Public Affairs Round-up - MSLGROUP India


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The first issue of MSLGROUP India's public affairs newsletter, Public Affairs Round-up. In the cover story, Bipul Kiran Singh talks about the prospects of the Indian economy. KPMG's

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Public Affairs Round-up - MSLGROUP India

  2. 2. 2The Indian economy:Performance and prospectssubsidies were rationalised earlier through a nutrient-basedscheme, last year the government boldly capped the numberof subsidised cooking gas cylinders, decontrolled petrolprices and announced that diesel prices would be graduallyrationalised too. The decision was significant because thepetroleum subsidy alone had grown from 0.5% of GDP in 2010-11 to 1% in 2012-13.These measures will help reduce demand for oil. Given India’slarge oil import bill, it will positively impact the worrisomecurrent account deficit. The government has also taken severalmeasures to moderate gold demand, including higher importduties.The Direct Benefit Transfer scheme to transfer subsidies directlyto beneficiaries’ bank accounts using the Aadhaar platform willhelp check leakages and better target subsidies. More than 300million residents were enrolled for the Aadhaar card till Marchand an additional 300 million are expected to be enrolled overthe next 18 months.These figures and the political faceoff delaying reforms haveled to a downswing in investor sentiment. While there is verylittle it could do about the global economic situation that ispartly responsible for lower growth, the government has beenfocused on addressing domestic causes to the best of itsability, given the pulls and pressures of democracy.India negotiated the 2008 global economiccrisis well, and the financial and monetarystimulus led to strong growth in 2009-10 and2010-11. However, the boost to consumption,coupled with supply-side constraints, led tohigher inflation. Consequently, monetarypolicy was tightened, even as supply-sideissues remained unaddressed and externalheadwinds increased. The consequentslowdown, especially in 2012-13, left nosector unaffected. Corporate performanceduring the latter half of 2012-13 indicatedthat growth of sales as well as profitsdecelerated significantly1.The government has been making concerted efforts to addressthe issues shackling growth. Subsidies, a politically sensitiveissue, are not only being reigned in, an effort is being madeto make them more focused so that fiscal consolidation doesnot adversely impact deserving beneficiaries. While fertiliserIndia’s economy continues to face many challenges, growth being the biggest. Growthtouched 5% for 2012-13, the lowest in a decade, but that is not the only worry. Thecurrent account deficit continues to be at unsustainable levels of over 6% of GDP andthe combined fiscal deficit of the Centre and states hovers around a worrisome 10%.Bipul Kiran Singh, public affairs and strategic communications adviser.He also consults with MSL India1Reserve Bank of India. May 2013. Monetary Policy Statement 2013-14.
  3. 3. 3Stalled investments continued to increase in 2012 becauseof bottlenecks, including onerous environment and forestregulations, inadequate availability and high prices of coaland gas, and land acquisition problems. The CCI has made adifference. It has already cleared investments worth $27 billionand streamlined the process of granting environment andforest clearances for mega projects.Independent regulatory authorities for roads and coal, and forrail tariff setting, have been announced.However, there may be no quick answers to land acquisitionissues as the Land Acquisition, Rehabilitation and ResettlementBill is stuck in Parliament for the last two years. When approved,while likely to make land acquisition more expensive, it maymake it fairer to those whose land would be acquired. It wouldalso bring greater clarity and reduce uncertainty, thereby aidinginvestments.After dithering for some months, India has liberalised theforeign direct investment (FDI) regime in areas like multi- andsingle-brand retail, and civil aviation. The finance minister hasset up a committee to remove the ambiguity in the definitionFDI and foreign institutional investment.Wholesale Price Index inflation has been falling in recentmonths with an average of 7.3% in 2012-13, down from 8.9%the year before. However, food inflation, after a brief slowdown,continues to be higher than overall inflation. Given the higherweightage for food in the Consumer Price Index (CPI), CPIinflation remains close to double digits, averaging 10.2% in2012-13.While inflation does not seem to be the biggest concernnow, there are pressures that could stoke it again. Inflationaryexpectations remain elevated; suppressed inflationarypressures from diesel price deregulation, electricity rate hikes,coal price pooling, and reduced cooking gas subsidies may getexplicitly manifested. Finally, any demand recovery over 2013-14 could start pushing up core inflation.Another consequence of the slowdown has been lower-than-targeted tax and non-tax revenues. While the governmentwas able to achieve the revised estimate of 5.2% of GDP forthe fiscal deficit in 2012-13 from 5.7% a year earlier throughcurbing expenditure as well as increasing revenues, the keyrisk to the 4.8% target for 2013-14 