The Union Budget 2018-19 had some excellent measures to ease the lives of the common people with emphasis on the farm sector, education, healthcare and social protection. A pick up in agricultural growth together with adequate price realisation by farmers is required for rural livelihoods to stabilise. Small and medium enterprises received a boost through tax measures as well as access to credit. The introduction of fixed term employment has been a long pending demand from industry. In a difficult year, the Finance Minister has done well to contain the fiscal deficit at 3.5 per cent of GDP, a deviation of 0.3 per cent from the Budget estimate. The plan to move towards fiscal consolidation in the coming year would maintain macro stability and enhance investor confidence.

2. 2ECONOMY MATTERS

3. 1
FOREWORD
JANUARY 2018
T
he Union Budget 2018-19 had some excellent measures to ease the lives of the common peo-
ple with emphasis on the farm sector, education, healthcare and social protection. A pick up
in agricultural growth together with adequate price realisation by farmers is required for rural
livelihoods to stabilise. Small and medium enterprises received a boost through tax measures as well
as access to credit. The introduction of fixed term employment has been a long pending demand from
industry. In a difficult year, the Finance Minister has done well to contain the fiscal deficit at 3.5 per cent
of GDP, a deviation of 0.3 per cent from the Budget estimate. The plan to move towards fiscal consolida-
tion in the coming year would maintain macro stability and enhance investor confidence.
The Budget aims to mitigate agrarian distress and a directional change is seen in the Finance Minister’s
statement that agriculture is being considered as an enterprise. Hence, 22,000 rural markets will be
strengthened as Gramin Agricultural Markets with physical infrastructure and digital technologies, to
be exempted from the APMC Act. This will eliminate bottlenecks in linking farmers to markets. Farmer
incomes will also be supported by the increase in the minimum support price to 1.5 times of cost of cul-
tivation. In another innovative move, the Budget introduced the National Health Protection Scheme to
provide benefits to 500 million people with an annual limit of Rs 5 lakhs for hospitalisation. Considering
that out-of-pocket expenses cause many households to slip back into poverty, this will impart a huge
measure of security to lower income families. It is indeed commendable that this is envisaged as the
‘largest government funded healthcare programme in the world.’
Further, the introduction of long term capital gains exceeding Rs 1 lakh at the rate of 10 per cent with-
out allowing the benefit of any indexation may have impacted the market sentiments in the short run;
however, the revenue realisation would contribute to Government resources. Customs Duty on certain
products, such as mobile phones and televisions, has been increased to provide a fillip to the ‘Make in
India’ initiative. The timeline has been fixed for adjudication of cases by the departmental adjudicative
authority.
Many of the measures in the Budget are in line with CII recommendations such as market linkages for
the rural economy, incentives for new jobs, enhancing quality of education including teacher training
and addressing healthcare access. Overall, this is a balanced and prudent Budget that sets the founda-
tion for future growth in the economy.
Chandrajit Banerjee
Director General, CII

5. 3 JANUARY 2018

6. EXECUTIVE SUMMARY
ECONOMY MATTERS 4
FOCUS OF THE MONTH
Union Budget 2018-19, which was presented by the Honor-
able Finance Minister Shri Arun Jaitley on the floor of the
Lok Sabha on 1st
February, 2018 addressed the major pain
points of the economy at the current juncture and would go
a long way towards facilitating the path of 8+ per cent GDP
growth rate. It took forward the landmark reform measures
of GST, Insolvency and Bankruptcy Code, bank recapitaliza-
tion and so on taken by the Government through the last
three years. As in previous Budgets, the Finance Minister in-
troduced some innovative steps which will add comfort to
citizens and strengthen key growth drivers. The support to
MSME sector through lowering of corporate tax rate to 25
per cent, increase in access to finance, and addressing non-
performing assets would help alleviate the stress in the sec-
tor. On the fiscal front, the Finance Minister has done well to
contain the fiscal deficit at 3.5 per cent of GDP, a deviation
of 0.3 per cent from the Budget estimate. The plan to move
towards fiscal consolidation in the coming year would main-
tain macro stability and enhance investor confidence. This
month’s Focus of the Month, carries insights from important
office bearers of CII on the Budget.
DOMESTIC TRENDS
Industrial output growth moderated to 7.1 per cent in De-
cember 2017 from an upwardly revised 8.8 per cent in the
previous month, nonetheless clocking an impressive growth
rate. With this data print, the cumulative growth for the
three quarters of FY18 (April-December) stood at 3.6 per
cent as compared to 5.2 per cent in the same period last
year. Going forward, we could see an uptick in growth owing
to a host of measures announced by the government in the
Union Budget 2018-19 and the recent pruning of the number
of items in the highest GST bracket. Additionally, a favour-
able base effect, related to the temporary slowing in activ-
ity last year after demonetisation, is likely to boost volume
growth in a variety of sectors in the remainder months of
2017-18. Meanwhile, on the inflation front, both CPI and WPI
inflation softened in January 2018, cushioned by moderating
food prices. However, upside risks to inflation have also in-
creased in the form of uncertainty surrounding the higher
MSPs announced in the Budget FY19, HRA allowances and
pick-up in global commodity prices amongst others. This led
to the RBI maintaining a status-quo on its policy rates in its
meeting held in the first week of February 2018. However,
CII hopes that going forward, the RBI would turn to a more
accommodative stance to facilitate growth especially at a
time when our country is witnessing early stirrings of eco-
nomic revival and the need is to nurture the recovery rather
than supress it.
POLICY FOCUS
This section covers the major policy changes announced by
government/RBI in the month of January-February 2018.
Amongst the prominent policy news announced during the
month,theFinanceMinisterArunJaitleyannouncedtwonew
initiatives under the Ayushman Bharat Programme in the
Union Budget FY19. Under the programme, a new flagship
National Health Protection Scheme has been announced,
providing a health insurance cover of Rs 5 lakh a family per
annum. Budget FY19 has also reduced the corporate tax rate
for companies with an annual turnover of up to Rs 250 crore
to 25 per cent. This move is expected to benefit the Micro,
Small and Medium Enterprises (MSMEs). Further, the Goods
and Services Tax Council on 18th
January, 2018 decided to cut
tax rates on 29 products and 54 services and agreed to make
the process of filing tax returns simpler. In an encouraging
move, the Department of Industrial Policy and Promotion
(DIPP) has notified relaxation of Foreign Direct Investment
(FDI) norms in several sectors, including single brand retail,
non-banking financial companies and construction. In a long
overdue move, the Reserve Bank of India (RBI) has decid-
ed to link the base rate for loans with the Marginal Cost of
Funds-based Lending Rate (MCLR) from 1st
April, 2018 to im-
prove monetary policy transmission. The Central Bank has
also withdrawn all its existing mechanisms for tackling bad
debt at Indian banks and replaced them with a harmonised
and simplified generic framework for resolving stressed as-
sets. It has also decided to remove the currently applicable
loan limits of Rs 50 million and Rs 100 million per borrower to
MSMEs respectively, for classification under priority sector.
GLOBAL NEWS
In the year 2017, China witnessed a real GDP growth to the
tune of 6.9 per cent, a sustainable increase over a GDP
growth of 6.7 per cent in 2016, when the country was fac-
ing several structural issues. This growth rate achieved by
China has certainly exceeded the expectations. Going for-
ward, the structural reforms in the direction of sustainable
development are anticipated to continue, taking China to
a more sustainable growth range of around 6.2 per cent to
6.6 per cent in the near term as per the projections by the
World Bank and the IMF. According to the latest update of
World Economic Outlook for 2018 released by the Interna-
tional Monetary Fund (IMF), global growth is expected to
strengthen in 2018 and 2019 relative to the 2017 growth lev-
els. The uptick reflects increased global growth momentum
and the expected impact of the recently approved US tax
policy changes. However, the risks to the global growth
forecast appear broadly balanced in the near term, but re-
main skewed to the downside over the medium term, IMF
highlighted in its update. India is forecasted to grow by 7.4
per cent in FY19 against 6.7 per cent in FY18 and gaining fur-
ther pace to 7.8 per cent in FY20. This would make the coun-
try the world’s fastest-growing economy in 2018 and 2019
following last year’s slowdown due to demonetisation and
the implementation of GST.

