following link: http://www.business-standard.com/article/opinion/abheek-barua-too-big-to-de-allo-cate-
114092900006_1.html

Coal Mining Ordinance: Turning Crisis into an
Opportunity
ECONOMY MATTERS 36
FOCUS OF THE MONTH
Within two days of the Union Cabinet decid-ing
to bring in an ordinance to handle the
situation arising out of the Supreme Court
order annulling captive mine allocations, the Coal Mines
(Special Provisions) Ordinance was promulgated. While
the ordinance was needed for transferring assets and
liabilities of the prior allottees, what it will also do is in-troduce
competition into the coal mining sector by do-ing
away with the requirement of end-use projects.
Now, coal can be mined for commercial use and sold for
profit. Once 130 of the mines listed in the first schedule
are allotted to companies not into power, cement, steel
or any other notified uses, coal will be freely available in
the market. India doesn’t have companies that simply
mine and sell. But with this move, there is a likelihood
of such companies coming up.
As there is no restriction on foreign investment into the
coal sector, companies such as BHP Billiton and Rio Tin-to
can easily bid through their Indian subsidiaries.
In the first schedule of the ordinance, there are 204
mines, whose allocations were cancelled by the Su-preme
Court; the coal-bearing land acquired by previous
allottees of these mines; and the mining infrastructure.
The second schedule comprises those 42 mines men-tioned
in the first that are operational and for which
the apex court has allowed a six-month grace period.
The third schedule has the 32 mines that are in various
stages of development. The government is empowered
to include more mines to this list.
The Supreme Court’s September 24 order had de-allocated
captive mines given to private companies
through two decades. “The (government) approach
has been ad-hoc and casual,” said the order. The reason
for such a scathing observation was there weren’t any
set criteria for allocation of mines. Since mining deals
with natural resources held by the government in pub-lic
trust, discretion in allocation to private companies is
viewed with suspicion. State government companies
that were given mining rights under the government’s
dispensation route also faced de-allocation, as they
gave mines to private companies for commercial min-ing,
not allowed under the law earlier.

BACK TO COMMERCIAL MINING AFTER 42 YEARS
The Coal Mines (Special) Provisions Ordinance, promulgated on October 21, classifies mines into three schedules. It
also changed the Coal Mines Nationalisation and Mines and Minerals (Development and Regulation) Acts to permit
commercial mining
Nationalisation: How it happened
• Coking coal mines were nationalised in 1972, followed by nationalisation of non-coking coal mine in 1973. The
Coal Mines Nationalisation (CMN) Act, enacted in 1976, terminated leases of private holders except those of
iron and steel producers for their captive use
37
FOCUS OF THE MONTH
Captive mining
• In July 1992, a screening committee under the chairmanship of the coal secretary was set up to consider appli-cations
for captive mining. A total of 143 coal blocks of Coal India and Singareni Collieries, for which production
plans weren’t in place, were offered. The Act was amended in June 1993 to include power as end use. In March
1996, cement and in July 2007, coal gasification and liquefaction too were notified as specified end uses
• Captive mining was opened up to 100 per cent FDI under the automatic route in Feb 2006.
Past attempts to permit commercial mining
• The Cabinet approved changes to the CMN Act in Feb 1997 but the Bill remained pending, after being intro-duced
in the Rajya Sabha in April 2000
Competitive bidding
• The Mines and Minerals (Development and Regulation) Act was amended in Sept 2010 to make competitive
bidding applicable to all minerals. In Feb 2012, the UPA govt notified auctioning of coal mines
De-allocation of captive mines
• On Aug 25, 2014, the Supreme Court held all coal block allocations as illegal. Leases of 204 mines cancelled on
Sept 24
By ordering the takeover of mines and the land at-tached
to those, the Supreme Court order has, in many
ways, given a taste of nationalisation to the sector, the
second time, after the Indira Gandhi government had
nationalised it in the 70s. But by allowing commercial
mining and saying auctioning of coal mines will happen
according to the three schedules, the government has
tried to calm investor’ nerves. Though there are doubts
on what kind of response auctioning of coal mines,
introduced by the United Progressive Alliance govern-ment
last year, will get, the National Democratic Alliance
government has successfully managed to turn a crisis
into an opportunity by permitting commercial mining.
This article appeared in Business Standard dated 26th October 2014. We thank Business Standard for allowing us to reprint the article. The online
version can be accessed from the following link: http://www.business-standard.com/article/opinion/coal-mining-ordinance-turning-crisis-into-an-opportunity-
114102600650_1.html

GLOBAL GROWTH SLOWDOWN

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