are lower-than-budgetedrevenues from disinvestment and telecom spectrum salesand spending on the food bill.India has the potential to accelerate growth. Despite theslowdown, India is likely to remain one of the faster-growingnations2. Among large countries, only China and Indonesiagrew faster in 2012-13. In 2013-14, only China is projectedto grow faster. But the fractured nature of Indian polity,not expected to change even after the next parliamentaryelections, will make the reform process laborious. India’sclimb back to higher growth will be gradual.The government is focusing also on revivinginvestments. To fast-track projects and address supply-side constraints, the Cabinet Committee on Investment(CCI) was set up in January. Headed by the primeminister and mandated to fast-track mega projectsworth more than Rs 1,000 crore ($200 million), itsfunctions include prescribing deadlines for the issue ofrequired approvals by ministries and taking decisionson unduly-delayed projects.The measures taken since July 2012 when PChidambaram took over as finance minister havenot only arrested the declining sentiment, but alsoimproved the situation. But much remains to be doneto steer India back to its 8%-9% growth rate.Reflecting this assessment, India’s central bank, theReserve Bank of India, in its Mid-Quarter MonetaryPolicy Review, cautiously reduced the repo rate by25 basis points to 7.5% (and further to 7.25% in theMonetary Policy Review in May) while keeping thecash reserve ratio unchanged at 4%.2World Bank. April 2013. India Development Update
  4. 4. 4AirAsia is expected to face challenges in executing its low-costbase model in an environment characterised by high fuel prices,high airport charges and a conservative regulatory framework.Some of this may affect AirAsia’s key differentiators, like highaircraft utilisation, low costs and strong ancillary revenues.The carrier has also leant from its experience as a foreignairline operating in India. It discontinued its long-haul low-costflights from Delhi, Mumbai and Hyderabad, presumably dueto high airport charges.AirAsia India is expected to face teething troubles as it flies toIndia’s interiors, but is expected to emerge as one of the topthree airlines in India in three to four years.The airlines innovative business model, track record and tie-ups with strong local partners make it a formidable player. Weare likely to witness a gory fight for supremacy in the Indianskies in the next 12 months.May the best airline win!(The views expressed are personal)Apart from bringing foreign capital to Indian carriers, the reformwas expected to give rise to one or two start-ups – betweena global airline and Indian partners. The first start-up off theblocks was a joint venture between AirAsia, the Tatas andTelestra Tradeplace. They recently received approval from theForeign Investment Promotion Board (FIPB) and have appliedto Ministry of Civil Aviation (MoCA) for a no-objection certificate.AirAsiaentersthetroubledIndianaviationmarketasahighlysuccessfulairlinewithstrongIndianpartners.Thecompanyplanstostartsmallandthengrow. Theirlow-costmodelisbuiltaroundhighfocusonoperationalexcellence,singleaircraftconfiguration,highutilisationrate(morethan12hrsofflyingperday),quickturnaroundofaircraft,aggressivepricingandafocusontiers2and3airportswherechargesarelow.TheirselectionofChennaiastheoperationalbaseseemslogicalsincemostofAirAsia’scurrentflightstoMalaysiaandThailandfocusontrafficfromSouthIndia.The choice of the Tata Group as a partner is interesting. Allairlines need tie-ups with companies providing catering, IT,cars, buses, low-priced and premium hotels, a nationwidedistribution network, engineering services, etc. If there’s onegroup providing all this under one roof, it’s the Tatas.Thoughcompetitionisfierce,thecountry’spotentialpassengerbaseofmorethan300millionmiddle-classpeopleislargelyuntapped.Lastyear,barely58millionpassengersflewondomesticroutes.Thispresentsasignificantgrowthpotential.India’sgrowingeconomy,largemiddle-class,lowairtravelpenetrationandgrowing‘valueoftime’wouldbethekeygrowthdrivers.AirAsia understands this. The airline recently stated that itwould rather work on opening new markets where there is noconnectivity in order to increase its market share. The carriercategorically said that it would avoid Delhi and Mumbai,presumably to avoid the high airport charges.The arrival of AirAsia is expected to shake up the domesticmarket, starting from South India. The airline is renowned forits strategy of offering low-priced tickets to stimulate demand.This is likely to lead to a price war and an increase in trafficvolumes but with lower yields per seat-km. The bet will surviveand we may see some mergers and acquisitions in the next 24months. The consumer is expected to benefit hugely from theincreased competition. I hope that we don’t go back to the erawhen market share was more important than profitability.Amber Dubey, partner and head (aviation), KPMG in India, with assistance from KunalSinha, senior consultant, KPMG in IndiaAirAsia’s India forayIn a landmark decision in September 2012, the Government of India decided to allowforeign airlines to invest up to 49% in Indian carriers. All along, the industry’s demandhad been for around 26% of foreign direct investment (FDI) by foreign airlines. Thedecision was a pleasant surprise.