7. 5
FOCUS OF THE MONTH
UNION BUDGET: 2018-19
JANUARY 2018
tress the government’s commitment to the reforms
agenda to facilitate growth with social justice.
It is gratifying to note that the Budget numbers show
only a marginal expansion in the fiscal deficit to 3.5 per
cent of GDP in 2017-18 (RE) as compared to a target of
3.2 per cent. Further, fiscal consolidation that plans to
reduce the deficit to 3.3 per cent of GDP in 2018-19 (BE)
ensures that prudent fiscal management practices are
not diluted. Part of this slippage in FY18 is explained
by the introduction of GST which did not provide 12
months of revenue as usual. Overall, the Budget has
attempted a delicate balancing act and drawn up a fis-
cal roadmap which would adhere to the basic precepts
of fiscal prudence even while providing the necessary
policy space for addressing the development priorities
of the economy and industry. This is in line with CII rec-
ommendations to keep fiscal deficit at targeted levels.
This month’s Focus of the Month, carries insights from
important office bearers of CII on the Budget.
T
he Government has presented a well-balanced
and pragmatic Budget which is fully aligned to-
wards fulfilling the dream of effecting economic
and social transformation in the country. Keeping this in
mind, the Budget offers a right blend of policies which
balances growth with social inclusion.
Major announcements such as efficient management of
the food economy, developing human capital through
better educational opportunities and skill development,
game-changing measures to improve health outcomes
and social security, intensifying infrastructure invest-
ment, continuing reforms in the financial sector, incen-
tives for start-ups and MSMEs, encouraging Make in
India, and digitisation and e-governance initiatives to
improve ease of doing business, among others, but-

8. 6
FOCUS OF THE MONTH
ECONOMY MATTERS
Focus to Help Strengthen Rural Infra
I
n a welcome move, the Budget has laid much needed
emphasis on the rural and agriculture sectors. The
need to boost farmer income has been given rec-
ognition and the Budget has mandated that minimum
support prices must be set at 1.5 times the cost of culti-
vation of crops. This will ensure that the farmer is remu-
nerated adequately. The idea of boosting on-farm and
non-farm incomes is a welcome move from the perspec-
tive of rural employment and there has been continued
focus on strengthening rural infrastructure.
The government’s intent to strengthen agriculture mar-
keting infrastructure and improving farmers’ price reali-
sation is clear with the announcement of setting up an
Agri marketing infrastructure fund with a corpus of Rs
2000 crore to strengthen market connectivity. Further,
plans have been announced to upgrade 22,000 rural
haats into Gramin Agriculture Markets (GrAMs), which
will be exempted from APMC and electronically linked
to e-NAM. This will open up national markets for agri-
culture produce.
In tandem, to strengthen physical infrastructure, the
Pradhan Mantri Gram Sadak Yojna Phase III will focus
on connecting GrAMs with all-weather roads, providing
better market connectivity and opportunities for im-
proved price realisation.
Additionally, in recognition that a significant share of
farmers’ income in recent times has been coming from
livestock and fisheries, the Fisheries & Aquaculture In-
frastructure Fund and Animal Husbandry Infrastructure
Fund, has been announced with a corpus of Rs 10,000
crore. Structural changes are to be brought into the
functioning of rural economy, with Niti Aayog to come
up with a model for lessee farmers to avail institutional
credit.
Meanwhile, the allocation for institutional credit has
been stepped up to 11 lakh crore for FY19. Further, in
an effort to create viable rural enterprises, favourable
tax treatment has been offered to incentivise setting
up of farmer producer organisations. In line with the
same idea, the Centre will come up a cluster model at
district level to promote economies of scale and market
connectivity. The model will leverage production advan-
tages of districts for specific horticulture products. It is
a welcome push towards diversification into high value
crops and horticulture crops, which will in turn lead to
improved soil health, productivity and thereby profit-
ability. Overall, the Budget provides significant impetus
to the rural sector with strengthened infrastructure to
enable better price discovery, better access to credit,
and stronger market linkages. A strong package for
rural connectivity will boost productivity of the agricul-
ture sector. With agriculture and the rural sector being
the backbone of the economy, the Budget measures
would help in supporting livelihoods and creating de-
mand for goods and services.
CII commends the ability to deliver a popular Budget
without becoming populist.
(This article was first published in The Asian Age, dated 3rd
February, 2018)

9. 7
FOCUS OF THE MONTH
JANUARY 2018
Measures to Help Regain Growth Glory
F
inance Minister Shri Arun Jaitley presented a re-
form-oriented Budget that would set the Indian
economy on an accelerated growth path and help
win back its tag of the fastest growing economy in the
world. The budget included major reform measures fo-
cussed primarily on the rural sector, education, health-
care and social protection. These would go a long way
in easing the lives of the common people and also posi-
tively impact those at the bottom of the pyramid. Indus-
try welcomes these reforms and believes that Budget
2018-19 will help the Indian economy achieve the 8 per
cent growth rate as envisioned by the Finance Minister.
The Government remained committed to the welfare
of farmers and a major focus this year was on reducing
agrarian distress. The increase of the Minimum Support
Price for all crops to at least 1.5 times of production cost
would provide relief to the farmers and help realize the
Government’s vision of doubling farmer’s income by
2022. Industry welcomes other significant measures in-
cluding electronically connecting the Gramin Agricultur-
al Markets, an agri market infra fund with a corpus of Rs
2000 crore to boost rural infrastructure and measures
to promote production oriented and scientific farming,
among others.
The announcement of the flagship National Healthcare
Protection Scheme to cover 10 crore poor families by
providing up to Rs 5 lakh per family per year for hos-
pitalization is a pathbreaking one. This is the world’s
largest government-funded healthcare programme and
industry greatly appreciates this initiative as this is a
progressive move towards achieving Universal Health-
care Coverage. The Government also announced the
creation of 1.5 lakh health and wellness centres which
would provide comprehensive care including maternal
and child services as well as free drugs and diagnostics
services.
For increasing research investments and infrastructure
in higher education institutions, a new scheme “Revital-
izing Infrastructure and Systems in Education” (RISE)
was introduced with a significant outlay of Rs 1 lakh
crore. This is in line with the CII recommendation of in-
creasing research in academia.
The MSME sector, a major engine of growth for the
economy, received a major boost in terms of allocation
of credit support worth Rs 3794 crores and reduction
of corporate taxes to 25 per cent for companies with a
turnover of up to Rs 250 crores. Other reforms include
online loan sanctioning, facilitation of the use of Fin-
Tech and a target of Rs 3 lakh crore of lending under the
Mudra Yojana.
Job creation received a big boost with initiatives such
as Government contribution of 12 per cent of wages for
new employees for EPF and extension of fixed term em-
ployment to all sectors, a key CII suggestion. It is also
commendable that a special effort has been made to
increase women’s participation in the workforce.
Industry welcomes other significant reforms including

10. 8
FOCUS OF THE MONTH
ECONOMY MATTERS
100 per cent tax deduction to companies registered as
farmer-producer companies with turnover of Rs 100
crores, reintroduction of standard deduction on salaries
and removal of TDS for senior citizens on FDs and post
office deposits upto Rs 50,000 and special package to
boost textile exports, among many others.
Thehigherspendingoninfrastructureisalsowelcomeas
this is the key to faster growth. Public spending through
budgetary and extra budgetary and other sources is ex-
pected to go up by more than Rs 1 lakh crore to Rs 5.94
lakh crore which will also create new demand.
Industry lauds the efforts of the Government for mov-
ing towards a fiscal consolidation path and macroeco-
nomic stability in the coming year. With the global econ-
omy and world trade improving, we can look forward to
faster growth rates ahead.
(This article was first published in The Telegraph, dated 2nd
February, 2018)

11. 9
FOCUS OF THE MONTH
JANUARY 2018
Defence Budget 2018-19: Complex Threats -
Competing Priorities
F
inance Minister Arun Jaitley in his Budget Speech
this year unequivocally stated the Government’s
intent to develop the Nation’s military capabilities
both in terms of developing connectivity infrastructure
and modernizing the Armed Forces. This declaration
of defence policy intent in the Union Budget comes
against the backdrop of intense challenges to the Na-
tion’s security.
Security VUCA 1
With the China Pakistan Economic Corridor rapidly tak-
ing shape, the China-Pakistan embrace has got much
tighter and so has the convergence between China and
Russia. China has intensified engagements with notice-
able military bias with several South Asian and Indian
Ocean Region States. Most recent is the unconfirmed
report of China exploring the possibility of a military
base in Wakhan Corridor in Afghanistan.2
Along the Line of Actual Control, since 2013 the level of
belligerence in face-offs has been increasing. Depsang,
Chumar and the unusually prolonged face-off at Doklam
last year are indicative of aggressive posturing with im-
proving infrastructure in Tibet. From a small ostensibly
anti-piracy deployment in 2013-14 in the Gulf of Aden,
there is increasing deployment of Chinese warships and
submarines in the Indian Ocean3
. The scale and content
of Chinese military exercises in Tibet and Xinjiang too
are noteworthy, including the Chinese Airforce joint ex-
ercise with Pakistan Airforce.4
In J&K, by the end of 2017, just as the internal security
situation was showing some semblance of control, ten-
sions along the line of control multiplied manifold. In
the past few weeks the hinterland is on the boil again as
the adversaries are back to using unarmed over-ground
workers to instigate violence and vandalize so as to pro-
voke security forces to react, and fabricate the victimi-
zation narrative.
Effectively there’s a continuous ongoing sub conven-
tional conflict with high risk of escalation. The entire
spectrum of threat is playing out and enlarging with nu-
clear capable potential adversaries standing shoulder
to shoulder. Alongside these direct security challenges
are international expectations for India to be a ‘net pro-
vider of security in the Indian ocean and beyond’.
Developing Connectivity Infrastructure
The Finance Minister told the Parliament, “To secure
India’s defences, we are developing connectivity infra-
structure in border areas”. He made specific reference
to completion of Rohtang Tunnel connecting Manali in
Himachal to Ladakh; contract for Zozila Tunnel on the
highway from Srinagar to Ladakh; and consideration for
constructing a tunnel under Sela Pass connecting Bom-
dila to Tawang in Arunachal.
1
VUCA – Volatility, Uncertainty, Complexity and Ambiguity
2
Dawn February 3, 2018; https://www.dawn.com/news/1387011 accessed February 3, 2018 at 7:44 PM
3
Hindustan Times, July 05,2017, https://www.hindustantimes.com/india-news/from-submarines-to-warships-how-chinese-navy-is-expanding-its
footprint-in-indian-ocean/story-QeJp31UtBphNjya2z8L7gM.html, accessed February 4, 2018, 9:15 PM
4
Economic Times, September 8, 2017, https://economictimes.indiatimes.com/news/defence/china-pakistan-air-forces-launch-joint-exercise/arti-
cleshow/60427426.cms, accessed February 4, 2018, 5:00 PM

12. 10
FOCUS OF THE MONTH
ECONOMY MATTERS
A reality check on the cost and time it takes for develop-
ing connectivity infrastructure: The 8.8 km Rohtang Tun-
nel was conceived in 1998, the project was announced
by Prime Minister Atal Bihari Vajpayee on June 3, 2000.
The work was entrusted to Border Roads Organisation
(BRO) on May 6, 2002. The foundation stone was laid by
Mrs Sonia Gandhi on June 28, 2010. The tunnel due to be
completed in February 2015 is delayed for several rea-
sons. Defence Minister Nirmala Sitharaman visited the
Rohtang Tunnel on October 15, 2017, the day on which
both ends of the tunnel met. It is now expected to get
fully operational by August 15, 2019. The estimated cost
of the project in 2010 was Rs 1700 crores, it was revised
to Rs 2000 crore in 2015 and now the projected cost by
2019 is Rs 4000 crore.5
Unlike the Rohtang Tunnel which the BRO is construct-
ing, the Zozila Tunnel is being implemented by Ministry
of Road Transport and Highways through the National
Highways and Infrastructure Development Corpora-
tion Limited. The total capital cost of the project is Rs
6808.69 crore and construction period is seven years.6
On May 26, 2017 Prime Minister Narendra Modi inaugu-
rated the Bhupen Hazarika Bridge (Dhola-Sadiya). The
9.15 km bridge across Lohit River is worth Rs 950 crore,
and took six years to complete. Also expected to be in-
augurated this year is Bogibeel, the fourth and eastern-
most bridge across the Brahmaputra. Approved in 1996,
the bridge was initiated in 2002. The cost has spiralled
from the initial Rs 1,767 crore in 2002 to Rs 6,000 crore
now.7
All this connectivity to the remote border areas is fi-
nally happening, thanks to the departure from the
past notion of keeping peripheral border areas under-
developed to act as buffer for the so-called heartland.
Another positive development is that much of the con-
nectivity infrastructure is being progressively covered
under larger National schemes like Bharatmala.
Considering the last mile connectivity that the Chinese
have achieved across our entire Northern front, it is crit-
ical for India to reduce the time and cost of these pro-
jects. For this to happen, urgent process simplification
is needed to navigate through the labyrinth of multiple
agencies. Infusion of high technology in executing the
projects is imperative.
Modernization of the Armed Forces
The Finance Minister touched upon initiatives for “mod-
ernizing and enhancing the operational capability of the
Defence Forces”, and emphatically stated that “ensur-
ing adequate budgetary support will be our priority”.
The budget has allocated Rs 2,95,511.41 crore for De-
fence, approximately 12.1 per cent of the total outlay
of Rs 24,42,213 crore. There is a growth of 7.81 per cent
over the Budget Estimates and 5.91 per cent over the
Revised Estimates respectively for the financial year
2017-18.8
In terms of Defence Expenditure as a percentage of
Central Government Expenditure and as a percentage
share of GDP, the declining trend persists. Defence Ex-
penditure as a percentage of Central Government Ex-
penditure has dropped from 15.24 per cent in 2000-01 to
12.59 per cent in 2016-179
and 12.1 per cent in 2018-19. As
percentage share of GDP, in 2017-18 the Defence budget
was 1.56 per cent, this year it is 1.58 per cent.10
Based on the 2016 data of Defence expenditure as a
percentage of GDP, India was at seventh place in inter-
national comparison (Chart 1). With further reduction in
2017 and 2018 India’s position will decline further.
5
Gaurav Bisht, Hindustan Times, October 29, 2017, https://www.hindustantimes.com/india-news/himachal-polls-2017-quiet-opening-to-rohtang-
tunnel-amid-election-din/story-joy4mvfOmw4uDsilNt48LI.html, accessed February 3, 2018, 6:30 PM
6
Times of India, January 5, 2018. https://timesofindia.indiatimes.com/india/cabinet-approves-zojila-pass-tunnel-project/articleshow/62355962.
cms?from=mdr, accessed February 3, 2018 6:30 PM
7
Hindustan Times, May 26, 2017, https://www.hindustantimes.com/india-news/pm-modi-inaugurates-dhola-sadiya-in-assam-all-you-need-to-
know-about-india-s-longest-bridge/story-hCkPQBvuTIp9VyS1cwpvCL.html, accessed February 3, 2018 9:30 PM
8
Press Information Bureau, Government of India, Press release, February 1, 2018; http://pib.nic.in/newsite/pmreleases.aspx?mincode=33 accessed
February 3, 2018 at 7:17 PM
9
Standing Committee on Defence 2016 – 17, http://164.100.47.193/lsscommittee/Defence/16_Defence_24.pdf, accessed February 4, 2018, 9:00 AM
10
The Times of India, February 1, 2018, https://timesofindia.indiatimes.com/india/budget-2018-govt-hikes-defence-budget-by-7-81/article-
show/62740525.cms?utm_medium=referral&utm_campaign=iOSapp, accessed February 3, 2018, 11 PM

13. 11
FOCUS OF THE MONTH
JANUARY 2018
In 2016 India’s total military spending was US$56 billion,
fourth highest in the world (Chart 2). However, in terms
of per capita military expenditure it was the lowest
amongst major countries. Israel was number one with
per capita US$2104, US was fourth with US$1891. India
was at seventeenth place with US$42, per capita mili-
tary expenditure. (Chart 3).

14. 12
FOCUS OF THE MONTH
ECONOMY MATTERS
For financial year 2018-19, out of the Defence alloca-
tion of Rs 2,95,511.41 crore, Rs 1,95,947.55 crore have
been allocated for Revenue (Net) expenditure and Rs
99,563.86 crore for Capital expenditure for the Defence
Services and the Organizations/ Departments under the
Ministry of Defence. The amount allocated for Capital
expenditure includes modernization related expendi-
ture.8
An expert, “back-of-the-envelope calculations
show that while there will be an overall increase of ap-
proximately Rs 5,300 crore, the allocation for the capi-
tal acquisition sub-segment will go up by just about Rs
4,500 crore to approximately Rs 73,500 crore, bulk of
which will go into meeting the committed liabilities on
account of the ongoing contracts.”9
The Parliamentary Standing Committee on Defence
2016-17, in their Nineteenth Report dated March 2017
observed, “while not questioning the wisdom of the
Defence Budget Planners and Financial Advisors in mak-
ing and presenting the budget figures, the Committee
nevertheless cannot help express being wary of the fact
that such a meagre increase in the budget does not in
any way, fulfil the basic requirements of the forces, let
alone the modernization aspect. Therefore, the Com-
mittee feels it is necessary that if additional budget
is not provided to the Forces as per the demand/pro-
jection, then the efficiency of spending should be im-
proved for better utilization of available resources.”10
“Efficiency of spending” opens up other dimensions of
the modernization narrative. It is ironic that on the one
hand there is inadequacy of funds for modernization,
on the other hand there is underutilization of capital al-
locations year after year. In 2016-17 the underutilization
was Rs 7393 crore (10.5 per cent). Over the years, pro-
cess has assumed greater importance than outcome in
procurement, even if allocations remain unspent. Com-
plexity of the process and multiplicity of agencies make
8
Press Information Bureau, Government of India, Press release, February 1, 2018; http://pib.nic.in/newsite/pmreleases.aspx?mincode=33 accessed
February 3, 2018 at 7:17 PM
9
Amit Cowshish, Economic Times, February 3, 2018, https://economictimes.indiatimes.com/news/defence/defence-budget-nothing-to-hasten-
modernisation-of-armed-forces/articleshow/62761748.cms accessed Feb 4, 2018, 11:55 AM
10
Standing Committee on Defence 2016 – 17, March 2017 http://164.100.47.193/lsscommittee/Defence/16_Defence_24.pdf, accessed February 4,
2018, 9:00 AM

15. 13
FOCUS OF THE MONTH
JANUARY 2018
it almost impossible to pin point accountability for delay
and lapse of funds. The process requires urgent re-en-
gineering with an end to end digitized system with ac-
countability and timelines strictly defined. Manual and
personality driven interventions need to be minimized,
to be able to effectively spend what is allocated.
Prioritization of Modernization Require-
ments
On the one hand, there are competing demands on the
budget, on the other hand are the multiplicity and com-
plexity of threats. There is an ongoing sub-conventional
conflict being fought on a daily basis and at the same
time there are continuous preparations for a war that
should ideally be deterred, all of these without losing
sight of a possible future war that could potentially cov-
er a much wider compass than military and may well be
fought without contact.
Prioritisation of defence modernisation requirements
is therefore absolutely critical. “Competitive jockeying”
amongst the three services and “cooperation when the
time comes”, has to give way to an authoritative joint
planning and robust coordination mechanism.
Self-Reliance for Defence
In order “to make the Nation self-reliant for defence”,
the Minister reiterated opening up private investment
in defence production including liberalizing foreign di-
rect investment. He announced measures to develop
two defence industrial production corridors in the coun-
try and an industry friendly Defence Production Policy
2018 to promote domestic production by public sector,
private sector and MSMEs.
At the current levels of import dependence (Chart 4),
the modernisation plans are difficult to sustain. The
force modernization budget has the potential to con-
tribute much more to the indigenous industrial base,
R&D and job creation. Saving to exchequer will happen
if we optimize on the revenue to employment ratio in
the public sector and leverage the potential of the pri-
vate sector much more.