  5. 5. 5Policy UpdatesTrade pact with Australia soon?India and Australia are exploring the possibility of a freetrade agreement or a comprehensive economic cooperationagreement covering goods, services, investments and relatedmatters. Discussions were held in the working groups ongoods, investment, services, legal and institutional matter,sanitary and phyto-sanitary, technical barriers to trade,customs procedures and trade facilitation. The negotiationsare under way and no timeframe has been fixed for thesigning of the agreement.PDS computerisation on fast trackComputerisation of the Targeted Public Distribution Systemis being implemented as a Mission Mode Project under theNational e-Governance Plan by the Central Government.It has been taken up to ensure correct identification ofbeneficiaries, distribution of commodities to the deserving,elimination of bogus or duplicate ration cards, etc. Itwould also enable timely availability of foodgrains at FairPrice Shops, check leakages and diversion of foodgrains,and introduce transparency and public accountabilityin implementation. The government has initiatedimplementation of Component-I of the scheme for end-to-end computerisation of operations: digitisation of rationcards and other databases, computerisation of the supply-chain management, setting up of a transparency portal and agrievance redressal mechanism.Quality seed supply to farmersFor ensuring supply of quality seeds to farmers, theDepartment of Agriculture and Cooperation is implementingthe Development and Strengthening of InfrastructureFacilities for Production and Distribution of Quality SeedsScheme, under which assistance is provided for strengtheningand modernising seed infrastructure, upgrading the qualityof farm-saved seeds, production and distribution of qualityseeds, establishing ‘seed banks’ for ensuring availability incontingent situations, and establishing and strengtheningquality-control infrastructure.30,000 MW capacity targetThe Ministry of New and Renewable Energy is targeting acapacity addition of 30,000 MW during the 12th Plan period(2012-17) from various renewable energy programmes suchas wind, small hydro, biomass and solar across India. Thegovernment has formulated an Integrated Energy Policy (IEP)covering all sources of energy, including renewable sources.The IEP document gives a roadmap to develop energy supplyoptions and increase exploitation of renewable energy sources.Flexible use of airspace okayedThe Cabinet Committee on Security cleared Flexible Useof Airspace (FUA) by civil and military users, a matter thathad been unresolved for years. The primary objective is toenhance airspace capacity, minimise delays, fuel conservation,emission reduction and consumer benefit. Implementation ofFUA through efficient civilian-military coordination is essentialto foster traffic growth. FUA permits both military and civilianusers to efficiently utilise the airspace on a sharing basis togain optimum usage, thereby enhancing capacity and makingoperations more efficient.New drug price control process startedTo implement the provisions of the National PharmaceuticalPricing Policy, 2012, the process of finalising a new Drug (PriceControl) Order has begun. The National PharmaceuticalPricing Authority is the implementing authority of the existingDrug (Price Control) Order.Telecom funding may get a leg upThe 12th Five Year Plan (2012-2017) has recommended thatthe Telecom Finance Corporation be created as a vehiclefor the sector to access funds at competitive rates. It wouldprovide long- and short-term loans to telecom infrastructurefirms, service providers, equipment manufacturers, internetservice providers, etc.