16. 14
FOCUS OF THE MONTH
ECONOMY MATTERS
Just before the budget, Defence Minister Nirmala Si-
tharaman made a good beginning on this count by
promulgating a revised policy for simplifying Make 2 –
the 100 per cent industry funded development projects
for simple indigenous requirements. Likewise, it is es-
sential to implement on priority, the indigenization pro-
visions already articulated in Defence Procurement Pro-
cedure 2016. There is enough scope to accelerate FDI
in Defence. Much more R&D can be promoted through
simplification of Technology Development Fund and
Services Technology Board projects. Currently the pol-
icy is designed for matured technologies. Provisions are
needed to encourage emerging technologies and inno-
vations. The discharge of pending offsets can be done
much more imaginatively to contribute to self-reliance.
Bang for the Buck
For getting the proverbial ‘bang for the buck’ from the
budget, three functions need focus; prioritizing require-
ments, effective spending and justified supplementary
allocation. This requires urgent reforms in structures
and policy for joint military planning; digitized capital
procurement process with role distinction and account-
ability, optimized revenue expenditure and incentives
for Make in India. In order to modernize and sustain
military capability the allocation needs to be scaled up
to over 2 percentage of GDP, at the revised estimates
stage depending on progress and prudence of expendi-
ture.

18. 16
DOMESTIC TRENDS
Union Budget 2018-19: Key Indicators
ECONOMY MATTERS
Gross tax revenue has been budgeted to grow at a higher clip of 16.7 per cent in FY19 as compared to 13.4 per cent
growth achieved in FY18. Further, the direct taxes growth at 14.4 per cent for FY19 has been realistically budgeted
with strong support from income tax. Crackdown on black money and rising formalization of the economy will aid
in achieving the target. Meanwhile, corporate tax is expected to grow at a relatively modest rate in FY19 consider-
ing the tax rate has been reduced to 25 per cent for corporates with turnover less than Rs 250 crore.
Total expenditure is expected to grow at 13.2 per cent in FY19 with equal emphasis on revenue and capital expendi-
ture. Revenue expenditure is expected to grow by 11.6 per cent in FY19 as compared to 10.8 per cent in FY18, on
account of compensation paid to states due to the GST rollout. The capital expenditure has been budgeted low in
FY19, which is a bit surprising given the Government’s focus on infrastructure. Subsidies outgo has been budgeted
higher for FY19, with food subsidy comprising the bulk of the outgo.
The fiscal consolidation path has been extended by three years. In the last Union Budget, the government had set
itself the target of lowering the fiscal deficit to GDP ratio to 3.0 per cent by FY19. This year’s budget has not only
increased this target to 3.3 per cent for FY19, but also proposed to stretch the glide path to achieve the 3.0 per
cent target to FY21. In the proposed amendment to the Fiscal Responsibility and Budgetary Management (FRBM)
framework, the government will simultaneously target debt and fiscal deficit reduction and do away with target-
ing revenue deficit. Further, the budget has assumed a nominal GDP growth of 11.5 per cent in the calculations of
FY19.

19. 17
DOMESTIC TRENDS
JANUARY 2018
T
he Economic Survey, which was tabled in the
Parliament on 29th
January, 2018 offered insight-
ful, far-reaching and pragmatic ideas designed to
stimulate a creative debate on the state of the economy
and the way forward. It maintained that the economy
has turned the corner with the GDP set to climb to and
grow in the range of 7.0-7.5 per cent in the coming year
powered by far reaching reforms.
As the Survey puts it, ‘transformative reforms such as
the implementation of GST, resolution of the twin bal-
ance sheet problem through the bankruptcy code, the
recapitalisation package, liberalisation of FDI and policy
for export uplift’ would help India to emerge as the fast-
est growing economy in coming times.
In its commentary on the economy, the Economic Sur-
vey rightly provides an agrarian focus and advocates
market reforms such as consolidation of land holdings,
farm mechanisation, R&D, among others to ensure re-
munerative prices for farmers. Here CII has suggested
that an empowered group of state agricultural minis-
ters may be created to take forward reforms in the ag-
riculture sector.
Acknowledging that job creation is a problem, the Sur-
vey has rightly recommended areas such as promotion
of inclusive employment-intensive industry and invest-
ing in infrastructure development. On promoting labour
intensive industry and initiating sectoral reforms, CII
has said that the provision of fixed term employment
should be extended to all industries. We need a flexible
employment policy that protects the interests of both
the employer and the employee.
The Survey also poses a question on whether we would
fall in to a low equilibrium trap if fiscal federalism is not
achieved. It maintained that low level of tax collections
by the local Governments in rural areas is posing a chal-
lenge in reconciling fiscal federalism and accountability.
Following are the ten new facts on the Indian economy
as highlighted by the Survey:
1). Large increase in registered indirect and direct tax-
payers: The Goods and Services Tax (GST) has given
a new perspective of the Indian economy and new
data has emerged. There has been a 50 per cent
increase in the number of indirect taxpayers. Simi-
larly, there has been an addition of about 18 lakh in
individual income tax filers since November 2016.
Economic Survey: 2017-18

20. 18
DOMESTIC TRENDS
ECONOMY MATTERS
2). Formal non-agriculture payroll much greater than
believed: India’s formal sector, especially formal
non-farm payroll, is substantially greater than what
it currently is believed to be. It became evident that
when “formality” was defined in terms of social
security provisions like EPFO/ESIC, the formal sec-
tor payroll was found to be about 31 per cent of the
non-agricultural work force. When “formality” was
defined in terms of being part of the GST net, such
formal sector payroll share was found to be 53 per
cent.
3). State’s prosperity is positively correlated with its
international and inter-state trade: For the first
time in India’s history, data on the international ex-
ports of states has been covered in the Economic
Survey. Such data indicates a strong correlation be-
tween export performance and states’ standard of
living. States that export internationally and trade
with other states were found to be richer. Such cor-
relation is stronger between prosperity and inter-
national trade.
4). India’s firm export structure is substantially more
egalitarian than in other large countries: India’s ex-
ports are unusual in that the largest firms account
for a much smaller share of exports than in other
comparable countries. The top one percent of In-
dian firms account only for 38 per cent of exports
unlike in other countries where they account for a
substantially greater share – (72, 68, 67 and 55 per
cent in Brazil, Germany, Mexico and USA respec-
tively). Such tendencies were also found to be true
for the top five or ten per cent of the Indian compa-
nies.
5). Clothing incentive package boosted exports of
readymade garments: It was pointed out that the
Rebate of State Levies (ROSL) has had a positive im-
pact on apparel exports compared to other goods
which did not receive the benefits of the scheme.
Further, it increased the exports of man-made fibre
apparels more than that of natural fibre apparels.
6). Indian parents continue to have children until they
get the desired number of sons: The data high-
lighted another seemingly known fact that Indian
society exhibits a strong desire for a male child. It
pointed out that most parents continued to have
children until they get the desired number of sons.
7). Substantial avoidance litigation in tax arena which
government action could reduce: The Survey point-
ed out that tax Departments in India have low suc-
cess rate of around 30 per cent when they have
contested for tax disputes. About 66 per cent of
pending cases accounted for only 1.8 per cent of
value at stake. It further stated that 0.2 per cent
of cases accounted for 56 per cent of the value at
stake.
8). To re-ignite growth, raising investment is more
important than raising saving: Extrapolating the
data, the survey indicated that growth in savings
did not bring economic growth but growth in in-
vestment did.
9). Direct tax collections by Indian states and local
governments are significantly lower than those of
their counterparts in other federal countries: The
survey mentions that collections of direct taxes by
Indian states and other local governments, where
they have powers to collect them, is significantly
lower than their counterparts in other federal coun-
tries.
10). Extreme weather adversely impacts agricultural
yields: The survey captures the footprints of cli-
matechangeontheIndianterritoryandconsequent
adverse impact on agricultural yields. Extreme tem-
perature increases and deficiency in rainfall have
been captured on the Indian map and the graphical
changes in agricultural yields are brought out from
such data. The impact was found to be twice as
large in un-irrigated areas as in irrigated ones.
Among the challenges, the Survey said that global is-
sues such as the rise in global oil prices and the grow-
ing protectionist tendencies of the advanced countries
are creating a headwind for the Indian economy. Hence
continuation of the reforms agenda such as stabilizing
the GST, completing the twin balance sheet actions, pri-
vatizing Air India are crucial to overcome the threats to
the macro-economy in the coming year.

21. 19
DOMESTIC TRENDS
JANUARY 2018
U
nion Budget 2018-19, which was presented by
the Honorable Finance Minister Shri Arun Jait-
ley on the floor of the Lok Sabha on 1st
Febru-
ary, 2018 addressed the major pain points of the econ-
omy at the current juncture and would go a long way
towards facilitating the path of 8+ per cent GDP growth
rate. It took forward the landmark reform measures of
GST, Insolvency and Bankruptcy Code, bank recapitali-
zation and so on taken by the Government through the
last three years. As in previous Budgets, the Finance
Minister introduced some innovative steps which will
add comfort to citizens and strengthen key growth
drivers. Following are the key highlights of the Union
Budget 2018-19.
Highlights of Budget 2018-19
• The Budget enunciated that a series of structural re-
forms will propel India among the fastest growing
economies of the world. Country firmly on course
to achieve over 8 per cent growth as manufactur-
ing, services and exports back on good growth
path.
• Minimum Support Price (MSP) for kharif crops (that
have not been announced) to be at least 1.5x of pro-
duction cost
• 100 per cent tax exemption to Farmer Producer
Organisations (FPOs) with turnover of up to Rs 100
crore.
• NITI Ayog to put in place optimal mechanism to en-
sure farmers receive adequate prices for their pro-
duce.
• 22,000 rural haats to be developed and upgraded
into Gramin Agricultural Markets (GrAMs) to pro-
tect the interests of 86 per cent small and marginal
farmers.
• “Operation Greens” launched to address price fluc-
tuations in potato, tomato and onion for benefit of
farmers and consumers.
• Two New Funds of Rs 10,000 crore announced for
Fisheries and Animal Husbandry sectors; Re-struc-
tured National Bamboo Mission gets Rs 1290 crore.
• Loans to Women Self Help Groups will increase
to Rs 75,000 crore in 2019 from Rs 42,500 crore in
2017.
• Higher targets for Ujjwala, Saubhagya and Swachh
Mission to cater to lower and middle class in provid-
ing free LPG connections, electricity and toilets.
• Outlay on health, education and social protection
will be Rs 1.38 lakh crore. Tribal students to get Eka-
lavya Residential School in each tribal block by 2022.
Welfare fund for SCs gets a boost.
• World’s largest Health Protection Scheme covering
over 10 crore poor and vulnerable families launched
with a family limit upto Rs 5 lakh for secondary and
tertiary treatment.
• Fiscal Deficit pegged at 3.5 per cent of GDP for 2017-
18 and is projected at 3.3 per cent of GDP for 2018-
19.
• NITI Aayog to initiate a national programme on Arti-
ficial Intelligence (AI).
• Disinvestment crossed target of Rs 72,500 crore
and is expected to reach Rs 1,00,000 crore in FY18.
• Comprehensive Gold Policy on the anvil to develop
yellow metal as an asset class.
• 100 per cent deduction proposed to companies reg-
istered as Farmer Producer Companies with an an-
nual turnover upto Rs 100 crore on profit derived
from such activities, for five years from 2018-19.
• Deduction of 30 per cent on emoluments paid to
new employees Under Section 80-JJAA to be re-
laxed to 150 days for footwear and leather industry,
to create more employment.
• No adjustment in respect of transactions in immov-
able property where Circle Rate value does not ex-
ceed 5 per cent of consideration.
• Proposal to extend the corporate tax rate of 25 per
Union Budget FY19 Addresses Key Drivers of the
Economy

22. 20
DOMESTIC TRENDS
ECONOMY MATTERS
cent currently available for companies with turno-
ver of less than 50 crore (in Financial Year 2015-16),
to companies reporting turnover up to Rs 250 crore
in Financial Year 2016-17, to benefit micro, small and
medium enterprises.
• Standard Deduction of Rs 40,000 in place of pre-
sent exemption for transport allowance and reim-
bursement of miscellaneous medical expenses. 2.5
crore salaried employees and pensioners to benefit
from this move.
• The following relief to Senior Citizens has been pro-
posed in the Budget:-
- Exemption of interest income on deposits with
banks and post offices to be increased from Rs
10,000 to Rs 50,000.
- TDS not required to be deducted under section
194A. Benefit also available for interest from all
fixed deposit schemes and recurring deposit
schemes.
- Hike in deduction limit for health insurance
premium and/ or medical expenditure from Rs
30,000 to Rs 50,000 under section 80D.
- Increase in deduction limit for medical expend-
iture for certain critical illness from Rs 60,000
(in case of senior citizens) and from Rs 80,000
(in case of very senior citizens) to Rs 1 lakh for
all senior citizens, under section 80DDB.
- Proposed to extend Pradhan Mantri Vaya Van-
dana Yojana up to March, 2020. Current invest-
ment limit proposed to be increased to Rs 15
lakh from the existing limit of Rs 7.5 lakh per
senior citizen.
• More concessions for International Financial Ser-
vices Centre (IFSC), to promote trade in stock ex-
changes located in IFSC.
• To control cash economy, payments exceeding Rs
10,000 in cash made by trusts and institutions to be
disallowed and would be subject to tax.
• Tax on Long Term Capital Gains exceeding Rs 1 lakh
at the rate of 10 per cent, without allowing any in-
dexation benefit. However, all gains up to 31st
Janu-
ary, 2018 will be grandfathered.
• Proposal to introduce tax on distributed income by
equity oriented mutual funds at the rate of 10 per
cent.
• Proposal to increase cess on personal income tax
and corporation tax to 4 per cent from present 3
per cent.
• Proposal to roll out E-assessment across the coun-
try to almost eliminate person to person contact
leading to greater efficiency and transparency in
direct tax collection.
• Proposed changes in customs duty to promote cre-
ation of more jobs in the country and also to incen-
tivise domestic value addition and Make in India in
sectors such as food processing, electronics, auto
components, footwear and furniture.
Industrial output growth moderated to 7.1 per cent in
December 2017 from an upwardly revised 8.8 per cent
in the previous month, nonetheless clocking an impres-
sive growth rate. With this data print, the cumulative
growth for the three quarters of FY18 (April-Decem-
ber) stood at 3.6 per cent as compared to 5.2 per cent
in the same period last year. Going forward, we could
see an uptick in growth owing to a host of measures
announced by the government in the Union Budget
2018-19 and the recent pruning of the number of items
in the highest GST bracket. Additionally, a favourable
base effect, related to the temporary slowing in activity
last year after demonetisation, is likely to boost volume
growth in a variety of sectors in the remainder months
of 2017-18.
Industrial Output Slows Down; Though Growth Re-
mains Impressive

23. 21
DOMESTIC TRENDS
JANUARY 2018
Manufacturing growth slows down margin-
ally
On a sectoral basis, the manufacturing sector (the larg-
est contributor to IIP, having 77.6 per cent weight)
growth slowed from double-digits growth of 10.7 per
cent posted in November 2017 to 8.4 per cent in Decem-
ber 2017. However, on a quarterly basis, manufacturing
sector growth has improved to 7.1 per cent in 3QFY18
from an anemic 2.5 per cent growth posted in 2QFY18.
Besides, 16 out of 23 industry groups in manufacturing
saw growth in annual terms in the reporting month, led
by transport equipment, pharmaceuticals and comput-
ers. Electricity and mining sector growth saw an uptick
during the month.
For the second consecutive month, capital
good grows at a fast pace, indicating revival
of investment
According to use-based classification, capital goods
grew at a faster pace of 16.4 per cent in December 2017
as compared to 10.0 per cent in the previous month
partly due to a low base of last year. Growth in capital
goods now stands at a 26-month high. The production
of infrastructure & construction goods slowed down to
6.7 per cent in December 2017 from a series-high 13.9
per cent in November 2017.
Ebbing of festive demand, pushes down du-
rable sector’s output
The output of consumer non-durables continued to
grow at double-digits, albeit at a slower pace of 16.5 per
cent in December 2017 as compared to 23.4 per cent in
November 2017. The pruning of GST rates on several of
the items included under non-durables is likely to have
cushioned the growth of this sector. As the impact of
festive demand ebbed, output of consumer durables
moderated to 0.9 per cent in the reporting month as
compared to 3.2 per cent in the previous month.

24. 22
DOMESTIC TRENDS
ECONOMY MATTERS
Core sector growth slows down to 5-month
low
The eight core infrastructure industries growth slowed
down to 4.0 per cent in December 2017 as compared
to 7.4 per cent in the previous month. A disaggregated
analysis indicates a sustained rise in cement production,
pushing the figures into positive territory. Coal sector
production meanwhile continued to remain sluggish,
entering the negative territory in December 2017. As
a result, electricity generation also took a small hit,
standing at 3.3 per cent as compared to 3.9 per cent in
the month before. Fertilizer production rose by 3.0 per
cent, from 0.3 per cent in November 2017 on renewed
demand for fertilizer in the rabi season. On a cumula-
tive basis, April-December FY18 growth stood at 3.9 per
cent, down from 5.3 per cent in the corresponding pe-
riod last year.