  6. 6. 6Primarily, there are three elements intended tobe controlled: Anti-competitive agreements Abuse of dominant position Regulation of combinations likely to have an adverse effect on competition.On December 10, 2012, the government introduced theCompetition (Amendment) Bill in Parliament. The Bill aimsto modify certain provisions of the Act, as well as insert somenew provisions, to meet the evolving needs of industry. TheBill still has to be debated and passed by both houses ofParliament before it becomes law.The substantive amendments proposed to theAct: Section 3 (4) states that if vertical agreements causeor are likely to cause any appreciable adverse effecton competition, they shall be deemed void. While thisprovision makes reference to provision of services, theillustrations mentioned therein only refer to “sale ofgoods” and not to services. The Bill now aims to includereference to “provision of services” in the explanation. The Bill proposes to replace Section 4(1) with “noenterprise or group, jointly or singly, shall abuse itsdominant position”. The objective is to include enterprisesor groups, related or unrelated, whether or not within thesame management, to fall within the ambit of Section 4.In a significant judgment, the CCI imposed a penalty of $114 million on DLF Ltd in the Belaire Owner’s Associationvs DLF Ltd and Others case. One ground was that DLFallegedly abused its dominant position in the market byimposing unfair conditions in its builder contracts. Otherreal estate enterprises accused of indulging in similarpractices were not reprimanded since they did not singlystand out as ‘dominant’ in the market. With the proposedamendment, if all (or at least more than one) real estatecompanies indulge in similar practices, they couldcollectively be held in contravention of the Act. The Bill proposes to modify Section 2(y) to include value of sale of goods or services, excluding taxes levied. Section 5 (b)(i) defines a group wherein two or more enterpriseswhich,directlyorindirectly,areinapositionto exercise26%ormoreofthevotingrightsinother enterprises. This threshold was increased from 26% to 50% on March 2, 2011. Now, the Bill aims to bring the Act in sync with the notification and revises the definition of ‘group’ to include “two or more enterprises which, directly or indirectly, are in a position to exercise 50% or more of the voting rights in the other enterprise”. Also, 50:50 joint ventures continue to fall within its scope.Sources:, RoadmapCompetition (Amendment) BillAfter attaining independence, India adoptedpolicies comprising ‘command-and-control’laws and regulations.The Monopoly and Restrictive Trade Practices Act was passedin 1969, replaced by the Competition Act, 2002, governed bythe Competition Commission of India (CCI). The CompetitionAct was replaced by the Competition (Amendment) Act, 2007,and again by the Competition (Amendment) Act, 2009. TheAct deals with the establishment, powers and functions aswell as the CCI’s adjudicatory functions.
  7. 7. 7Rs 28,400 croreFunds managed by the National Pension Scheme as of March2, 2013. It has 44.93 lakh subscribers. The government iseasing withdrawal norms and providing tax incentives to makeit more attractive for small savers24%The stake sold by Jet Airways to Etihad for Rs 2,046 crore$24 billionValue of manufacturing projects stalled due to lack ofclearances$500 millionCollective value of five deals struck this year in the renewableenergy sector, led by wind energy12%Rate at which the Indian IT services market is expected togrow, according to Gartner, in 2013. It is expected to touch$10.2 billion (Rs 55,590 crore)Number View$1.2 billionValue of shares sold by India-dedicated funds and exchangetraded funds during the March quarter of 2013$11 billionAmount infused by foreign institutional investors in the equitymarket in the first four months of this year$814.3 billionWhat global sales of connected devices like smartphones,tablets and PCs are expected to touch, according to IDC. Salesare expected to surpass 2.2 billion units6.1%World Bank’s scaled-down growth forecast for India, from 7%projected six months ago for the current fiscal51.0HSBC Manufacturing Purchasing Managers’ Index for April2013, down from 52.0 in March 2013. It is at its lowest sinceNovember 2011
  8. 8. 8Public Affairs Round-upMSLGROUP INDIAFor more information onwhat MSLGROUP INDIA PAR hasto offer to your company,please contact our Asia Practice LeaderJaideep