25. 23
DOMESTIC TRENDS
JANUARY 2018
Outlook
Though there was a mild dip in industrial growth in December 2017, it was much higher than the corresponding
previous year indicating that the economy is on the road to recovery. December growth showed not only a robust
year on year growth but also a strong sequential improvement in industrial activity. The various reform measures
initiated by the government in the form of easing compliance norms for MSMEs, faster refund process for export
oriented companies amongst others have cushioned industrial output growth. We expect this recovery to continue
and it is likely to be predominantly led by private consumption with some support from public capex and exports.
Additionally, a favorable base will also perk up industrial output in the next few months.
Consumer Price Index (CPI) based inflation marginally
slowed to 5.1 per cent in January 2018 from 5.2 per cent
in December 2017, mildly pulling back the upward tra-
jectory seen since July 2017. Lower food and fuel infla-
tion enabled the mild slowdown in inflation during the
month. However, inflation in service sectors such as
housing, education & recreation perked up. Food infla-
tion moderated to 4.7 per cent in January 2018 from 5.0
per cent in December 2017. The slowdown was led by a
deceleration in inflation in cereals (at 2.3 per cent from
2.6 per cent), vegetables (27.0 per cent from 29.1 per
cent) and continuing deflation in pulses (at -20.2 per
cent from -23.5 per cent). Inflation in vegetables has
been rising sharply since September 2017 and the de-
cline in January 2018 is a welcome relief. CPI fuel & light
inflation too fell to 7.7 per cent in the reporting month
as compared to 7.9 per cent in November 2017 as infla-
tion in petrol and diesel moderated. Housing inflation
continued to rise higher to 8.3 per cent from 8.2 per
cent due to the impact of revision of house rent allow-
ance paid to the government employees.
To be sure, the Reserve Bank of India (RBI) has revised
its CPI forecast for H2FY18 to 4.3-4.7 per cent from 4.2-
4.6 per cent. We broadly expect CPI inflation to come
within RBI’s projected range for the second-half despite
the looming upside risks to inflation in the form of high-
er Minimum Support Prices (MSPs) and the risk of fiscal
slippages.
Lower food prices push down WPI based in-
flation in January 2018
Mirroring the moderation in CPI inflation, the whole-
sale price index (WPI) based inflation also eased to a
6-month low of 2.8 per cent in January 2018 as com-
pared to a 3.6 per cent rise in the previous month. De-
celeration in food prices was the key driver behind the
decline in inflation during the month. Food inflation
slowed down to 1.7 per cent in January 2018 from 2.9
per cent in the previous month despite high vegetable
prices. Inflation in vegetables witnessed some soften-
ing with annual inflation at 40.7 per cent in January 2018
as against 56.5 per cent in the previous month. Kitchen
staple onion witnessed a whopping 193.8 per cent price
rise in January 2018. Pulses witnessed deflation at 30.4
per cent, and the same for wheat and cereals was 6.9
per cent and 1.9 per cent respectively in the reporting
month.
On a cumulative basis, average inflation in the first ten
months of the current fiscal (April-January) stood at 2.9
per cent as compared to 1.0 per cent recorded in the
same period last year.
Inflationary Pressures Ebb Marginally

26. 24
DOMESTIC TRENDS
ECONOMY MATTERS
Primary articles inflation eases on lower
food prices
Inflation in primary articles eased to 2.4 per cent in Jan-
uary 2018 as compared to 3.9 per cent in the previous
month. Primary food inflation eased on lower prices of
protein rich items (milk, eggs, meat and fish). Primary
non-food category continued to face deflation for the
10th consecutive month. On a cumulative basis, infla-
tion in primary articles stood at a low of 1.5 per cent
during April-January FY18 as compared to 3.4 per cent
during the same period last year.
Fuel inflation eases sharply on lower petrol
and diesel prices
Fuel inflation eased sharply to 4.1 per cent in January
2018 as compared to 9.2 per cent in the previous month
on the back of lower petrol and diesel prices during the
month. In some relief for the common man, the Finance
Minister announced a reduction in excise duty on petrol
and diesel by Rs 2 per litre in the Union Budget FY19.
This is expected to cool down fuel inflation further in
the months to come. On the other hand, inflation in the
manufacturing group accelerated to 2.8 per cent in the
reporting month as compared to 2.6 per cent in the pre-
vious month.

27. 25
DOMESTIC TRENDS
JANUARY 2018
In its sixth bi-monthly monetary policy meeting held
on 7th
February, 2018, the Monetary Policy Commit-
tee (MPC) of the Reserve Bank of India (RBI) chose to
keep the key policy rates unchanged. After this deci-
sion, the repo rate, reverse repo rate and the Marginal
Standing Facility (MSF) rate stay unchanged at 6.00 per
cent, 5.75 per cent, and 6.25 per cent respectively. The
RBI sounds optimistic for FY19 growth pros-
pects
On the growth front, RBI has marginally revised down
its projection of real Gross Value Added (GVA) growth
by 10 bps to 6.6 per cent for FY18, partly reflecting a
downward revision in growth estimates by the Central
Statistics Organisation (CSO). GVA growth for FY19 is
projected at 7.2 per cent overall—in the range of 7.3-
7.4 per cent in the first half and 7.1-7.2 per cent in the
second half of the year. The key factors supporting
growth going forward are pick-up in investment activ-
ity as suggested by multiple high frequency indicators,
industry would have liked to see atleast a 25 bps rate
cut as there is a pressing need for nurturing the nascent
green shoots of recovery. However, it came as a relief
that the MPC chose to tone down its otherwise hawkish
assessment of inflation by enumerating several mitigat-
ing factors. To be sure, the MPC voted 5-1 to keep rates
unchanged, with one member voting for at least 25 bps
increase in the policy rate.
recapitalization of public sector banks, movement in
Non-Performing Assets (NPA) resolution under the In-
solvency and Bankruptcy Code (IBC) and streamlining
of GST implementation.
Upside risks to inflation persist, though miti-
gating factors are also at play
The CPI inflation for FY19 is projected at 5.0 per cent—in
the range of 5.1-5.6 per cent in the first half and 4.5-4.6
per cent in the second half. The risk is tilted to the up-
side and led by a.) the staggered impact of state gov-
ernment Housing Rent Allowance (HRA) increases and
Outlook
Both CPI and WPI inflation softened in January 2018, cushioned by moderating food prices. This scenario is likely
to continue, going forward, as food prices will most likely remain contained, due to the good harvest this year on
account of favorable monsoons. Moreover, the GST Council’s decision to cut the tax rate on 177 items from 28 per
cent to 18 per cent, leaving only 50 items under the highest tax slab, is expected to partially ease the inflationary
pressure on consumers as and when companies start passing on the benefits by cutting prices.
RBI Softens its Tone from Hawkish to Neutral

28. 26
DOMESTIC TRENDS
ECONOMY MATTERS
Merchandise export growth slowed down for the sec-
ond consecutive month as it stood at 9.1 per cent in
January 2018 as compared to 12.4 per cent in the pre-
vious month as the exporters continued to face teeth-
ing problems in getting refund of Input Tax Credit (ITC).
Outward shipments increased in 20 out of 30 sectors,
but declined in traditional sectors like yarn and ready-
made garments whose competitive edge could have
been blunted by an appreciating rupee.
Major commodity groups which showed growth in ex-
ports during the month included engineering goods
(15.8 per cent), petroleum products (39.5 per cent),
gems & jewellery (0.9 per cent), organic & inorganic
chemicals (33.6 per cent) and drugs & pharmaceuti-
cals (8.6 per cent), according to data released by the
Commerce Ministry. The cumulative value of exports in
April-January FY18 stood at US$247.8 billion as against
US$221.8 billion in the same period last year, thus regis-
their second round impact, b.) pickup in global com-
modity prices including crude, c.) uncertainty regarding
Minimum Support Prices (MSP) hikes for kharif crops as
announced in the budget FY19, d.) increase in customs
duty on certain items proposed in the Union Budget
FY19 and e.) deviation from the fiscal consolidation
roadmap.
tering a growth rate of 11.8 per cent during the period.
With two more months remaining in this fiscal, there
are bright chances of exports reaching the US$300 bil-
lion target for the year.
Rising inward shipments of petroleum prod-
ucts and pearls & precious stones pushes im-
port growth upwards
In contrast, merchandise import growth accelerated to
26.1 per cent in January 2018 as compared to 21.1 per
cent growth posted in the previous month driven by a
sharp rise in imports of petroleum, crude & products
(42.6 per cent), pearls, precious & semi-precious stones
(55.7 per cent) and machinery, electrical & non-electri-
cal (29.1 per cent). On a cumulative basis, imports were
valued at US$379.1 billion during the first ten months of
the current fiscal as compared to US$310.2 billion in the
same period last year, thus recording a growth of 22.2
per cent so far.
There are also mitigating factors. First, capacity utilisa-
tion remains subdued. Second, oil prices have moved
both ways in the recent period and can potentially sof-
ten from current levels based on production response.
Third, rural real wage growth is moderate.
CII’s reaction
The RBI’s decision to maintain a status quo on policy rates and continue with the neutral stance for the third time
in a row is tough on industry. CII hopes that going forward, the RBI would turn to a more accommodative stance
to facilitate growth especially at a time when our country is witnessing early stirrings of economic revival and the
need is to nurture the recovery rather than supress it. On inflation, CII believes that the measures taken in the
Budget such as encouraging farmer producer organisations will help moderate food prices.
Trade Deficit Widens Sharply as Import Growth Soars

29. 27
DOMESTIC TRENDS
JANUARY 2018
Oil imports bill balloons on an uptick in glob-
al Brent prices
The oil import bill ballooned by 42.6 per cent in January
2018 as compared to 34.9 per cent in December 2017 as
the global Brent prices ($/bbl) increased at a higher clip
of 25.7 per cent in January 2018 as compared to 18.8 per
cent in December 2017 on a year-on-year basis. Non-oil
imports were 20.5 per cent higher in January 2018 on
year-on-year basis. Growth of gold imports—one of the
major categories of non-oil imports moderated by 22
per cent during the reporting month as compared to a
high of 71.5 per cent in the previous month.
Trade deficit widens to 56-month high in Jan-
uary 2018
As merchandise imports grew at a higher pace than
merchandise exports during the month, the merchan-
dise trade deficit widened to 56-month high of US$16.3
billion in January 2018 as compared to US$14.8 billion
in the previous month. The rising trade deficit is a mat-
ter of concern and the import profile needs to be ana-
lysed carefully to see whether imports would augment
domestic production or pose a challenge. On a cumula-
tive basis, trade deficit during the period April-January
FY18 stood at a high of US$131.2 billion as compared to
US$88.3 billion posted in the same period last fiscal.

31. 29
POLICY FOCUS
POLICY FOCUS
JANUARY 2018
Key Budget related Announcements
1). Government to bring over 10 crore BPL
people under new health insurance
scheme
Finance Minister Arun Jaitley announced the following
two new initiatives under the Ayushman Bharat Pro-
gramme in the Union Budget FY19:
i). As per the National Health Policy 2017, 1.5 lakh
Health and Wellness Centres are planned to
bring health care system closer to the homes
of people. This flagship programme has an al-
location of Rs. 1200 crore in this budget.
ii). Flagship National Health Protection Scheme to
be launched to cover over 10 crore poor and
vulnerable families (approximately 50 crore
beneficiaries) providing coverage upto 5 lakh
rupees per family per year for secondary and
tertiary care hospitalization. This will be the
world’s largest government funded health
care programme.
2). Corporate tax rate reduced to 25 per cent
for companies with turnover of up to Rs
250 crore
The Union Budget FY19 has reduced the corporate tax
rate for companies with an annual turnover of up to
Rs 250 crore to 25 per cent. This move is expected to
benefit the micro, small and medium enterprises (MS-
MEs), in line with the finance minister’s earlier promise
of reducing the tax rate to 25 per cent, accompanied
by a complete phasing out of exemptions. This lower
corporate income tax rate would leave such companies
with higher investible surplus, which would in turn cre-
ate more jobs.
3). Customs duty raised in Budget FY19
In order to incentivise domestic value addition and
Make in India, the Finance Minister has proposed to
increase customs duty on mobile phones from 15 per
cent to 20 per cent, on some of their parts and acces-
sories to 15 per cent and on certain parts of TVs to 15 per
cent. This measure is likely to promote creation of more
jobs in the country. In fact, this is expected to make the
The important policy announcements made by the Government/RBI in the month of January-February 2018 are covered
in this month’s Policy Focus. Our endeavour through this section is to keep our readers abreast of the latest happenings
on the policy front so that they can take an informed decision accordingly.

32. ECONOMY MATTERS 30
POLICY FOCUS
domestic items cheaper than imported ones and will
generate more demand which, in turn, will create more
employment opportunities for the people at large. Fur-
ther, the Finance Minister has also proposed to reduce
customs duty on raw cashew from 5 per cent to 2.5 per
cent to help the cashew processing industry.
4). Relief to salaried taxpayers: standard de-
duction of Rs 40,000 allowed in lieu of
present exemptions
In order to provide relief to the salaried taxpayer, the Fi-
nance Minister has proposed to allow a standard deduc-
tion of Rs. 40,000/- in lieu of the present exemption in
respect of transport allowance and reimbursement of
miscellaneous medical expenses. However, the trans-
port allowance at enhanced rate shall continue to be
available to differently-abled persons. Also, other medi-
cal reimbursement benefits in case of hospitalisation
etc., for all employees shall continue. The total number
of salaried employees and pensioners who will benefit
from this decision is around 2.5 crores.
5). EPF contribution by women employees
reduced to 8 per cent from 12 per cent
A number of steps have been taken in the last three
years to boost employment generation and in order to
continue this momentum, in the Union Budget FY19, it
was announced that the government will contribute 12
per cent of the wages of the new employees in the Em-
ployees Provident Fund (EPF) for all the sectors for the
next three years. Also, the facility of fixed term employ-
ment will be extended to all sectors. Further, in order to
enable higher take-home wages for the women, it has
been proposed in the Budget to the amend Employees
Provident Fund and Miscellaneous Provisions Act, 1952
to reduce women employees’ contribution to 8 per
cent for first three years of their employment against
the existing rate of 12 per cent or 10 per cent with no
change in employers’ contribution.
Other Policy Announcements
6). GST rates on 29 goods and 54 services cut
The Goods and Services Tax Council, at its 25th meeting
held on 18th
January, 2018, agreed to cut tax rates on 29
products and 54 services and to make the process of
filing tax returns simpler. The following decisions with
respect to rate cut were taken in the meeting:
- The Council has cut GST rate on second-hand me-
dium and large cars and SUVs from 28 per cent to 18
per cent and on other old and used motor vehicles
to 12 per cent.
- GST on LPG supplied by private LPG distributors to
household domestic consumers will come down to
5 per cent from 18 per cent.
- The GST rate on bio-fuel powered buses has been
cut from 28 per cent to 18 per cent.
- The rate on diamonds and precious stones has been
cut from 3 per cent to 0.25 per cent.
- Sugar boiled confectionary and drinking water
packed in 20 litre bottles will attract GST of 12 per
cent, instead of 18 per cent earlier.
- Drip irrigation system will attract lower GST of 12
per cent, instead of 18 per cent earlier.
- Cigarette filter rods will attract higher GST rate of
18 per cent as against 12 per cent currently.
7). DIPP notifies relaxation of FDI norms in
several sectors
The Department of Industrial Policy and Promotion
(DIPP) has notified the relaxation of Foreign Direct In-
vestment (FDI) norms in several sectors, including sin-
gle brand retail, non-banking financial companies and
construction. According to DIPP, 100 per cent FDI in
single brand retail is aimed at attracting investments
in production and marketing, improving the availability
of such goods for the consumer and encouraging in-
creased sourcing of goods from India. It also noted that
foreign investing companies registered as Non-Banking
Financial Companies (NBFC) with the RBI, being over-
all regulated, would be under 100 per cent automatic
route. However, it said that investment by Core Invest-
ing Companies (CIC) will have to follow government ap-
proval route besides taking permission from the bank-
ing sector regulator RBI. The DIPP has also notified the
liberalization of the policy in power exchanges, an on-
line platform where electricity is traded.
8). Defence Ministry to stop investing in ord-
nance factories, DPSUs
The Ministry of Defence has decided that it will not

33. 31
POLICY FOCUS
JANUARY 2018
make any further investments in Ordinance Factory
Boards (OFBs) and Defence Public Sector Undertakings
(DPSUs). The government has also decided that core
military hardware, such as battle tanks, combat vehicles
and specialised military trucks will remain in the domain
of the government-owned enterprises. Modernisation,
upgrades, repowering, product launches and improve-
ment in operational efficiencies are to be carried out
with the help of private sector. The role of OFBs and
DPSUs in the past has been limited to production, while
R&D has been carried out by DRDO. At present, there
are 41 factories and 8 DPSUs under OFB that produce a
wide range of products for all three services.
9). RBI to link base rate with MCLR from 1st
April
The Reserve Bank of India (RBI) has decided to link the
base rate for loans with the Marginal Cost of Funds-
based Lending Rate (MCLR) from 1st
April, 2018 to im-
prove monetary policy transmission. The move is ex-
pected to narrow the gap between the base rate and
MCLR, and benefit borrowers who are still using the
base rate. While the impact of this on existing borrow-
ers will become clear only when details of this ‘harmoni-
sation’ are known, prima facie it appears that once base
rate is linked to MCLR, the former will automatically
increase or decrease in tandem with the latter without
any specific action required for adjustment. This may
benefit the existing borrowers whose loans are still
linked to the base rate. The RBI has made it clear that
banks should allow base rate borrowers to switch to
MCLR. The existing loans can run till maturity or borrow-
ers can switch to MCLR on mutually agreed terms. The
base rate borrowers have two options, either switch to
MCLR based lending with the same bank or else trans-
fer i.e. get the loan refinanced from another bank on
MCLR mode. One may also continue the loan on base
rate, especially if the loan term is nearing the end.
10). RBI removes credit caps on MSME (ser-
vices) under priority sector
In the light of feedback received from various stake-
holders, it has been decided to remove the currently
applicable loan limits of Rs 50 million and Rs 100 million
per borrower to Micro, Small and Medium Enterprises
(MSMEs) respectively, for classification under priority
sector. Accordingly, all bank loans to MSMEs, engaged
in providing or rendering of services as defined in terms
of investment in equipment under Micro, Small and
Medium Enterprises Development (MSMED) Act, 2006,
shall qualify under priority sector without any credit
caps.
11). Cabinet proposes new criteria for classi-
fying MSMEs
The Union Cabinet has approved change in the basis of
classifying Micro, Small and Medium enterprises from
‘investment in plant & machinery/equipment’ to ‘annu-
al turnover’. Section 7 of the Micro, Small and Medium
Enterprises Development (MSMED) Act, 2006 will ac-
cordingly be amended to define units producing goods
and rendering services in terms of annual turnover as
follows:
• A micro enterprise will be defined as a unit where
the annual turnover does not exceed five crore ru-
pees;
• A small enterprise will be defined as a unit where
the annual turnover is more than five crore rupees
but does not exceed Rs 75 crore;
• A medium enterprise will be defined as a unit where
the annual turnover is more than seventy five crore
rupees but does not exceed Rs 250 crore.
• Additionally, the Central Government may, by no-
tification, vary turnover limits, which shall not ex-
ceed thrice the limits specified in Section 7 of the
MSMED Act.
The change in the norms of classification will enhance
the ease of doing business and make the norms of
classification growth oriented by aligning them to the
new tax regime revolving around GST. The consequent
growth and will pave the way for increased direct and
indirect employment in the MSME sector of the coun-
try.
12).IBBI amends regulations for insolvency
resolution process
The Insolvency and Bankruptcy Board of India (IBBI) has
amended the Insolvency and Bankruptcy Board of India
(Insolvency Resolution Process for Corporate Persons)
Regulations, 2016. The following has been proposed ac-
cording to the Amendments:

34. ECONOMY MATTERS 32
POLICY FOCUS
1) The Resolution Professional shall appoint two reg-
istered valuers to determine the fair value and the
liquidation value of the corporate debtor. The reso-
lution professional shall provide the fair value and
the liquidation value to each member of the com-
mittee of creditors in electronic form, on receiving
a confidentiality undertaking.
2) The Resolution Professional shall submit the infor-
mation memorandum in electronic form to each
member of the committee of creditors within two
weeks of his appointment as resolution profes-
sional and to each prospective resolution applicant
latest by the date of invitation of resolution plan, on
receiving confidentiality undertaking.
3) The Resolution Professional shall issue an invita-
tion to the prospective resolution applicants. The
prospective resolution applicant shall get at least
30 days from the issue of invitation or modification
thereof, whichever is later, to submit resolution
plans.
4) While the Resolution Applicant shall continue to
specify the sources of funds that will be used to
pay insolvency resolution process costs, liquidation
value due to operational creditors and liquidation
value due to dissenting financial creditors, the com-
mittee of creditors shall specify the amounts pay-
able from resources under the resolution plan for
these purposes.
5) A Resolution Plan shall provide for the measures
for insolvency resolution of the corporate debtor
for maximization of value of its assets.
6) The Resolution Professional shall submit the resolu-
tion plan approved by the committee of creditors
to the Adjudicating Authority.
13). RBI introduces simplified framework for
resolution of stressed assets
The Reserve Bank of India (RBI) has withdrawn all its
existing mechanisms for tackling bad debt at Indian
banks and replaced them with a harmonised and sim-
plified generic framework for resolving stressed assets.
The new system will force lenders to identify and tackle
any stressed-asset accounts more rapidly, the regulator
said.
The latest notification by Reserve Bank of India (RBI)
has also withdrawn the existing mechanism which in-
cluded Corporate Debt Restructuring Scheme, Strate-
gic Debt Restructuring Scheme (SDR), Scheme for Sus-
tainable Structuring of Stressed Assets (S4A). The Joint
Lenders’ Forum (JLF) as an institutional mechanism for
resolution of stressed accounts also stands discontin-
ued, it said, adding that “all accounts, including such
accounts where any of the schemes have been invoked
but not yet implemented, shall be governed by the re-
vised framework”

35. 33
GLOBAL TRENDS
Chinese Economy on the Sustainability
Bandwagon
JANUARY 2018
I
n 2017, the Chinese government adopted the new
development philosophy, focused on maintaining
stability, by initiating supply-side structural reform
while pushing forward structural optimization and qual-
ity improvement. As a result, the national economy has
maintained the momentum, exceeding expectations,
with sustainability strengthened. In the year 2017, China
witnessed a real GDP growth of 6.9 per cent, a sustain-
able increase over the growth of 6.7 per cent achieved
in 2016, when the country was facing several structural
issues. The primary and tertiary industries registered
moderate increases in growth rates as compared to
last year, while the secondary industry saw a nearly flat
growth

36. 34
GLOBAL TRENDS
ECONOMY MATTERS
On a quarterly basis, the economy saw a nearly flat
growth in the fourth quarter of 2017 as compared to
the same quarter in the previous year. While GDP on
an overall basis has not fluctuated significantly for the
last five quarters, growth in the primary industry has
Looking at the sectoral composition of the economy, it
is evidenced that growth rate in the information trans-
mission, software and IT services was the highest at
26.0 per cent in 2017. This was followed by Renting and
leasing activities and business services which rose by
The latest figures available for the fourth quarter of 2017
show that the growth rate across sectors nearly mirrors
that for full year 2017. Information transmission, soft-
ware and IT services; renting and leasing activities and
seen a modest recovery in the last quarter of the year.
Growth in the secondary industry in the Q4 of 2017 has
remained unchanged as compared to Q4 of 2016, while
the tertiary industry growth has remained at high levels
during the last quarter of 2017.
10.9 per cent. The transport, storage and post sector
came next with 9 per cent growth. The three sectors
which were at the bottom in terms of growth were —
farming, forestry, animal husbandry & fishery; construc-
tion; and finance.
business services; and transport, storage and post were
top three. Construction; finance; and farming, forestry,
animal husbandry and fishery were at the bottom.

37. 35
GLOBAL TRENDS
JANUARY 2018
Manufacturing PMI on a downtrend
In January 2018, China’s manufacturing Purchasing
Managers Index (PMI) stood at 51.3 per cent, a de-
crease of 0.3 percentage points from last month, but
still unchanged from the same period of last year. The
manufacturing industry continued its steady expansion.
Retail sales of consumer goods remain in
tepid growth territory
In December 2017, the total retail sales of consumer
The PMI of large-sized enterprises was 52.6 per cent—
smoothly in the expansion range; that of medium-sized
enterprises was 50.1 per cent— above the threshold
level of 50, while that of small-sized enterprises was
48.5 per cent—below the threshold. Among the five
sub-indices composing PMI, the production index and
new orders index were higher than the threshold.
goods saw a growth of 9.4 per cent in nominal terms
(real growth rate 7.8 per cent) as against 10.2 per cent in
the previous month. For 2017 as a whole, the total retail
sales of consumer goods saw a growth of 10.2 per cent.

38. 36
GLOBAL TRENDS
ECONOMY MATTERS
Investment in fixed assets remains stable
In 2017, the overall private investment in fixed assets
reached 38.2 trillion yuan, an increase of 6.0 per cent
in nominal terms while investment in fixed assets (ex-
Going forward
Going forward, the structural reforms in the direction
of sustainable development are anticipated to contin-
cluding rural households) touched 63.2 trillion yuan, up
by 7.2 per cent. The proportion of private investment in
fixed assets to the total investment in fixed assets (ex-
cluding rural households) stood at 60.4 per cent.
ue, taking China to a more sustainable growth range of
around 6.2 per cent to 6.6 per cent in the near term as
per the projections made by the World Bank and the
IMF.

39. 37
GLOBAL TRENDS
JANUARY 2018
In its latest World Economic Outlook update, the Inter-
national Monetary Fund (IMF) has lifted its forecast for
global growth. As per the IMF, global output is estimated
to have grown by 3.7 per cent in 2017, which is 0.1 per-
centage point faster than projected in the fall and about
half a percentage point higher than in 2016. The pickup
in growth has been broad based, with notable upside
surprises in Europe and Asia. Global growth forecasts for
2018 and 2019 have been revised upward by 0.2 percent-
age point to 3.9 per cent. The revision reflects increased
global growth momentum and the expected impact of
the recently approved US tax policy changes.
As the IMF has highlighted in its update, the risks to
global growth forecast appear to be broadly balanced in
the near term, but remain skewed to the downside over
the medium term. On the upside, the cyclical rebound
could prove stronger in the near term as the pickup in
activity and easier financial conditions reinforce each
other. On the downside, rich asset valuations raise the
possibility of a financial market correction, which could
dampen growth and confidence. Inward-looking poli-
cies, geopolitical tensions and political uncertainty in
some countries also pose downside risks.
(b) Euro area: On an overall basis, growth in the euro
area is expected to moderate to 2.2 per cent in 2018
from 2.4 per cent in 2017. However, growth rates for
many of the euro area economies have been marked
up for 2018 compared to 2017, especially for France and
Following are the brief summaries of the growth fore-
cast for different regions/countries.
(a) United States: The growth forecast for the United
States has been revised up given stronger than expect-
ed activity in 2017, higher projected external demand
and the expected macroeconomic impact of the tax re-
form, particularly the reduction in corporate tax rates
and the temporary allowance for full expensing of in-
vestment. The US growth forecast has been raised from
2.3 per cent in 2017 to 2.7 per cent in 2018.
the Netherlands, reflecting the stronger momentum in
domestic demand and higher external demand. How-
ever, growth in Spain, which has so far been well above
potential, has been marked down slightly for 2018, re-
flecting the effects of increased political uncertainty on
confidence and demand.
The Global Recovery Has Strengthened: IMF

40. 38
GLOBAL TRENDS
ECONOMY MATTERS
(c) India:The Indian economy is forecasted to grow
at 7.4 per cent in FY19 against 6.7 per cent in FY18 and
would be gaining pace to rise further to 7.8 per cent in
(d) China: Growth is expected to moderate in China in
2018 and 2019 relative to the levels seen in 2016 and 2017.
China is likely to cut back the fiscal stimulus of the last
couple of years and, in line with the stated intentions
Going forward
In the near term, the global economy is likely to main-
tain its momentum without a correction in financial
markets—which have seen a sustained run-up in asset
FY20 . This would make the country the world’s fastest-
growing economy in 2018 and 2019 following last year’s
slowdown due to demonetisation and the implementa-
tion of Goods and Services Tax (GST).
of its authorities, rein in credit growth to strengthen its
overextended financial system. Consistent with these
plans, the country’s ongoing and necessary rebalancing
process implies lower future growth.
prices and very low volatility. Such a momentum could
even surprise on the upside in the near term if confi-
dence in the global outlook and easy financial condi-
tions continue to reinforce each other.

42. ECONOMY MONITOR : BUDGET AT A GLANCE
40ECONOMY MATTERS

43. 41
ECONOMY MONITOR : BUDGET AT A GLANCE
JANUARY 2018

44. 42
ECONOMY MONITOR : BUDGET AT A GLANCE
ECONOMY MATTERS